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Is NFT Hype Killing DeFi on Ethereum?

Posted by
Ian Kane

Gas wars rage as new NFTs drop every day

The number of active wallets interacting with DeFi dapps dropped 17% in August, and at the same time, the NFT hype keeps increasing. New NFT projects launch every day, and with those launches, collectors create gas wars in an effort to mint one or more collectibles. This NFT hype could very well be killing DeFi activity on the Ethereum blockchain. 

As the industry narrative is squarely focussed on NFTs and digital collectibles there is an underlying story emerging. One where Ethereum gas prices are being pushed through the roof by competing NFT projects that seemingly arrive by the day. As these collections are minted, they burn ETH and fill up blocks with transactions. Causing gas prices to spike. Making DeFi, and other applications on Ethereum suffer from expensive gas fees and slow transactions. 

Firstly, we will look at the amount of ETH being burnt by NFT collections in the last 30 days. We have previously reported that OpenSea, the leading NFT marketplace sits atop the pile. Having burnt almost 39,000 ETH in the last 30 days. But there have been countless collections launched in the last month that have burnt considerable ETH. The total ETH burnt in the last 30-days is 263,133 ETH at the time of writing. Of that, 64,000 ETH, or approximately 25% has been burnt by NFT collections. The fact that OpenSea leads ahead of Uniswap, Tether, and Metamask is significant. Even more significant is that this is just a snapshot of the last 30-days. 

Gas wars 

The increased activity surrounding NFT collection is what is pushing gas prices up. As more transactions compete for blocks, Ethereum gets congested. Then, simply put, whoever pays the most, gets the fastest service. As seen below the price of a simple token swap on Ethereum is now above $20 on average. In reality, it’s even closer to $30. That doesn’t include allowing the exchange access to your tokens which would add another $10 to $15. 

Imagine then you want to buy $300 of UNI for example. You will actually spend closer to $350 to make that trade. In the early days where whale traders ruled the roost, this was ok. Now, with so many new traders leaping into crypto, it is not. As we will see later in the article, all these fees have done is give steam to the alternative blockchains with large DeFi dapp ecosystems. Such as Polygon, Binance Smart Chain, and to some extent Tron. Effectively, Ethereum pushed users into their competitor’s arms due to unworkable fees. 

Adjusted TVL

Looking secondly through the lens of the total value locked (TVL) in the Ethereum DeFi ecosystem everything would appear to be normal. However, using DappRadars adjusted total value locked (aTVL) metric provides us with a time-locked view of Ethereum’s growth. One where token price increases have been removed.

Instantly we see that aTVL is almost $20 billion lower than TVL. This simply means that when the price increase of ETH is excluded from the calculation we see a more realistic figure. One that is actually declining, not growing as we see with TVL. As seen more clearly in the image below aTVL fell in line with token price decreases in August and again recently. 

What does this mean? It means that the total value locked in Ethereum DeFi protocols across all their smart contracts currently stands more accurately at around $70 billion and is not charging forward. As is the picture being painted by most media reporting on only TVL as a growth metric. Now we know that the value locked has fallen over the last 30 days. 

Dapp UAW Metrics 

We can look deeper into the DeFi and Exchange dapps responsible for generating this value. More precisely we are interested to see if the number of unique active wallets interacting with Ethereum DeFi and Exchange platforms is decreasing. In the last 30 days, just two of the top ten dapps in the DeFi category have not seen a user drop. Importantly, the 1inch user spike was driven by the dapp returning gas to users. While HEX generally defies all market trends, often rising when the entire market is crashing. 

The most significant drops in unique active wallets can be seen for ShibaSwap, Aave, and dYdX. Importantly, Uniswap, the leading DeFi dapp on Ethereum, is also suffering. 

Looking at dapps in the Exchange category (DappRadar separates DeFi and Exchange dapps into two categories currently) the story is somewhat similar. More reds, and decreasing user activity except for SushiSwap, which shows a small increase of just over 8%. Nothing to write home about. Especially when positive spikes in user activity in DeFi and Exchange dapps can be triggered by something as simple as a stake or pool coming to an end. 

Where are all the DeFi’ers? 

Up to now, we have shown a tight correlation in the data provided. Gas is certainly increasing as countless NFT collections eat huge chunks of resources every day. Also, we see DeFi dapps eating a lot of resources amidst a turbulent time for cryptocurrency prices overall. DeFi and Exchange dapps on Ethereum have seen a drop in unique active wallets visiting their platforms in the last 30-days. Whilst aTVL shows that contrary to most reports, growth in the Ethereum DeFi sector is not what it appears. 

But where are all the traders? Did they simply sit on their hands for the last 30-days waiting for NFT mania to die down? No, they found alternatives. As mentioned earlier, high gas fees and Ethereum woes have pushed traders into the arms of very welcoming blockchains. Namely, Binance Smart Chain and Polygon. Who were perfectly positioned to offer not only lots of choices of dapps but arguably the key ingredients for users: Cheap and fast transactions. Importantly, very few notable NFT collections have launched outside of Ethereum, further improving the service they are able to offer due to less congestion.  

Polygon DeFi 

The top three DeFi protocols on Polygon have all seen a lift in the numbers of unique active wallets interacting with their smart contracts over the last 30 days. Interestingly, the two leaders are also present on Ethereum but launched replica dapps on Polygon this year. Where they are finding more success

Looking at exchange dapps on Polygon, a slightly different picture emerges. However, it’s well worth noting that the most well-used finance applications on Polygon sit in the DeFi category. Although, leading exchange ApeSwap is certainly a key player and has seen a rise in user activity. Others have observed drops. Moreover, these drops could also coincide with a general cooling of token swaps as cryptocurrency prices have reduced lately. The increase for ApeSwap can be stimulated by a similar situation as SushiSwap. 

Binance Smart Chain 

Looking at the top 5 DeFi dapps on BSC once again reinforces the idea that traders have shifted their loyalty. With 1inch we once again see an Ethereum finance dapp that ported over to BSC The token swap aggregator currently sits 5th on the list, while also showing the highest growth month-over-month. ApeSwap is somewhat convoluted as the decrease can be attributed to an especially bumper previous month spurred by new IDO and IAO offerings that spiked user activity and it also runs on Polygon. 

Exchange dapps once again reflect a slightly different tale, like previously seen on Polygon. Here we see that BSC users are seemingly jumping from one DEX to another looking for yields and rewards as the dapp ecosystem grows. We see more established DEXs showing small signs of decreasing activity whilst relatively newer finance dapps lead the charge. Something quite expected as the nature of BSC traders tends to lean towards yield hunting and fast returns over purchasing tokens to hold. 

GameFi to the rescue   

One emerging trend in 2021 has been the rise of GameFi, or play-to-earn gaming as it is also known. According to the latest DappRadar Blockchain User Behavior Report the industry’s interest is shifting towards games, the number of Unique Active Wallets connected to game dapps increased 64% month-over-month, whilst DeFi and NFT unique wallets increased only 3% and 6% respectively in the same period. 

The rise in gaming popularity positively impacted NFTs as well. In blockchain games, game items are represented by NFTs, thus, they represent an important subject in the NFT marketplaces across all protocols. In August alone, the NFT space generated over $5 billion in total sales volume. Almost 20% of the record sales involved gaming NFTs to some extent. 

Furthermore, most of the other blockchains saw their demand grow with respect to gaming dapps. Only in EOS and Ethereum, we don’t see an increase in the interactions between unique wallets and smart contracts. However, it is important to note that Upland, EOS’ main dapp, increased its UAW in August by 47% month-over-month, reaching more than 37,000 daily unique wallets on average.

In summary 

Up to now the picture painted is perhaps a little gloomy for Ethereum. Rising gas fees and falling user activity never sound good. Additionally, and contrary to popular belief, EIP-556 did very little to adjust gas fees. However, a booming NFT landscape is emerging on Ethereum. One where innovation and creativity have been let loose to experiment and deliver new, dynamic NFT collections. Yes, they are pushing up gas prices, but the argument is perhaps that innovation comes at a cost. Moreover, those NFTs are finding their way into the DeFi sector. Innovations such as leveraging NFTs for loans or sharding valuable NFT assets so as to divide and sell them in pieces are becoming more widely known and used. 

Additionally, while some may think Ethereum is going to fight for relevance moving forward. I am more of the belief that it will sit at the top of the pile, more encompassing and supporting other chains. As opposed to directly competing with them, because at DappRadar we believe that the future is multichain. 

The above does not constitute investment advice. The information given here is purely for informational purposes only. Please exercise due diligence and do your research. The writer holds positions in ETH, BTC, ADA, MATIC, SAFEMOON, HEX, LINK, GRT, CRO, OMI, USDT, SOL, SHIBA INU, AVASTR, RAY, BOSON, AND OCEAN

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