DeFi's Liquidity Concentrated Among Large Players, Study Finds
Decentralized Finance (DeFi) aims to democratize finance, with retail investors providing liquidity. However, a study reveals a concentration of liquidity among a few large players, similar to traditional finance.
In DeFi, retail investors, making up 93% of liquidity providers (LPs) on decentralized exchanges (DEXs), contribute to liquidity in a crowdsourcing manner. Yet, a few larger actors provide 65-85% of the liquidity, primarily automated market makers (AMMs) operating via smart contracts. The highest liquidity remains concentrated on centralized exchanges (CEXs) like Binance and Coinbase, acting as key market makers.
The average retail investor's position on DEXs is $29,000, while professionals hold $3.7 million. Professionals earn an average net return of 3 basis points more daily than retail LPs, translating to 11.65% more annually. The Bank for International Settlements (BIS) found that sophisticated players dominate DEX transactions, mirroring professional intermediaries in traditional finance.
Despite DeFi's aim to provide an alternative to intermediaries, the liquidity landscape shows a concentration among a few large players, similar to traditional finance. Retail investors, while numerous, face professionals earning higher returns. Further decentralization and regulation may be needed to address this imbalance.
