Chainalysis Archive

Ethereum exchange inflows become more concentrated in a few users since the rise of DeFi

28 April 2021
SUMMARY SUMMARY
    • The bitcoin price recovers to its largest level of on-chain support of just under $55k, suggesting that cost curve analysis helps us understand the medium-term price floor even if news drives the price in the short-term.
    • Exchanges are the primary venues where prices are determined and exchange inflows are closely watched to understand how much cryptocurrency is about to be sold. The majority of inflows originate from other exchanges, 81% for bitcoin and  61% for Ethereum, illustrating the opportunity that exists for those who provide liquidity across exchanges.
    • There are on average 132k on-chain bitcoin users of exchanges per day versus 23k for Ethereum. Ethereum not only has a smaller number of on-chain exchange users than bitcoin, but the top ten users deposit 53% of Ethereum inflows, compared to 22% for bitcoin. Ethereum inflows have become more concentrated since DeFi and decentralized exchanges became established, suggesting these markets are more dominated by a few insiders than centralised exchanges are.

Cryptocurrency prices had another volatile week. Almost immediately after I published last week’s Market Intel Report, titled ‘The bitcoin price settles near its largest on-chain support level of $54.5k’, the bitcoin price fell, to reach a low of $47k on Sunday 25 April. However, the bitcoin price has since recovered to under $55k. The Ethereum price also fell, to a low of $2,096, and then also recovered, to reach a new all time today, Wednesday 28 April, of over $2,700.

The price falls seem to have been triggered by the Biden Administration’s announcement of plans to raise capital gains tax, which was followed by a sell-off across broader financial markets. The recovery of the bitcoin price over the week to my expected level suggests that cost curve analysis helps us understand the medium-term price floor, but that in the short-term the news often drives the price.

Over the last few weeks I’ve gone into detail on the fundamentals that set prices. This week I want to take a deeper look at the venues where prices are determined: exchanges.

Exchanges are the primary businesses on the blockchain, and exchange inflows have become a closely watched metric to understand how much cryptocurrency is about to be sold. At Chainalysis we can provide more insight than just how much bitcoin or Ethereum is flowing into exchanges. We can also describe the source of these inflows, how many people are responsible for these inflows, and how concentrated these inflows are amongst a small number of these people. In the following charts I will describe this more detailed data for bitcoin and Ethereum.

The majority of exchange inflows are from other exchanges. For bitcoin, 81% of exchange inflows have been from exchanges since the start of 2020, as the first chart below shows, while for Ethereum this is 61%, as the second chart below shows. These huge inter-exchange flows illustrate the opportunity that exists for those who provide liquidity across exchanges. Note that these inflows are not always directly between exchanges, but often flow via an intermediary, such as an OTC broker. In this data, assets that flow between exchanges within a week are considered to be from exchanges, even if they are transferred via an intermediary.

Other services than exchanges are the source of 9% of bitcoin exchange inflows and 27% of Ethereum exchange inflows. Two thirds of the inflow from other services on Ethereum since the start of 2020 is from DeFi. The large spike in Ethereum inflows in September 2020, and more recently this April, are from the flow of Ethereum from DeFi to decentralized exchanges, which often then flows back to DeFi.

Self-hosted assets, such as that held by private investors, accounts for 10% of bitcoin exchange inflows and 12% of Ethereum exchange inflows. This demonstrates that investors rarely send assets to exchanges to be sold, while traders provide the vast majority of liquidity.

Many more people deposit bitcoin on exchanges than deposit Ethereum on exchanges. At Chainalysis we can see this by counting the number of deposit addresses receiving assets on each exchange. In my Market Intel Report on 14 April I described how for bitcoin, crypto-to-fiat exchanges had far more active deposit addresses than crypto-to-crypto exchanges. In the chart below I show that exchanges have far more active deposit addresses for bitcoin overall than they do for Ethereum. Since the start of 2020 there have been an average of 132k users per day depositing bitcoin on exchanges, compared to 23k users per day for Ethereum. So bitcoin has more than five times the number of on-chain exchange users than Ethereum.

The number of active deposit addresses is an upper bound on the number of users depositing assets on exchanges via the blockchain as a user may have multiple deposit addresses. It is also a lower bound of the number of users an exchange has, especially for centralised exchanges. The vast majority of centralised exchange users never transfer assets on the blockchain, instead they solely interact with an exchange’s website.

Since June 2020, the ten users who deposit the most Ethereum on exchanges are responsible for 53% of all Ethereum deposited, compared to 22% for the top ten bitcoin depositors. Before June 2020, that is before DeFi and decentralized exchanges became established, the concentration of inflows to the top deposit addresses was similar across bitcoin and Ethereum, as shown in the chart below.

The increasing concentration of Ethereum inflows matters because assets are typically sent to exchanges to be sold. So this suggests there is much less competition amongst sellers of Ethereum on exchanges relative to bitcoin. The fact that competition amongst sellers of Ethereum dropped as DeFi and decentralized exchanges took off suggests that these markets are more dominated by a few insiders than centralised exchanges are.

This data is slightly different from the analysis in my Market Intel Report on 14 April, where, for bitcoin only, I summed the inflows to the ten largest deposit addresses on each exchange within the categories of crypto-to-fiat and crypto-to-crypto exchanges. So in that analysis I was considering many more deposit addresses than just the top ten across all exchanges, and so the share of inflows was higher than in this report.

So overall, exchanges are the primary venues where prices are determined. The majority of inflows originate from other exchanges, for bitcoin more than Ethereum, illustrating the opportunity that exists for those who provide liquidity across exchanges. There are on average 132k on-chain bitcoin users of exchanges per day versus 23k for Ethereum. Ethereum not only has a smaller number of on-chain exchange users than bitcoin, but these inflows are even more concentrated amongst a small number of these users. Ethereum inflows have become more concentrated since DeFi and decentralized exchanges became established, suggesting these markets are more dominated by a few insiders than centralised exchanges are. As always, let me know your thoughts and feedback via marketintel@chainalysis.com.

Philip Gradwell, Chief Economist

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