How does value move around when entering the blockchain industry? This report is the first in a bigger series.
This report is part of a series which introduces the idea of Value Flow within the blockchain industry. In these reports, we’ll analyze how the value enters and what path it follows once inside the industry. For this release we have focused on the top 4 cryptocurrencies by market cap, trying to identify where the value comes from and what is the current endpoint in each case.
The blockchain industry has exponentially expanded during 2021. Several blockchain categories are excelling. Whether a network joining the DeFi race, billions generated in the NFT space or games attracting millions of daily players, the industry just keeps adding value. But how does this value flow within the industry? This is the question we’ll try to answer. To do so, we need to start from the top, or actually, from the outside.
In this report we’ll explain how fiat money flows into the blockchain to have a measure of magnitude to further analyze the deeper layers. We’ll then try to map how these currencies turn into the first layer of blockchain, cryptocurrencies and try to understand whether the value is growing or decreasing. Also, how the main cryptos are being used and finally, understand how stablecoins, the main tool to interact with DeFi protocols, affect this space.
- The number of BTC (reserves) sitting in centralized exchanges is at its lowest point in 2021; meanwhile, WBTC doubled since the start of the year, reaching 20,000 WBTC locked in Ethereum DeFi dapps.
- The amount of ETH leaving centralized exchanges is at its highest, matching the highest supply of WETH used in DeFi (6% of ETH’s circulating supply), and the record trading August volumes in NFTs ($5.2 billion).
- Four stablecoins (USDC, USDT, DAI and UST) constitute 39% of the assets bridged in Ethereum, pointing towards a hefty use in both DeFi and NFTs.
- ADA is, for now, one of the most static assets as 70% of ADA is locked in staking pools; this would represent 2.45% of industry market cap locked in the industry.
Table of Contents
- Into the blockchain
- Bitcoin value flow
- Ethereum value flow
- Tether and other stablecoins value flow
- ADA value flow
- Only the tip of the iceberg
Into the blockchain
Cryptocurrencies are digital tokens that grant ownership to an individual through a secure and immutable ledger called blockchain. These cryptos can then be used to interact with DeFi dapps, to buy art or any type of NFT, and are also widely used in blockchain games as governance tokens or as in-game rewards. So, in order to get exposure within any of these spaces, any individual must have cryptocurrency funds in a wallet.
Centralized exchanges (CEX) are one of the most utilized entrances, and therefore the first layer of the blockchain money flow structure. Although centralized exchanges may contradict the decentralization nature of the industry, they are one of the key elements of blockchain.
CEXs are platforms run by third parties where individuals can easily trade their fiat currency for a given cryptocurrency that is listed in the exchange. In this sense, centralized exchanges act as the middlemen to investors by providing a trustful manner to exchange value, but also as the place where the assets are stored. CEXs rely on commissions and transaction fees as their business model. This constitutes the first layer of how the money flows in the blockchain landscape.
Now that the entrance gate to the blockchain industry is clear, we’ll use CEX metrics along with on-chain analysis to identify value flow patterns in the top 5 cryptocurrencies by market cap. Exchange net inflows analysis is widely used for trading purposes. However, in this case, we want to understand how the asset is being used. Positive inflows (deposits > withdrawals) signal an increase in the asset supply which can then be used for trading or converting back to Fiat. On the other hand, negative inflows (deposits < withdrawals) indicate that the asset is flowing outside from exchanges into another type of wallet.
Bitcoin value flow
Currently, there are thousands of cryptocurrencies thrifting through the space, however, a few years ago, Bitcoin (BTC) was the main entry point. Bitcoin is obviously one of the most, if not, the most important asset in the industry, even dictating the pace of the entire crypto market. Thus, the importance of analyzing the value provided by BTC. The graphic below shows the BTC net inflow on exchanges.
By analyzing bitcoin net inflows on exchanges, we are able to see that a high 47,200 BTC were supplied into exchanges on July 17, whilst nearly 57,700 BTC were taken out.
This goes in line with CEX reserves, another important indicator to consider. In technical analysis, reserve levels are used to estimate potential sell-offs caused by price volatility. For this report, we’ll consider crypto reserves held in CEX as a complimentary value flow analysis. Having low reserve levels may actually point to different scenarios which are actually beneficial for the industry’s long term outlook.
Looking at BTC reserves, we calculate the reserve to circulating supply ratio at 12.67%, the lowest in 2021. The reserve to circulating supply ratio indicates the amount of the asset available in CEX compared to the total circulating supply. At the beginning of the year, the reserve ratio for BTC was estimated to be around 15%.
A decrease in the reserves of a given asset can signal two main behaviors. On one hand, investors are trying to protect their assets by moving them from their exchange accounts, to cold storage wallets that provide more security. Whilst this conduct does not generate any value immediately, it means that the asset will remain on-chain without reverting back to fiat. Therefore, the value is still on the blockchain.
On the other hand, any decrease in the exchange reserves may also signal towards a real value generation in other blockchain spaces. For example, in the case of BTC, we can observe this trend confirmed by looking at Wrapped Bitcoin or WBTC. WBTC is a token locked in a smart contract which is fully backed in value by BTC. The BTC is locked in an Ethereum smart contract so the user can now use Bitcoin in a more flexible manner within the Ethereum network. Thus, WBTC can be used as a collateral in lending protocols or to provide liquidity in Automated Market Makers.
To get a better grasp on the value provided by WBTC around DeFi, we analyze how much WBTC has been locked in Ethereum DeFi dapps. At the time of writing, there are more than 20,000 WBTC tokens locked in Ethereum DeFi dapps. The WBTC locked in these DeFi contracts has increased almost 100% since the start of the year. Currently, 1.1% of BTC’s circulating supply has been wrapped.
Furthermore, looking into the top WBTC holders, we confirm the DeFi use case. Around 65% of Wrapped BTC is locked in 10 DeFi smart contracts.
Another blockchain metric that helps us size the value flow in the industry is on-chain volume. This metric shows the amount of BTC that is being actively traded in the blockchain. Since July 2020, on-chain volumes show that at least 2 million BTC are being traded daily, reaching more than 11 million BTC during September. The amount of BTC on-chain increased exponentially, boosting the size of the blockchain industry. The start of this high demand period matches the DeFi summer of last year.
So far, the report has only been focused around Bitcoin, but it’s utterly necessary to consider Ethereum as well. Bitcoin’s intrinsic value covers one part of the equation. Next, we’ll turn the attention to Ethereum, where exchange and on-chain analysis can provide additional insights.
Ethereum value flow
The case of ETH is much more flexible than BTC. The main differentiator is the flexibility offered by smart contracts which, as previously explained, are pieces of programmable code that run within the network. Smart contracts allow Ethereum to host several dapps that go from DeFi dapps to NFTs or even games.
First, analyzing the ETH net inflows, we are able to see more distinguishable outflow levels than the ones seen in BTC. These high withdrawal ratios may have to do with two important sectors in the Ethereum ecosystem.
First, Ethereum is the leading blockchain in terms of Total Value Locked (TVL), currently holding $122 billion or 65% of the industry’s important metric. Although its dominance has been decreasing by the multichain paradigm, along with significant strides made by other chains, Ethereum is still DeFi’s dominant chain.
Also, you should be aware of the explosion that is happening in the NFT space, where trading volumes have just surpassed $5.2 billion in August alone. As a note, Ethereum hosts around 90% of the NFT volumes.
Looking at the current ETH reserve volumes, we see a clear decrease of the amount of ether held in exchanges. As previously mentioned it can point either to cold storage, or the interaction with other use cases like DeFi and NFTs, where Ethereum is leading. Hence, in the case of Ethereum, we can assume that it is about the latter.
Similar to what happens in Bitcoin, where the asset is wrapped around to be utilized in different manners, ETH is also commonly “wrapped” for DeFi purposes. In reality, Wrapped ETH or WETH is the ERC-20 version of ether. In the end, the objective remains the same, to be compatible with DeFi dapps.
At the time of writing, there are approximately 7.069 million of WETH in circulation. This represents around 6% of ETH’s total circulating supply. Looking at the top WETH holders, we clearly identify at least seven DeFi related smart contracts, and two important bridges, one of them totally related to the game space.
To complement the value generation idea around Ethereum’s DeFi ecosystem, we’ll take a closer look at the WETH supply in Aave. Since May 2021, WETH tokens have almost quadrupled, reaching almost 2,000 WETH locked in Ethereum’s Aave version. Again, a trend that indicates an increase in the value coming from Ethereum.
Overall, Ethereum’s value flow is not straightforward to map due to the different applications offered by the network. Whilst the value is apparently increasing on the DeFi side, it looks like a stronger trend is happening on the NFT sphere. A complete in-depth analysis is required to confirm that trend. However, a high-level overview confirms Ethereum holds as much value as any crypto in the industry.
The amount of ether leaving centralized exchanges is at its highest. In contrast to bitcoin, ether’s main value is driven by its flexibility to be used in several use cases. The decreasing reserves of BTC and ETH bode well for the long term; however, the industry’s picture still feels incomplete without other relevant cryptos.
Tether and other stablecoins value flow
BTC and ETH are the most popular cryptos and together they represent almost 60% of the cryptocurrencies market cap. However, there are two additional cryptos that have a strong say in the value flow of the industry too.
Starting with Tether (USDT), the third crypto in terms of market cap. Tether is a stablecoin, a cryptocurrency pegged 1:1 to the value of USD. Stablecoins represent one of the most important backbones in the whole Decentralized Finance ecosystem.
USDT remains one of the most important stablecoins in the industry despite some legal involvements. Thus, it can provide a good estimate of how value flows from stablecoins. First, analyzing Tether’s circulating supply, we see a constant increase since its tracking date.
However, we see a period between May and August, where the generation of the asset was stalled. According to Dune Analytics, the supply of other stablecoins like the USD Coin (USDC), the Binance USD (BUSD) or Terra USD (UST) are gaining ground. Still, Tether remains at the top.
As already mentioned, stablecoins are an important part of the industry, and a good indicator of how the value is used in blockchain, especially in DeFi. In this case, stablecoin reserves on exchanges show increased value in the industry. As of now, the four aforementioned stablecoins represent around 5% of the overall’s crypto market cap.
Moreover, according to CryptoQuant data, stablecoin reserves on exchanges, reached an all-time high of $19.52 billion. This metric represents almost a 500% increase from the start of the year. According to Coingecko, the market cap for stablecoins stands at $127 billion. This means that exchanges hold around 15% of stablecoins market value. In contrast to assets like BTC or ETH, an increase in the stablecoin exchange reserves might translate into higher trading volumes, where individuals convert back to other cryptos. The stablecoins trading volume is estimated at $93.57 billion.
To round up the stablecoins value flow, we observe that these types of assets are amongst the most bridged assets in the Ethereum ecosystem. Four stablecoins (USDC, USDT, DAI and UST) constitute 39% of the assets bridged on Ethereum, pointing towards a hefty use in both DeFi and NFTs.
ADA value flow
To round up the Top 4 crypto in terms of market capitalization, we can find ADA, the native currency of Cardano. Cardano is another smart contract blockchain that aims to become one of the most important networks in the industry. In recent months, ADA has enjoyed a positive surge, mostly in part due to development progress of the Cardano mainnet, including the launch of smart contracts.
Cardano is another crypto that drives high value to the industry. For now, the main use of ADA is staking through delegation pools. Around 70% of ADA is staked, according to Messari. This means that, for now, most of ADA’s value will remain the same. This means that around 2.45% of the market cap is likely to remain locked for future months.
However, it is important to mention that the value flow proposition in ADA might change soon. Cardano’s smart contracts are expected to be fully functioning by 2022. Once the Cardano ecosystem is in full display, ADA’s value story will be different.
Only the tip of the iceberg
The top 4 cryptocurrencies provide visibility over 67% of the industry’s market cap. Combining off-chain analysis with high-level on-chain exploration, provides us with a general notion about the potential value flow within the industry. However, this is only the starting point.
It looks like DeFi has become one of the main beneficiaries of value inflows. In the specific case of BTC, we were able to identify how the number of WBTC is increasing within the DeFi space. Coupled with the irregular decrease in centralized exchanges, we could demonstrate how the usage of WBTC has increased significantly since the DeFi summer of 2020.
Furthermore, stablecoins like Tether, are key players in DeFi’s operating framework. Whilst the reserves analysis does not point towards a clear scenario, having additional on-chain analysis, like the Ethereum bridges, confirm that stablecoins still drive value within that specific category.
Finally, Ethereum. This network has become one of the main engines for blockchain development. The decrease of ETH in exchanges goes in hand with the increased interest of the blockchain audience in the different categories offered by this particular protocol. Although we see a clear ascension of WETH in DeFi’s most important dapps, it is undeniable that the record trade volumes seen in NFTs are probably draining value from one category to another. In the next release, we’ll dive deeper into on-chain analysis to really identify how the value flows within the different categories that form the blockchain industry.