Decentralized finance doesn't seem so decentralized after all, especially when you look at symbolic concentration.

Key points to remember

• 90% of the supply for most DeFi tokens is held in less than 10% of addresses.
• LINK is the least concentrated of the coins analyzed, as the investor base of the token widened as it experienced price appreciation.
• MKR's offer is concentrated in less than 1% of all addresses, jeopardizing its governance model based on tokens.
• The concentration of utility tokens is the result of the adoption of the bootstrap and strong conviction whales doubling their bets.

Token supplies for the best DeFi protocols are centralized among a tiny fraction of super-rich holders. Chainlink , Kyber Network, MakerDAO, 0x Protocol and Bancor all have disturbing levels of token concentration. For some of these protocols, this could prove disastrous.

Analysis of the concentration of supply

Chainlink  ,   Kyber Network, MakerDAO,   0x Protocol and Bancor are some of the best names in the popular DeFi niche. These protocols have collectively experienced immense growth since 2019. If the final objective of these protocols is to decentralize the financial systems, their tokens are highly concentrated in the belly of whales, jeopardizing this objective.

There is a similar trend with these five protocols: coins are spread across multiple addresses after the initial token sale. But after a while - usually weeks or months - tokens start to accumulate in a few addresses.

Two months after the ICO LINK , 35% of the addresses represented 90% of the LINK offer . LINK's concentration has steadily increased, with 15 to 20% of addresses for most of the years 2018 and 2019. In May 2020, 11% of LINK addresses held 90% of LINK tokens .

For Chainlink ( LINK ), the concentration of tokens is lower than the others, which is undoubtedly a by-product of its massive appreciation of prices attracting new investors. Kyber Network ( KNC ) token supply has almost always been with a few whales, with 90% of KNC supply based in less than 10% of addresses since May 2018.

Kyber did not experience an explosive price appreciation like LINK until 2019. Since then, more and more investors have taken KNC positions , which has halved the concentration measure by 90%, by 3 % to 6% of all KNC addresses .

Bancor (BNT) and 0x Protocol ( ZRX ), which are liquidity routers like Kyber , are in a similar boat with 90% of the BNT and ZRX offer occupying 6% and 8% of the total addresses respectively.

For ZRX , this measure reached 25% between February 2018 and October 2018, because the token saw manic pumps.

The BNT, meanwhile, has experienced a constant centralization of the offer with less than 10% of addresses holding 90% of tokens since the end of 2017.

The most concentrated DeFi token, overall, belongs to MakerDAO ( MKR ). During most of the token's lifetime, less than 1% of the total MKR addresses held more than 90% of the supply.

However, there were some anomalies after the infamous Black Thursday event, causing an increase in the distribution of MKR supplies . Between March 12 and March 17, 25% of total MKR addresses owned 90% of all MKRs .

Blaise Cavalli, co-founder and CEO of Nyctale, commented on this anomaly, saying that it is the result of “the issuance of new tokens that they [MakerDAO] had to carry out to maintain the value of the DAI , after some problems in their chain liquidation mechanism. “

Maker announced plans to recover network losses by selling fresh MKR on March 12, but the auction was held on March 19. The date range for the anomaly conveniently slides between these two dates, which supports Cavalli's theory.

Token concentration isn't always bad

Utility tokens are typically assigned to users who actively support the network. For emerging networks struggling with adoption, the number of operators on the network is limited. Symbolic offer tends to go to these few operators, who distribute it according to their investment thesis and the demand of market players. The concentration of tokens is a direct result of the new tokens accumulated by these few users.

Just as BTC provisioning is intended for users who secure the network through mining, chainlink node operators receive LINK to act as data oracles. Kyber standby operators are paid in KNC to provide cash.

Excluding network operators, the accumulation of whales has always been a sign of bullish momentum in cryptography, as long-term accumulation reduces supply on the free market, thus exerting upward pressure on prices. High conviction whales also contribute to symbolic concentration.

This story applies to ChainLink , Kyber , 0x and Bancor, which are all utility tokens. Maker ( MKR ), however, is another story. Since MKR is a governance token used to participate in executive votes on the MakerDAO, concentration means that a small number of participants can control the proposals and the direction of the protocol.

The concentration of the offer for any governance token jeopardizes the decentralization of the protocol.

Most utility tokens offer no control over the protocol, at least not without a DAO that facilitates token voting. Governance is rather largely community-oriented, although these communities are still tiny, which makes some centralization inevitable.

The phenomenon of token concentration can be seen in most crypto networks and mastering it will occur organically as more and more active investors and participants in the network arrive. But governance tokens require widespread distribution across a number of stakeholders to protect these networks from centralized control.