LiquidityPool: Game-Theoretic Analysis of Stakeholder Revenue in Ranking-Dependent DeFi

Ranking-dependent DeFi protocols create participation barriers for small-volume stakeholders due to competitive disadvantages based on fund size rankings. Our analysis reveals that brokers with higher fund balances achieve better revenue performance, disadvantaging smaller investors. We introduce LiquidityPool, a fund aggregation protocol that enables collective participation in ranking-dependent DeFi environments by pooling resources from multiple stakeholders. Through game-theoretic analysis of multi-leader multi-follower Stackelberg competition, we establish theoretical results that differ from traditional competition assumptions. Our analysis reveals knife-edge equilibrium properties where symmetric multi-party competition exists only under restrictive initial conditions. When initial asymmetry exceeds a critical threshold, protocols converge to a monopolistic market structure regardless of the starting configuration. We show that monopolistic concentration performs better than fragmented competition in terms of social welfare, contrary to the predictions of classical Bertrand and Cournot competition. This occurs because convex revenue functions create economies of scale that favor fund aggregation over competitive fragmentation. Experimental validation using real Ethereum blockchain data shows monopolization across different market structures. While welfare improvements are modest due to concentrated wealth distribution, LiquidityPool enables 98% of small-volume stakeholders to participate in protocols that were previously inaccessible. These findings suggest that traditional antitrust policies promoting market fragmentation may not be effective in ranking-dependent DeFi networks, where concentration enables rather than restricts efficient resource allocation and stakeholder accessibility.