Unraveling the crypto market: A journey into decentralized finance transaction network

Abstract

The explosive growth of decentralized finance (DeFi) has revolutionized the accessibility and functionality of financial services. To gain valuable insights into this evolving ecosystem, analyzing transaction data using network analysis methodology proves to be highly effective. Network analysis allows us to uncover intricate relationships, patterns, and communities within the DeFi market by examining participant transactions. We model nodes group representing actors or wallet addresses, and edges represent transactions between wallet addresses. This study focuses on three prominent DeFi token-based Ethereum protocols: DAI, UNI, and WBTC. We analyzed 5,802,742 transaction data spanning from January 2022 to January 2023 of those three tokens. Using network topology metrics, we uncover market size, average transaction of each wallet address, market density, and reachability (diameter). We also detect the presence of transaction clusters and grouping quality using the modularity metric. At last, we employ centrality calculation to identify the most important wallet address and their role in the market. We gain insight by comparing those three tokens and reveal valuable insight into patterns and relationships, network dynamics, decentralized nature, and the presence of intermediaries in the token economy market. Our objective is to uncover hidden dynamics and trace asset flows, which can provide valuable information to market participants, regulators, and innovators seeking to optimize the DeFi infrastructure, ensure stability, and mitigate risks. Leveraging the power of network analysis offers the potential to shape the future of DeFi by enhancing efficiency, security, and accessibility, thereby fostering financial inclusion and empowering individuals and businesses globally.