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DeFi Market Concentration: Gauntlet Data Reveals Few Major Projects Dominate the Industry

Decentralized finance (DeFi), a sector seeking to reimagine financial markets without intermediaries, currently exhibits a concentration of participants, with a limited number dominating various categories, according to data from Gauntlet, a crypto-risk modeling company.

The research indicates that within DeFi, areas such as peer-to-peer lending and decentralized exchanges show a concentration of capital in a small number of major projects. Specifically, in the DeFi exchanges category, the top four projects hold around 54% of the total market share, representing a high level of competition.

In contrast, categories like decentralized derivatives exchanges, DeFi lenders, and liquid staking demonstrate a notably lower level of competition. This data suggests that while certain segments of DeFi are highly competitive and concentrated, others have a more diversified landscape.

Gauntlet’s findings reveal that in the liquid staking category, the top four projects hold approximately 90% of the total market share, indicating a high level of concentration within this specific segment of decentralized finance (DeFi).

The CEO and co-founder of Gauntlet, Tarun Chitra, attributes this concentration to security and risk considerations. Newer protocols in the DeFi space have experienced security failures, prompting a shift among investors towards projects with better risk management practices and no history of hacks.

The overall wariness among investors in the DeFi sector is attributed to security breaches and setbacks in the broader cryptocurrency industry, including the collapse of FTX in November of the previous year. Gauntlet utilized the Herfindahl-Hirschman Index, a widely used measure of market concentration, to analyze the data and draw these conclusions.

DeFi TVL Still Far Below 2021 Peaks

The total value locked (TVL) in decentralized finance (DeFi) currently stands at around $46 billion, significantly lower than the peak value of $179 billion reached two years ago, as reported by DeFiLlama.

One contributing factor to this decline is the Federal Reserve’s interest rate hikes, which have led to higher yields in traditional markets. This has provided investors with the opportunity to generate greater income without venturing into riskier areas of finance.

This contrasts sharply with 2021 when DeFi experienced rapid growth, fueled by low-interest rates and a higher appetite for risk. During the peak of DeFi’s bull run, numerous crypto projects emerged, with early adopters like MakerDAO and Compound showcasing the sector’s potential to enhance Wall Street’s capabilities.

Currently, projects with robust risk management protocols and a clean track record are gaining increased market share in the decentralized finance (DeFi) sector, as noted by Chitra.

Despite a recent market rally, data from blockchain research firm Messari indicates that only around 30 DeFi projects have generated revenue exceeding $1 million in the past 180 days.

The high concentration in the DeFi market presents challenges for new entrants, especially considering the decline in venture funding within the crypto space this year. Nevertheless, some newer players have managed to establish themselves. For instance, Vertex protocol, a DeFi exchange that launched earlier this year, has emerged as a leading trading venue in terms of volume, according to data from tracker Token Terminal.

The recent surge in cryptocurrency prices has the potential to benefit smaller projects by providing them with the resources to sustain operations for a longer duration. However, Rune Christensen, the founder of MakerDAO, one of the oldest and most profitable decentralized finance (DeFi) projects, has expressed concern about this development.

Christensen suggests that if the bear market is indeed over and a significant rally ensues, it could pose problems for the industry. He believes that a healthy process for startups involves allowing businesses that are not viable to be “flushed out.” According to Christensen, this is a natural part of the startup landscape, as most startups, in reality, do not succeed.

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I want to save money. Will cryptocurrency work?

Cryptocurrency is essentially virtual money that operates in a decentralized manner, not through a bank but directly on multiple independent computers.

Every cryptocurrency has two main components: the units of digital exchange called “coins” and the network within which the exchange takes place. These units can be transferred between wallets and exchanged on exchanges. The networks in which these coins exist are called blockchains, which translates to “chains of blocks.”

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