Liquidity on decentralized exchanges remains concentrated in the hands of a few large players, reducing the democratization of access to the DeFi market. These findings were shared by Bank for International Settlements (BIS) in a recent report.

Researchers analyzed the 250 largest liquidity pools on Uniswap V3 and concluded that a small group of participants controls approximately 80% of TVL (Total Value Locked) and earns significantly higher profits than retail participants. Moreover, after accounting for risk, retail participants are often losing money.

“These large participants place orders that mimic traditional spreads between bid and ask prices, allowing them to earn significantly higher profits — both in absolute and relative terms — compared to their retail counterparts,” the experts emphasized.

BIS pointed out that the centralization seen in traditional financial markets may be an “inherited trait” of financial systems, which is also present in DeFi.

In 2023, analysts from Gauntlet noted the increasing centralization in the DeFi market. They found that four DEX platforms control 54% of the market, and 90% of all assets in the liquid staking market are concentrated in the top four projects.

Back in 2021, SEC Chairman Gary Gensler expressed doubts about the true decentralization of the DeFi segment:

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

He noted that platform operators are motivated to promote their projects and reap significant benefits from it.

Economist Gordon Liao believes that a 15% increase in earned fees is a small advantage compared to less skilled passive users. However, he points out that the situation in traditional finance is much worse, citing a 2016 study which showed that individual liquidity providers do not receive adequate compensation for their role in the market.

Liao also disagreed with the notion of order manipulation:

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

Despite the lack of decentralization, BIS researchers acknowledged that the DeFi market faces fewer regulatory, operational, and technological barriers compared to traditional finance systems.

It’s worth noting that in October, Vitalik Buterin agreed with the need to lower the entry threshold for individual stakers in Ethereum to maintain decentralization in the network.