BIS Challenges the Myth of Decentralized Liquidity in DEXs

The Bank for International Settlements (BIS) published a report questioning the actual decentralization of liquidity on DeFi platforms. The study sought to determine whether decentralization fosters a truly democratic market or mimics traditional financial systems dominated by large players.  

The research focused on Uniswap V3, analyzing 250 of its largest liquidity pools. The findings revealed that liquidity is primarily centralized among a few dominant players, with decentralization present only at a technical level.  

These players hold about 80% of total value locked and focus their attention on liquidity pools that have the most trading volume and are less volatile

the report highlights.

This setup enables institutional players to dominate the market, capturing the bulk of trading fees and earning significantly higher returns compared to retail investors. Additionally, smaller liquidity providers often face greater losses due to risk adjustments, particularly in low-liquidity pools or with less popular tokens.  

The study concludes that open access to liquidity pools does not ensure market democratization and cannot fully eliminate centralization. However, BIS also acknowledged the notable technological and operational advancements that decentralized platforms have achieved over traditional finance.  

The report further notes that the trends observed on Uniswap are reflective of most decentralized exchanges. In the future, BIS plans to conduct similar studies on other DeFi applications, such as lending and borrowing platforms.