Study Reveals Lack of Decentralization in DeFi Market

Liquidity on decentralized exchanges is concentrated in the hands of a few major providers, diminishing the democratization of access to the DeFi market. These findings were shared by analysts from the BIS in a report.

Researchers examined the 250 largest liquidity pools on Uniswap V3 and concluded that a small group of players holds about 80% of the TVL and earns significantly more profit than retail participants. Adjusted for risk, the latter actually lose money.

“These [large] participants place orders that mimic traditional bid-ask spreads, allowing them to earn significantly more profit — both in absolute and relative terms — compared to their [retail] counterparts,” the experts emphasized.

According to the BIS report, factors that led to centralization in the traditional financial industry may be “inherent traits” of the financial system, and thus are also present in DeFi.

In 2023, Gauntlet experts noted an increase in centralization in the DeFi market. They found that among DEXs, four platforms control 54% of the market, and 90% of all assets in the liquid staking market are concentrated in the four largest projects.

Back in 2021, the head of the SEC, Gary Gensler, questioned the true decentralization of the DeFi segment:

“These so-called decentralized financial platforms are actually largely centralized. There is a group of entrepreneurs who manage these platforms.”

He noted that platform operators are interested in promoting their projects and derive significant benefits from this.

Economist Gordon Liao believes that a 15% increase in earned fees is a minor advantage compared to less skilled passive users.

In his view, the situation in traditional finance is significantly worse. The economist supported his position with a 2016 study, which found that individual liquidity providers do not receive sufficient compensation for their role in the market.

Liao also disagreed with the thesis on order manipulation:

“The distribution of tick ranges is usually much larger than 1–2%. This is very different from ‘placing orders that mimic bids and asks,’ as described in the annotation.”

Despite the lack of decentralization, BIS researchers acknowledged that the DeFi market has significantly fewer regulatory, operational, and technological barriers compared to its traditional counterpart.

In October, Vitalik Buterin agreed on the need to lower the entry threshold for individual stakers in Ethereum to support decentralization.