This report covers the economic patterns made possible by verifiable decentralized networks. Starting with stablecoins, to collateralized lending and borrowing protocols, to NFTs and gaming, the Web3 ecosystem now represents an expansive ecosystem of new ways for creators and communities to monetize, and new models for internet-native communities to collaborate. Web3 is still nascent, which is why we cover the new types of Layer 2 networks built to offload execution of programmable smart contracts from the Ethereum base layer to improve speed and reduce transaction costs.

Smart contracts themselves are a new type of programming, and it takes careful diligence and review to ensure secure, gas-efficient smart contracts that reduce the risk of vulnerabilities, which we cover in our section on smart contract security. And finally, governments and regulators around the world are beginning to decide how to enforce existing regulations, protect investors, and categorize these new types of assets.

Growth of stablecoins supply continues to be diversified on Ethereum with USDC and BUSD increasing market share at the expense of USDT. On Ethereum, which remains the dominant smart contract protocol for stablecoins, USDC has consistently grown its market share year to date.

BUSD’s market share expanded over the same time horizon, while DAI market share remained stable. USDC is quickly approaching USDT’s market share.

The stablecoin peg performance graph below shows that most USD-denominated stablecoins have been able to keep peg close to parity with the US Dollar, with only moderate volatility.

DAI exhibited more volatility relative to the rest, but DAI is collateralized by other digital assets like ETH, BAT, or USDC, whereas USDC has a harder peg since each crypto dollar is backed by a US dollar held in reserve. All stablecoins had minimum values below and above par.

While stablecoins have been able to maintain peg with some volatility around parity, reserve assets backing stablecoins differ in credit quality and risk. For instance, USDT has significant exposure to commercial paper and corporate bonds relative to PAX and USDC, which are a source of credit risk.

DAI is a DeFi stablecoin that is overcollateralized by cryptocurrencies such as ETH, WBTC, and USDC instead of fiat.

Borrowing and lending in DeFi saw significant growth in terms of outstanding loans in Q3, reaching an all-time-high on September 6th, with approximately $24.7 billion worth of debt outstanding. This dramatic rebound in Q3 came after a precipitous drop-off in activity at the end of Q2, where total debt outstanding stood at around $14.3 billion.

Aave leads the DeFi lending protocols with outstanding debt on the protocol standing at $7.4 billion. Interestingly, the market foresaw Aave becoming the leading lending protocol, as the AAVE token has significantly outperformed leading competitor Compound’s COMP token. Furthermore, Aave has attained an approximately $4.6 billion fully diluted market cap while Compound lags behind at around $3.1 billion fully diluted market cap.

Approximately 68.2% of outstanding loans reside in DAI versus 21.9% for USDC, indicating a growing level of trust in the decentralized stablecoin. The increasing level of trust for DAI is likely driven by concerns over the SEC’s ongoing investigation of Circle.
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User growth for leading lending protocols, Aave and Compound, both slowed in Q3. While Aave’s user base grew by 42% in Q2, from 46,588 total users to 66,083 total users, and grew only 16% in Q3 to approximately 76,909 total users. Similarly, while Compound’s user base grew by about 4% in Q2, from 311,581 total users to 323,759 total users, their user base only grew by 1.9% in Q3 to a total user base of 323,759. While outstanding loans overall have increased dramatically, user growth has not experienced the same exponential growth, meaning that the average debt outstanding per user dramatically increased in Q3. This fact could be driven by the market rally we experienced starting in Q3.

The DeFi ecosystem has experienced an unprecedented surge in volume in 2021 as more participants enter the market and more sophisticated financial instruments are built. Popular protocols like Uniswap, PancakeSwap, and SushiSwap are now generating well over $100 million in annualized revenue.

dYdX, a decentralized exchange that supports perpetual, margin trading, and spot trading, realized over $45 million in revenue during the month of September.

Web3 needs Ethereum to scale, but the scaling landscape can be confusing for first-time users. Many scaling solutions are still in the research and development phase, and the technology is evolving with new solutions coming out monthly. The most secure scaling solutions are Layer 2s.
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Layer 2 solutions are designed such that Ethereum can act as a referee in case of a dispute. Rollups — a subset of Layer 2s — are highly promising solutions given their scalability capabilities and inherited security through Ethereum. However, rollups differ due to design and implementation choices by the development teams. In the following section, we attempted to provide an analysis of the five most used rollups in Q3. The results of this analysis are snapshots of the current state — less of the future capabilities of those solutions.

We identified three dimensions tied to DeFi user needs for scaling: how much money is on the Layer 2 (also known as Total Value Locked or TVL), how many transactions occurred over the course of Q3 2021, how many unique addresses, and finally, the costs for transacting on the L2.
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Keep in mind that most presented solutions here are in beta and not as decentralized, economic, fast, and secure as they plan to be in the future. Also, only Optimistic Rollups, Arbitrum, and Optimism, have block explorers, which means comparing data one to one can be difficult. For the costs of transactions we were only able to snapshot the current costs using various data sources.

Greater usage of a Layer 2 means better prices for DeFi users, less slippage, and typically more liquidity. Arbitrum as a universal Optimistic Rollup shows the most usage at the end of Q3 in all categories.

It is, however, closely followed by Optimism that has a very similar approach design-wise. For the single-purpose rollups built for decentralized exchanges, dYdX has by far the most usage with 480k daily trades.

All Layer 2s are able to significantly reduce costs. Zero Knowledge (zk) rollups show more potential for reduction of transaction costs. However, in those cases dYdX, Loopring, and zkSwap v2 have a fixed percentage of the volume as trading fee which is only indirectly caused by the solution’s gas fees.

Yet, when it comes to transferring ETH, one can see that Loopring as a zero knowledge-based rollup is the cheapest.

Consensys is making it easier for developers and end users to begin using Layer 2 solutions. If you want to begin exploring Layer 2 DeFi, be sure to check out our guide on adding custom networks to your wallet. If you are developing a dapp on a Layer 2 like Arbitrum or Optimism, our Infura and Truffle developer tools now support both.

2021 has without a doubt been the year of the non-fungible token. From the advent of novel mechanisms for turning songs into financial assets, like Royal, to Snoop Dogg claiming to be the renowned NFT collector Cozomo de' Medici, you would be hard-pressed to have escaped the hype.

And the proof is in the pudding with sales totalling $10.7 billion for Q3 2021 — up eight fold from the previous quarter — across 33,985,609 sales.

As the ecosystem matures, we're starting to see secondary sales now outnumbering primary sales ($17.5 million vs $16.4 million) across the quarter, highlighting that whilst new projects are still attracting attention, older projects have retained attention.

Yet primary sales remain strong, with over $16 billion in primary sales in Q3.

The platform largely facilitating this revolution is OpenSea, an NFT marketplace where users can buy and sell pieces from almost any NFT collection out there. And the transactions going through OpenSea speak volumes: in the record breaking month of August, the platform accounted for $3.16 billion of the total $3.25 billion in NFT sales volume. Interestingly, Nifty Gateway was the dominant NFT marketplace until April this year with OpenSea cementing its place as the go-to platform in Q2 and Q3 2021.

SuperRare, Foundation, and Hic et Nunc are other leaders in the NFT marketplace space, but they hold a comparatively small minority with OpenSea accounting for 97% of marketplace volume over the past quarter. Another contender to be aware of, this time from the traditional world, is Christie's, who surpassed $100 million in NFT sales in September 2021, with a recent NFT auction in Asia fetching $15.6 million in sales on 28 September.

Because NFTs are inherently composable with other Ethereum smart contracts and protocols, they are suitable for financialization. We look at three main types: collective bidding, fractionalization, and using NFTs as collateral for loans.

First up is PartyBid, a product that allows you to team up with friends to collectively bid on NFTs. By pooling together funds consumers can acquire higher value pieces that wouldn't otherwise be possible (like CryptoPunks).

Not only does this act as a cool way to buy beyond your means and to build an NFT collection with friends, but it gives users access to some of the most exciting projects on the market, with potentially higher returns. This innovation is only made possible by the digital nature of NFTs, whereby people across the world can enjoy ownership of the same digital good without the difficulty of physically sharing something like a piece of art. In one special case, that has even meant partial owners of one CryptoPunk were airdropped part of another rare CryptoPunk, for free.

A variation of this is the fractionalisation of NFTs, where companies like Fractional allow you to bid for and buy fractions of an NFT. The total bids from all users amount to the total sell price, with fractions of the NFT dolled out depending on the amount you invested. Fractional plays on the same premise as PartyBid, with the exception of getting strangers involved for increased purchasing power. Not only does this democratize ownership on a greater and more global scale, but it improves the chances that artists and content creators can monetize their work in a capital efficient manner.
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Lastly, we have platforms like NFTfi that are offering NFT collateralized loans. By putting up any ERC-721 token up for collateralization, other users can begin offering you a loan. Once accepted, the ETH gets paid to you and the NFT is locked in the NFTfi smart contract, only to be returned once your loan is paid. If you can't pay back the loan then the NFT is then transferred to the lender. NFTfi has already supplied nearly $4 billion USD in loans.

Whilst this is simple in theory, in practice there are a few risks to be aware of. Firstly, smart contract risk is prevalent in the industry, whereby hackers identify a flaw in the code and are able to steal the funds or NFTs locked into the contract. A recent example of this is Poly Network, which had $600 million worth of assets stolen through smart contract flaws. Another risk is loan to value ratio, where the value of the NFT may fluctuate greatly, potentially leaving the NFT used as collateral to be worth much less than the loan. This risk is particularly high for longer term loans, especially given the nascent state of the industry. Lastly, many NFT projects have low liquidity, which may give them an artificially high floor price as sellers do not want to sell cheap, but buyers are not  active. This can lead to lenders mispricing the NFT that is being used as collateral; if the loan  defaults they may receive an NFT of lower value than they had bargained for. In summary, projects like NFTfi are yet to have had smart contract exploitations, but that’s not to say they won’t in the future, and if you’re looking to borrow, always be wary of the NFTs used as collateral.

The "metaverse" as a term officially entered the popular lexicon in Neal Stephenson’s 1992 science fiction novel Snow Crash where he used the term to describe a virtual reality-based successor to the Internet. The word is used to describe the concept of a future iteration of the Internet, made up of persistent, shared, 3D virtual spaces linked into a perceived virtual universe. If you want to experience a "metaverse" for yourself, you can check out Consensys' headquarters in the Ethereum-based world, Decentraland.

One of the clearest examples of the Metaverse in the context of the blockchain is the concept of play-to-earn gaming. The traditional model of gaming back in the days of “Age of Empire” was simple: consumers had to pay a fee in exchange for the “playing” experience. While money is typically required to play metaverse games, the revenue model continues to change and is no longer as simple as it was.

With Facebook’s rebranding to Meta, the term is increasingly getting misused, but the idea in Web3 is that products and objects that you can collect in one virtual world can move across to other virtual worlds via tokens built on collectively-owned protocols. Let's dive into some of the bigger projects in the Metaverse space to add some color.

During Q3 the play-to-earn industry grew enormously. Standout games and economies were Axie Infinity, ZED Run, Sandbox, and Yield Guild Games.
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Sky Mavis, creator of Axie Infinity, raised $152M at a valuation of nearly $3 billion USD. Axie Infinity is a game in which players collect Axies which can battle, perform tasks, and breed to create more Axies of varying value and rarity.

The ultimate goal of the game however is to obtain SLP (smooth love potion) tokens which can be sold. Axie creatures themselves can also be traded as ERC-721 NFTs. In the third quarter of 2021 alone, Axie Infinity generated more than $720M dollars through NFT trading.

Axie Infinity currently boasts over 300,000 daily active users (DAUs), an increase of more than 30x since the beginning of the year. Furthermore, growth in their Discord has gone parabolic, making them one of the largest Discord servers globally.

Axie Infinity's monthly revenue in July surpassed $23 million, double June's revenue numbers. Axie Infinity’s revenue in January was only $100,000. This informal market has grown into a formal play to earn financial services. Users in the Philippines are quitting their jobs and making 10x their income playing Axie. 

Another of the largest and most prominent companies creating this financial services ecosystem is a project called Yield Guild Games, who recently announced a raise of $4.6 million USD, led by a16z . Since 2020 they have been accumulating yield producing NFTs and stakes in great gaming protocols and projects.

YGG recently released its treasury report where they list new partnerships, acquisitions, scholarship updates, and examples of games they invested in. All of these games focus primarily on NFTs - assets that can operate, loan, trade, and sell. This short documentary shows how the play to earn economy is growing and  transforming the lives of people participating.

One of the most developed virtual worlds in the Metaverse is Decentraland — a world created and owned by the users. It's a place where users can create an avatar, interact with friends and strangers, build houses on your own digital plot of land (known as LAND), or simply check out an art shows. To start building, people can purchase a parcel of LAND, either from Decentraland if unsold, or from someone else at a price they determine. And just like real-world real estate, the more coveted the spot the higher the value, with some plots fetching up to $900,000.

The world itself is fueled by NFTs, which make up the majority of in-world items, from the plots of land to the clothes avatars wear. In effect, the world acts as the building blocks for the virtual world of the future, allowing users to build and monetize the services they create. Currently the median price for a Decentraland NFT sits at almost $5,000, and the average weekly sales across Q3 totaled $772K across an average of 300 sales.

Loot has been another stand-out NFT project in the last quarter. At its core, Loot consists of a unique list of items that you would expect to find in a game. The hitch is that the NFT is just that: nothing more than a list of words, with no item specs, appearance, or traits, other than what your imagination can put together. The genius behind the concept lies in the community's reaction to the Loot bags as their price began to rocket. Community members flocked together to create artwork for the items and  derivative projects like Loot Realms where adventurers, equipped with their Loot gear, can explore.

It's effectively NFT improv, with the community collectively building out a virtual world limited only by their coding ability and imagination. The reason this has been revolutionary is that it sets the scene for future builders of the Metaverse. With collective contributions we can build worlds based off of the smallest of starting points into the most diverse and elaborate worlds imaginable.