Are there oligopolies in DeFi yet?

After the first unprecedented DeFi wave we’ve seen this past summer, there are definitely a few that sit at the top of the DeFi Pulse rankings that clearly stick out to us due to their development team, esteem, popularity, and token popularity. The likes of Uniswap, Compound, Curve, Yearn and Maker are clearly the cream of the crop in DeFi. But despite their rankings and current advantages, SushiSwap has shown that liquidity and other factors aren’t necessarily a formidable MOAT. Things move fast in DeFi and surely can the current DeFi leaders. 

Another way to look at the current DeFi landscape’s competitiveness is to take a reading of the Herfindahl-Hirschman Index (HHI) which is a traditionally popular indicator of an industry’s competitive concentration. It’s also used by some governments when reviewing if a possible merger or acquisition would in turn violate any competition laws or antitrust of a particular industry.

(Figure 1) In simple terms, the HHI is calculated by taking the total sum of the squares of each firm’s market share, and then multiplying it by 10,000. Depending on the value of the product from this equation, it will either fall in one of the value ranges depicted on the chart on the right hand side. 

From using the current rankings list on DeFiPulse, we took the first 20 DeFi protocols out of the 42 to calculate the HHI. The reason for this is that all of the values after the 20^th ranking are too miniscule to make a difference. The following table shows the results.

(Figure 2) PANews’ calculation of the DeFi Market’s HHI competitiveness as of September 25th. 

Based on the results, the current DeFi market’s HHI value comes out to 1,040 which indicates a low concentrated and highly competitive industry. Which is good in general as it exhibits no monopoly or oligopoly currently. For perspective, in the US, the manufacturing, utilities, and finance industries all exhibit high concentration of competition with HHI values over 6,000 according to a study by The Hamilton Project.

Although this formula does have some limitations in interpretations due to its simplicity it’s a great way to get a general overview of the market. Other indicators could also be used to measure market share such as market cap of the corresponding token, # of transactions, and even # of unique addresses. But regardless, in this instance, we can expect a rotation of leadership in the DeFi Pulse rankings.