30s Summary

The Bank for International Settlements (BIS) found that decentralized finance (DeFi) may not be as decentralized as believed, with big players controlling around 80% of capital in Uniswap’s liquidity pools. Consequently, these major players earn higher trading fees and better investment returns. Despite these findings, BIS noted that DeFi carries fewer regulatory and technological obstacles compared to traditional finance. Economist Gordon Liao argued that, while big traders hold 80% of fees, they only hold a 15% edge over smaller traders, a gap he sees as less significant compared to traditional finance.

Full Article

As much as the whole decentralized finance (DeFi) thing is hyped up to be the Robin Hood of finance, the Bank for International Settlements (BIS) has some news for you: it might not be as decentralized as you think.

The BIS took a good look at Uniswap v3, a big shot in the DeFi world, on Nov. 19. They wanted to check whether DeFi was really giving power to the people or just copying the way traditional finance runs, with a handful of big fish getting all the gains.

For the nerdy details, the BIS analyzed the top 250 liquidity pools (places where traders can swap tokens) on Uniswap, which sits on the Ethereum blockchain. They wanted to see if the average Joes and Janes could really compete with the fat cats.

And guess what the BIS found? It’s not as fair a game as we’d all hoped. Normal traders are losing out to a handful of savvy hustlers who run most of the show. These big players control around 80% of all money locked in these pools. And they like to play in the pools where the most trading is going down and where things aren’t too up and down.

These industry high-rollers not only earn a larger chunk of trading fees, but they also get better returns on their investments. Meanwhile, the smaller retail players are getting stuck with low returns and sometimes even lose money when you factor in the risks. And these findings aren’t just limited to Uniswap, they could apply to other DeFi platforms too.

This isn’t great news for fans of DeFi, as it seems that the whole system might be just as unbalanced as traditional finance. The BIS also pointed out that just letting everyone join in doesn’t automatically make it a level playing field.

But it’s not all doom and gloom. The BIS did say that DeFi tends to have less red-tape and tech issues than old-school finance.

On the flip side, economist Gordon Liao had a different take on the whole thing. He reckoned that the smarty-pants traders who rake in 80% of fees only have a 15% edge over the less-savvy traders, which he doesn’t think is that impressive. He even said that things are way worse in traditional finance.

So, whether DeFi is the white knight we expected it to be or not is still up for debate. But it sure isn’t short of drama.