TL;DR
- A BIS report reveals that institutional participants dominate liquidity in DEXs, controlling between 65% and 85% of the total.
- Institutional players apply strategies similar to those in traditional markets, achieving annual returns 11.65% higher than retail LPs.
- The BIS research shows that institutional LPs prefer pools with high liquidity and low volatility, while retail investors operate in smaller pools and lose money more frequently.
A report from the Bank for International Settlements (BIS) has revealed a growing trend of dominance by more experienced participants in the decentralized exchange (DEX) market, such as Uniswap V3, challenging the essence of decentralized finance (DeFi) as an ecosystem accessible to all.
Although retail investors make up 93% of liquidity providers on these platforms, institutional players control the majority of liquidity, reaching between 65% and 85% of the total. Additionally, these players have a much higher profitability rate than retail investors, with an annual return 11.65% higher.
Are DeFi at risk?
According to the BIS, participation in DEXs is mostly concentrated among a small group of institutional LPs, who follow strategies similar to those in traditional markets, such as bid-ask spreads.
This tactic allows them to achieve much higher returns, especially during periods of high volatility, when risks for LPs are higher. In contrast, retail investors tend to be less active and make adjustments less frequently, putting them at a disadvantage.
The BIS Reveals a Disturbing Reality
BIS data also indicates that institutional liquidity providers, with average positions of around $3.7 million, prefer to operate in high-liquidity and low-volatility pools, while retail investors tend to focus on smaller pools, with daily volumes below $100,000. Institutional LPs benefit from their larger trading volumes and their ability to quickly adapt to market changes, allowing them to maximize their profits during volatility spikes.
Regarding losses, the research revealed that retail LPs face more difficulties, as more than half of the days studied, smaller investors lost money. Despite DeFi’s promises of financial inclusion, the centralization of liquidity and profits in the hands of a small group of players raises questions about the true democratization of market access