The uptick in Cryptos since the lows of mid-July has seen sustained momentum with each consolidation resulting in a new leg upwards. At the time of writing, Bitcoin topped $48.3k, while Ethereum was trading around $3,220. The nonfungible token (NFT) sector of the cryptocurrency ecosystem has exploded in 2021 as Celebrities, musicians, sports teams, established auction houses a& even fast-food restaurants got involved with the creation and/or sale of one-of-a-kind digital items.
No wonder then top NFT marketplaces like OPENSEA seeing record-breaking trading volumes as projects like CryptoPunks and Pudgy Penguins see tens of millions of dollars in value exchanged daily. On the more traditional side of things, the USD value of assets moved per week on blockchains has increased to hundreds of billions — a total of $236 billion per week was transferred on Bitcoin, Ethereum, USDC & Tether (on Ethereum) on average in 2021 to date.
According to Chainalysis Market Intel, and as shown in the chart below (Figure 1), this digital asset movement has generated $4.1 billion in fees on Ethereum and $0.9 billion on Bitcoin in 2021 to date. Needless to say, that this provides a great opportunity for rewards, for processing transfers on the blockchain. With the booming business of assets transfer, more scalable blockchains can contribute to continued growth — processing more transfers at a lower cost.
Figure 1
One main reason that blockchains are increasingly being used for assets transfer is the capability of all these transactions being transparent — containing a complete record of all the transfers occurring on them. And the second question that arises is: Who’s involved in these? The second chart below (Figure 2) attempts to answer that question.
Chainalysis states that the majority of the flows occur between crypto exchanges & self-hosted entities — both coming in at 38% of USD value transferred since the start of 2021 (Figure 2, left). While transfers between exchanges and other entities accounted for 18% of the total. And flows between other types of entities made up of only 7%.
The chart on the right below further signifies that, so far in 2021, 80% of the bitcoin sent from self-hosted entities was sent by entities that held that bitcoin for less than two weeks. On average these entities are holding bitcoin for 5 days, but the transfer sizes are significantly smaller (far less than 0.1 BTC).
Figure 2
This means that up to 80% of self-hosted flows may be internal transfers between addresses that an entity controls, rather than an exchange of assets between different entities. Breaking it down further, if 80% of the 38% of self-hosted to self-hosted transfers are internal, then the share of economic transfers between self-hosted entities shrinks to 8%, while the share of flows between exchanges increases from 38% to 56% and the share between exchanges and other entities increases from 18% to 27%.
This leads to the conclusion that crypto exchanges were a counterparty for 82% of the USD value of bitcoin transferred in 2021 to date. These numbers are meant to make you understand that crypto exchanges are the main source and the destination when BTC transfers take place. Working out a scalable solution for BTC should, therefore, focus on exchange transfers, as well as the movement between the internal addresses.
On-chain data (Figure 3) highlights the fact further on who would benefit from scalability on the Bitcoin blockchain. As the chart above suggests, exchange inflows are dominated by the so-called whales (big players). 68% of BTC is flowing between exchanges, while 32% of exchange inflows are from other sources — 15% of exchange inflows are from large traders, 5% are from large investors (holding at least 1k BTC), businesses account for 7% and large traders and investors make up the rest of 5%.
Figure 3
From the data, it is abundantly clear by now that a relatively small number of entities account for the vast majority of bitcoin transfers. And this is where the role of digital custodians has become so important. Not only do they keep the private keys of the large investors secure, but also integrate with crypto exchanges to avoid moving the digital assets between venues on the blockchain.
Ethereum, on the other hand, works in contrast to Bitcoin. Being the key component of Decentralized Finance (DeFi), the second-largest crypto has seen a huge increase in on-chain activity. Decentralized exchanges & financial services thrive because they are decentralized, which allows them to be open to rapid innovation, but being decentralized necessitates making transfers on the blockchain. That is why fees for transfers on Ethereum are 4.5 times more than bitcoin fees in 2021.
ETH can thus benefit from both scalability and innovation in the crypto space. But BTC has some technical limitations when it comes to its use cases. For now, at least, Bitcoin is seen more as a store of value and any use case beyond transferring is limited. And the large custodian holdings of whales are a testament to that fact.
Originally Published on Medium
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