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

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A limited number of participants are currently dominating decentralized finance (DeFi), the sector aiming to recreate financial markets without intermediaries.

According to data gathered by Gauntlet, a crypto-risk modeling company, most categories within DeFi, such as peer-to-peer lending and decentralized exchanges, are witnessing a concentration of capital in just a few major projects. 

The research revealed that the DeFi exchanges exhibit the highest level of competition, with the top four projects holding approximately 54% of the total market share. 

On the other hand, categories like decentralized derivatives exchanges, DeFi lenders, and liquid staking demonstrate a significantly lower level of competition. 

For instance, the top four liquid staking projects control about 90% of the total market share in that particular category, as per Gauntlet’s findings.

Tarun Chitra, the CEO and co-founder of Gauntlet, attributed the concentration to security and risk failures experienced by some of the newer protocols, leading to a shift towards projects with better risk management and no history of hacks.

Investors have grown wary due to security breaches in the DeFi sector and various setbacks in the broader crypto industry, including the collapse of FTX in November last year. 

Gauntlet used the Herfindahl-Hirschman Index, a popular measure of market concentration, to analyze the data.

DeFi TVL Still Far Below 2021 Peaks

The total value locked (TVL) in DeFi currently stands at around $46 billion, a considerable decline from the peak value of $179 billion reached two years ago, according to DeFiLlama. 

Furthermore, the Federal Reserve’s interest rate hikes have pushed yields higher in traditional markets, allowing investors to generate greater income without venturing into riskier areas of finance.

This is in start contrast to 2021, when DeFi experienced rapid growth amid an era of low interest rates and a higher appetite for risk. 

During the peak of DeFi’s bull run, numerous crypto projects emerged, with early adopters such as MakerDAO and Compound showcasing the potential of the sector to augment Wall Street’s capabilities.

Presently, projects with robust risk management protocols and a clean track record are gaining increased market share, according to Chitra.

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

It is worth noting that the high concentration in the DeFi market poses challenges for new entrants, particularly as venture funding within the crypto space has declined this year.

Nevertheless, a few newer players have managed to carve out a space for themselves. 

Vertex protocol, a DeFi exchange that went live earlier this year, has emerged as a leading trading venue in terms of volume, as per data from tracker Token Terminal. 

The recent surge in cryptocurrency prices could potentially benefit smaller projects by enabling them to sustain operations for a longer duration. 

However, Rune Christensen, the founder of MakerDAO, one of the oldest and most profitable DeFi projects, has voiced concern about this development.

Christensen claimed that if the bear market is indeed over and a significant rally ensues, it could be problematic for the industry. 

He believes that a healthy process for startups involves allowing businesses that are not viable to be flushed out. 

“This is just the reality of startups. Most startups fail.”

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