Chainalysis | Top Protocols Monopolize DEX, Lending Markets, NFTs Key to Cryptocurrency Adoption

The cryptocurrency firm Chainalysis recently released a Web3 report spanning 109 pages, with the content curated and condensed by Joel John.

He emphasizes that different individuals may draw completely different conclusions from the same data, hence he supports his arguments with multiple charts.

Summary of the content:

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1. Decentralized exchange (DEX) trading volume has exceeded $1 trillion.

2. The top five DEXs account for approximately 85% of the trading volume.

3. Lending platform trends are similar, with Aave and Compound holding a market share of 90%.

4. NFT adoption is crucial for retail participation. NFT users are active for an average of only 10 days, compared to 300 days for DeFi.

5. NFTs contribute the fastest growth in on-chain transaction fees.

6. DeFi protocol DAOs have an average asset under management of around $100 million.

7. 85% of DAOs have excessively concentrated reserve assets.

Summary: Average transaction amounts are decreasing, while the number of transactions is increasing, with NFTs becoming a key area for retail investors to enter and adopt.

Increase in Transaction Volume

The "holy grail" of crypto adoption is to make it accessible to the general public. However, the technology does not go from 0 to 100 overnight, as described by author Joel John:

It won't transition from a mysterious military technology to something your mother can understand overnight. Instead, it gradually infiltrates society through the advantages of niche markets.

John was drawn to the chart below, showing that on-chain transaction volume in blue started to decline from Q2 last year, but the number of transactions in orange did not decrease but instead increased, gradually trending downward only after Q4 last year. Despite the decrease in transaction volume, which was only a 10% drop from its peak, he believes there are several reasons for this.

NFTs Attracting New Users

John highlighted two prominent services for retail investors: NFTs and gaming. In the graph below:

• NFTs: Transaction volume exceeds $10 billion, with over 10 million transactions.
• Gaming: Transaction volume is only $8 million, with over 1 million transactions.

NFTs significantly outperform gaming in terms of data, and John believes that this is likely due to the substantial increase in NFT values compared to in-game assets.

Growth of Gaming and NFTs in the Crypto Market

The graph below shows the active days of different crypto categories' wallets. The user wallets for DEX start to level off after around 300 days, assuming the average active period for DeFi users is about a year, while the active period for gaming and NFT wallets is less than 50 days.

John suspects this may indicate that users quickly exit the NFT space after initial exposure, resulting in lower average active days for NFT wallets.

Rapid Increase in NFT Fee Percentage

The chart below shows the fee percentage for various categories, with NFTs contributing only 5% of fees in July last year, now reaching 20-25%, making it the fastest-growing category.

DEX

The report mentions that compared to CEX, DEX has significantly increased transaction volume, but the top five DEXs account for 85% of the volume, much higher than CEX. John points out:

If a DEX is not among the top five exchanges in DeFi, then that DEX can be said to be competing for that 15% market share.

DeFi Lending

In the lending category, Aave and Compound have a higher market share of 90%.

However, John points out that some may view DeFi lending as highly centralized. Still, considering the high volatility and frequent liquidations in recent months, these platforms have actually been operating very well, highlighting the intense competition among DeFi "second-tier protocols."

Additionally, the flow of funds in DeFi lending is shown in the chart below:

• DEX｜38%: Typically for swapping to another currency.
• CEX｜13%: As a withdrawal channel.
• Miners｜3.6%: Miners rely more on Nexo and banks for leverage.

John confidently states that, unlike the original intent of inclusive finance, DeFi lending is currently primarily used for trading.

DAOs in DeFi projects account for 83% of funds, with each DAO managing an average of around $100 million, all cash flows being on-chain.

However, a concern is that in DAOs surveyed by Chainalysis, about 85% of DAOs hold a single asset, likely the project token, as reserves, with only 23% using stablecoins.

The data below shows the number of DAOs and the percentage allocated to stablecoins, but this does not fully reflect the volatility in reserve assets.

Significant User Growth

Looking at NFT data, it has not been crushed by the bear market. This year, the total transaction volume has already reached $370 billion, just over half of the $400 billion in 2021.

At the time of the Chainalysis report, there were approximately 750,000 active NFT trading users, slightly lower than the record high of 1 million users in Q1 this year, representing a 20-fold increase compared to Q1 last year.

Institutional Traders' Involvement

According to data, less than 10% of transactions are valued below $10,000, while transactions of $100,000 and above account for 90% of NFT trades. Therefore, John believes the market has been divided into two segments, and for project founders focusing on development, the latter may be more crucial:

1. Low-end NFTs affordable for retail investors may focus on layer-two scaling or the widespread adoption of low-cost networks like Solana, emphasizing low transaction fees and user experience.

2. NFTs that can be compared to "art" will not concern users of this class about transaction fees of a few hundred dollars as long as the trade certainty exists.

NFTs with High Transaction Volume

John also mentioned a token-rewarding NFT trading platform, although not specifying the name, likely referring to LooksRare.

He highlighted an impressive high-volume trader who never interacted with others, continuously bought and sold three identical NFTs, with a trading volume of 650,000 ETH, earning token rewards worth $185 million with a Gas Fee of $114 million.

John concludes by expressing great interest in why the platform LooksRare did not cancel the rewards and hopes for the opportunity to interview the high-volume trader.