(Bloomberg) -- A small number of participants are dominating the world of decentralized finance as the crypto sector, which seeks to replicate financial markets without middlemen, still hasn’t recovered from FTX’s collapse a year ago.

Most categories in DeFi — from peer-to-peer lending to decentralized exchanges — are seeing capital largely held in a few major projects, according to data compiled by crypto-risk modeling company Gauntlet. The firm used a popular measure of market concentration and competition called the Herfindahl-Hirschman Index. 

Based on the metric, the most competition exists between decentralized finance exchanges, with the top four venues holding about 54% of total market share. Other categories including decentralized derivatives exchanges, DeFi lenders, and liquid staking, are much less competitive. For example, the top four liquid staking projects hold about 90% of total market share in that category, according to Gauntlet. 

“This has mainly been due to security and risk failures of some of the newer protocols leading to a ‘flight to quality,’” said Tarun Chitra, chief executive officer and co-founder of Gauntlet.

Investors have been spooked by hacks in the sector and multiple blowups in the broader crypto industry, including that of FTX last November. The total value of cryptocurrency sent to DeFi stands at about $46 billion, compared to a peak value of about $179 billion two year ago, according to DeFiLlama. The Federal Reserve’s rate hikes have also pushed yields up in traditional markets, permitting investors to earn a higher income without dipping into riskier corners of finance.

That’s a far cry from the backdrop in 2021, when the rapid growth of DeFi coincided with a period of ultra-low interest rates and higher risk appetite. Thousands of crypto projects launched at the peak of DeFi’s bull run, as some early adopters like MakerDAO — the creator of the Dai stablecoin — and peer-to-peer lender Compound highlighted the potential of the sector to augment Wall Street’s capabilities. 

Now, the projects that have good risk management and no history of hacks are the ones that are seeing increased market share, Chitra said.

Overall, only about 30 DeFi projects logged revenue of more than $1 million in the past 180 days, according to data from blockchain research firm Messari, despite a recent market rally.

High market concentration makes it more difficult for new players to enter the DeFi arena, especially as venture funding in crypto tumbled this year. 

Still, some newer players were able to make space. DeFi exchange Vertex protocol, which went live earlier this year, climbed to the spot of a top trading venue in DeFi by volume, according to data on tracker Token Terminal. Darius Tabatabai, co-founder of Vertex protocol, said that having patient venture investors and a clear market fit — in this case, serving institutional traders — helped them grow.

The latest jump in crypto prices could boost tokens of smaller projects, allowing them to survive for longer. But Rune Christensen, founder of MakerDAO — one of the oldest and most profitable projects in DeFi — expressed his concern about a potential side effect.

“If the bear market is really over now and there’s going to be a huge rally and so on, that’s almost a little bit problematic for the industry, I think,” he said. “There’s a lot of businesses left that could have been flushed out and that’s a really healthy process. This is just the reality of startups. Most startups fail.” 

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