This report is part of a series of reports introducing the concept of value stream in the blockchain industry. In these reports, we will analyze how value enters the industry and what path it will follow once it enters the industry. In this article, we focused on the top 4 cryptocurrencies by market capitalization, trying to determine the source of their value, etc.
The blockchain industry will grow exponentially in 2021. Several blockchain categories performed well. Whether it’s joining the DeFi competition, creating billions of dollars in revenue in the NFT field, or attracting millions of daily players to games, this industry has been adding value. But how does this value flow within the industry? This is the question we will try to answer.
In this report, we will explain how fiat money flows into the blockchain for further analysis. Then, we will try to map how these currencies become the first layer of cryptocurrencies in the blockchain, and try to understand whether their value is growing or declining. In addition, how the major cryptocurrencies are used, and finally understand how stablecoins (the main tool for interacting with the DeFi protocol) affect this field.
The number of BTC (reserves) on centralized exchanges is at its lowest point in 2021; at the same time, WBTC has doubled since the beginning of the year, reaching 20,000 WBTC locked in Ethereum DeFi dapps.
The number of ETH leaving centralized exchanges reached the highest level, matching the highest supply of WETH used in DeFi (6% of the circulating supply of ETH) and the record trading volume of NFT in August ($5.2 billion).
Four stablecoins ( USDC , USDT, DAI, and UST) account for 39% of Ethereum’s bridged assets, indicating that these stablecoins are heavily used in DeFi and NFT.
Currently, ADA is one of the most stable assets because 70% of ADA is locked in the pledge pool; this will account for 2.45% of the industry’s locked-in industry market value.
Enter the blockchain
Bitcoin value flow
Ethereum value flow
Value flow of other stablecoins such as Tether
ADA value flow
Enter the blockchain
A cryptocurrency is a digital token that grants ownership to individuals through a secure and immutable ledger called a blockchain. These cryptocurrencies can be used to interact with DeFi dapps, purchase artwork or any type of NFT, and are also widely used in blockchain games as governance tokens or in-game rewards. Therefore, in order to enter this field, any personal wallet must have cryptocurrency funds.
The Centralized Exchange (CEX) is one of the most commonly used entrances and therefore is the first layer of the blockchain capital flow structure. Although centralized exchanges may contradict the decentralized nature of the industry, they are one of the key elements of blockchain.
CEX is a platform operated by a third party, and individuals can easily exchange their fiat currency into specific cryptocurrencies listed on the exchange. In this sense, the centralized exchange acts as an intermediary for investors, provides a reliable way to exchange value, and is also a storage place for assets. CEX relies on commissions and transaction fees as their business model. This constitutes the first layer of capital flow in the blockchain landscape.
Now that the entry point of the blockchain industry is clear, we will use CEX indicators and on-chain analysis to determine the value flow mode of the top 5 cryptocurrencies by market value. Exchange net inflow analysis is widely used for trading purposes. However, in this example, we want to understand how the asset is used. Positive inflows (deposits> withdrawals) indicate an increase in the supply of assets, which can then be used for trading or converted back to fiat currency. On the other hand, negative inflows (deposits <withdrawals) indicate that assets are flowing from the exchange to another type of wallet.
Bitcoin value flow
Currently, there are thousands of cryptocurrencies booming in this field, however, a few years ago, Bitcoin (BTC) was the main entry point. Bitcoin is clearly one of the most important assets in the industry, and even determines the speed of development of the entire crypto market. Therefore, it is important to analyze the value provided by BTC. The chart below shows the net inflow of BTC from the exchange.
By analyzing the net inflow of bitcoins on exchanges, we can see that on July 17, as many as 47,200 bitcoins flowed into the exchanges, and nearly 57,700 bitcoins were withdrawn at the same time.
This is consistent with another important indicator that needs to be considered-CEX reserves. In technical analysis, reserve levels are used to assess potential selling caused by price fluctuations. In this report, we will use the encrypted reserves held in CEX as a free value stream analysis. Low reserve levels may point to different situations, which actually benefits the long-term prospects of the industry.
In terms of BTC reserves, we calculated that the ratio of reserves to circulating supply is 12.67%, which is the lowest value in 2021. The ratio of reserves to current supply indicates the ratio of available assets to the total circulating supply in CEX. At the beginning of this year, Bitcoin’s reserve ratio is estimated to be around 15%.
The decrease in the reserve of a given asset may herald two main behaviors. On the one hand, investors are trying to protect assets by transferring assets from exchange accounts to safer wallets. Although this behavior does not immediately generate any value, it means that the asset will remain on the chain and will not revert to legal tender. Therefore, the value is still on the blockchain.
On the other hand, the reduction of reserves may also indicate the actual value of other blockchain fields. Taking BTC as an example, we can observe this trend through Wrapped Bitcoin or WBTC. WBTC is a token locked in a smart contract, and its value is fully supported by BTC. Bitcoin is locked in the Ethereum smart contract, so users can now use Bitcoin in a more flexible way in the Ethereum network. Therefore, WBTC can be used as collateral in loan agreements or to provide liquidity for automated market makers.
To better understand the value WBTC provides around DeFi, we analyzed how much WBTC is locked in Ethereum DeFi dapps. At the time of writing, there are more than 20,000 WBTC tokens locked in Ethereum DeFi dapps. Since the beginning of this year, WBTC locked in these DeFi contracts has risen by almost 100%.
In addition, by investigating the top holders of WBTC, we confirmed DeFi use cases. Approximately 65% of Wrapped BTC is locked in 10 DeFi smart contracts.
Another blockchain indicator that helps us measure the flow of value within the industry is on-chain transaction volume. This indicator shows the number of bitcoins that are actively traded in the blockchain. Since July 2020, the on-chain transaction volume has shown that there are at least 2 million bitcoins used in transactions every day, reaching more than 11 million bitcoins in September. The number of BTC on the chain has grown exponentially, increasing the scale of the blockchain industry. The beginning of this high-demand period coincides with last year’s “DeFi Summer”.
So far, the report has only focused on Bitcoin, but it is also absolutely necessary to consider Ethereum. The intrinsic value of Bitcoin covers part of the equation. Next, we will turn our attention to Ethereum, where exchanges and on-chain analytics can provide additional insights.
Ethereum value flow
The situation of ETH is much more flexible than BTC. The main difference lies in the flexibility provided by smart contracts. As mentioned earlier, smart contracts are programmable code fragments that run within the network. Smart contracts allow Ethereum to host multiple dapps, from DeFi dapps to NFTs and even games.
First, analyzing the net inflow of ETH, we can see a more obvious level of outflow than BTC. Such a high withdrawal rate may be related to two important areas in the Ethereum ecosystem.
First of all, in terms of total locked value (TVL), Ethereum is in a leading position, currently holding $122 billion, accounting for 65% of the industry’s important indicators. Although with the influence of the multi-chain paradigm, Ethereum’s dominance has been declining, and other chains have also made significant progress, Ethereum is still the dominant chain of DeFi.
In addition, you should be aware of the explosive growth in the NFT field. In August alone, the transaction volume exceeded $5.2 billion. It should be noted that approximately 90% of NFT transaction volume occurs on Ethereum.
Judging from the current ETH reserves, we see that the amount of ETH held by the exchange has decreased significantly. As mentioned earlier, this may be due to cold wallets or interactions with other use cases such as DeFi and NFTs. Considering that Ethereum is leading the way in DeFi and NFTs, in the case of Ethereum, we can assume that the decrease in the amount of ETH held by the exchange is due to the latter.
Similar to what happens in Bitcoin, assets are wrapped up for ease of use, and ETH is usually also “wrapped” for DeFi purposes. In fact, Wrapped ETH or WETH is the ERC-20 version of Ether . In the end, the goal remains the same, which is to be compatible with DeFi dapp.
At the time of writing, there are approximately 7.069 million WETH in circulation. This accounts for approximately 6% of the total circulating supply of ETH. Looking at the top-ranked WETH holders, we clearly identified at least seven DeFi-related smart contracts and two important bridges, one of which is completely related to the game field.
Source: Etherscan /DappRadar
In order to supplement the value creation concept of the Ethereum DeFi ecosystem, we will carefully study the WETH supply in Aave. Since May 2021, WETH tokens have almost quadrupled, and the number of WETH locked in the Aave version of Ethereum has reached nearly 2,000. Again, this trend shows that the value from Ethereum has increased.
In general, because the Ethereum network provides different applications, the value flow of Ethereum is not easy to map. Although the value in DeFi has increased significantly, there seems to be a stronger trend in the NFT field. Confirming this trend requires a comprehensive and in-depth analysis.
The number of ETH leaving the centralized exchange is the highest. Compared with Bitcoin, the main value of ETH lies in its flexibility in multiple use cases. In the long run, the reduction in BTC and ETH reserves is a good sign; however, without other related cryptocurrencies, the outlook for the industry is still uncertain.
Value flow of other stablecoins such as Tether
BTC and ETH are the most popular cryptocurrencies, and together they account for nearly 60% of the market value of cryptocurrencies. However, there are two other cryptocurrencies that also have a strong say in the flow of value in the industry.
Source: Coingecko / DappRadar
The first is Tether (USDT), the third largest cryptocurrency by market capitalization. Tether is a stable currency that is pegged 1:1 to the US dollar exchange rate. Stable coins are one of the most important pillars in the entire decentralized financial ecosystem.
Despite some legal issues, USDT is still one of the most important stablecoins in the industry. Therefore, it can be a good estimate of how value flows out of stablecoins. First, analyzing the circulating supply of Tether, we see that it has been increasing since the tracking date.
However, for a period of time between May and August, growth was stagnant. According to data from Dune Analytics, the supply of other stable currencies such as USD Coin (USDC), Binance USD (BUSD) or Terra USD (UST) is increasing at this stage. Despite this, Tether is still in the lead.
Source: Dune Analytics / DappRadar
As mentioned earlier, stablecoins are an important part of the industry and also a good indicator of the use of value in the blockchain, especially DeFi. In this case, the exchange’s stablecoin reserves show the added value of stablecoins in the industry. As of now, the above four stable currencies account for about 5% of the total market value of cryptocurrencies.
In addition, according to CryptoQuant data, the exchange’s stablecoin reserves reached a record high of 19.52 billion U.S. dollars. This indicator has increased by nearly 500% compared to the beginning of the year. According to Coingecko’s data, the market value of stablecoins is $127 billion. This means that exchanges hold approximately 15% of the market value of stablecoins. Compared with assets such as BTC or ETH, the increase in stable currency foreign exchange reserves may translate into higher trading volumes, where individuals can convert back to other cryptocurrencies. The trading volume of stablecoins is estimated at 93.57 billion U.S. dollars.
In order to summarize the value flow of stablecoins, we observe that these types of assets are the most bridging assets in the Ethereum ecosystem. Four stablecoins (USDC, USDT, DAI, and UST) account for 39% of the bridged assets on Ethereum, which shows that both DeFi and NFTs are heavily used by users.
Source: Dune Analytics / DappRadar
ADA value flow
Among the top 4 cryptocurrencies by market capitalization, we can find Cardano’s cryptocurrency ADA. Cardano is another smart contract blockchain that aims to become one of the most important networks in the industry. In recent months, ADA has shown good growth, mainly due to the development of the Cardano mainnet, including the launch of its smart contracts.
Cardano is another cryptocurrency that brings high value to the industry. At present, the main purpose of ADA is to pledge through the fund pool. According to Messari’s data, about 70% of ADA is pledged. This means that, for now, most of the value of ADA will remain unchanged. This means that its market value of about 2.45% may remain locked in the next few months.
At the same time, it is worth mentioning that the state of value flow in ADA may soon change. Cardano’s smart contract is expected to be fully operational in 2022. Once the Cardano ecosystem is fully demonstrated, the value flow of ADA will be different.
The top 4 cryptocurrencies provide more than 67% of the industry’s market capitalization. The combination of off-chain analysis and more accurate on-chain tracking provides us with a general concept of potential value flows within the industry. However, this is only a starting point.
DeFi seems to have become one of the main beneficiaries of value inflows. In the specific case of BTC, we can determine how the number of WBTC has increased in the DeFi field. Coupled with the irregular reduction of centralized exchanges, this can prove how the use of WBTC has increased significantly since the explosive growth of DeFi in 2020.
In addition, stablecoins such as Tether are key players in the DeFi operation framework. Although the reserve analysis does not point to a clear scenario, there is additional on-chain analysis to confirm that stablecoins still drive the flow of value in this particular category.
Finally, Ethereum has become one of the main engines of blockchain development. As blockchain users’ interest in the different types of services provided by the protocol has increased, the number of ETH in exchanges has decreased. Although we have seen a significant increase in WETH in DeFi’s most important dapp, it is undeniable that the record transaction volume in NFT may be flowing value from one category to another. In the next version, we will conduct in-depth on-chain analysis to truly determine how value flows in the different categories that make up the blockchain industry.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/blockchain-value-flow-report-part-one/
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