The Bank for International Settlements (BIS) has revealed that institutional players dominate the liquidity provision on decentralized exchanges (DEXs) such as Uniswap, according to a November 19 report:
In a recent report entitled “Decentralized dealers”, the BIS analyzed the behavior of sophisticated and private participants in the Uniswap v3 liquidity pools. The survey looked at their responses to market activity and the extent to which DeFi delivers on its promise of inclusivity.
Liquidity providers play a crucial role in DEX ecosystems by depositing assets into trading pools, enabling token swaps. In return, they earn trading fees, with higher returns typically associated with high-volume pairs.
Uniswap is the largest DEX platform in the DeFi ecosystem. It is available on around 20 blockchain networks, including Ethereum and several layer 2 networks such as Base, Arbitrum, and Optimism, among others. Since its launch in 2018, it has enabled more than $2 trillion in transactions.
Institutional players dominate
The report highlighted that institutional players in DeFi often replicate strategies from the traditional financial sector, gaining a competitive advantage over retail participants.
These sophisticated participants act as market makers and employ sophisticated tactics such as mimicking bid-ask spreads to maximize profits. Their dominance mirrors patterns in traditional financial systems, where large players often outcompete smaller participants.
Uniswap v3’s design allows liquidity providers to allocate funds within specific price ranges, providing significant benefits for those with advanced market knowledge. The report notes that institutional players actively adjust their positions during volatile market periods, achieving higher returns. In contrast, retail participants rarely make similar adjustments, often leading to lower profitability and, in some cases, losses.
The BIS report also highlighted that retail participants interact with fewer liquidity pools and adjust their positions less frequently, making it difficult for them to compete with institutional players.
BIS stated:
“Retail participants exhibit significantly lower skills. They are much less profitable in highly volatile periods and do not appear to adapt their liquidity provision to changing market conditions.”
Although DEXs promote inclusivity and equal opportunity, the findings suggest that there is a gap between the ideal and reality. Institutional dominance raises questions about whether DEXs are actually fulfilling their mission to create a level playing field for retail participants.
