The Bank for International Settlements (BIS) has revealed that institutional players dominate liquidity provision on decentralized exchanges (DEXs) like Uniswap, according to a Nov. 19 report,

In a recent report titled “Decentralized Dealers,” the BIS analyzed the behavior of sophisticated and retail participants in Uniswap v3’s liquidity pools. The study examined their responses to market activities and the extent to which DeFi delivers on its promise of inclusivity.

Liquidity providers play a critical role in DEX ecosystems by depositing assets into trading pools, enabling token swaps. In return, they earn trading fees, with higher returns typically linked to 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 like Base, Arbitrum, and Optimism, among others. Since launching in 2018, it has facilitated more than $2 trillion in trades.

Institutional players dominate

The report highlighted that institutional players in DeFi often replicate strategies from traditional finance, gaining a competitive edge over retail participants.

These sophisticated participants act as market makers, adopting advanced tactics such as mimicking bid-ask spreads to maximize profits. Their dominance reflects patterns in traditional financial systems, where large players frequently outpace smaller participants.

Uniswap v3’s design allows liquidity providers to allocate funds within specific price ranges, offering significant advantages to those with advanced market knowledge. The report noted that institutional players actively adjust their positions during volatile market periods, reaping higher returns. In contrast, retail participants rarely make similar adjustments, which often leads 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 substantially lower skill. They are much less profitable in highly volatile periods and do not seem to adapt their liquidity provision to changing market conditions.”

While DEXs promote inclusivity and equal opportunities, the findings suggest a gap between the ideal and the reality. Institutional dominance raises questions about whether DEXs genuinely fulfill their mission to level the playing field for retail participants.

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