Demand Driver – ICP Transactions

Part of the Demand Series newsletters

Background

ICP, as a medium of exchange, can be used to facilitate transactions and every time ICP is moved from one wallet to another the sender pays a 0.0001 ICP (~$0.002) transaction fee.  This fee gets burned with the transaction.  The ICP transaction is probably one of the least discussed aspects of the Internet Computer (IC), which is why I wanted to write about it as the first driver for ICP demand.  By the end of this article I hope you will have an appreciation for how deflationary the ICP transaction fee can be and how much utility the ICP token can provide as a medium of exchange.

Where we are at today

It’s best to think of ICP transaction demand as two categories: 1) transactions that must be in ICP, such as NNS staking and ICP movement to/from exchanges and 2) transactions that choose to be in ICP, such as NFT marketplaces and DeFi.  There hasn’t been a lot of apps choosing to use another medium of exchange on the Internet Computer (and why would they when the IC has a finality speed of 2 seconds and can handle well over a 1000 transactions/second?), but that could change as DeFi and the SNS release new token options to the community.

As the chart below (from https://dashboard.internetcomputer.org/circulation) shows, as of 25JAN22, there has been 193ICP burned due to transaction fees, equating to a total 1.93M transactions.  (Note – “transactions” in the chart below refers to ICP burned due to computation, not transactions in the sense used in this article).  193 ICP burned is really nothing given the existence of 476.6M ICP, however I believe it is worth watching the chart below to measure the success of various DeFi and NFT projects.

It's clear that the rate of ICP burned from transactions is increasing, with a clear rate increase in September and another increase in early November.  Some of this is caused by activity increases on Entrepot, as seen below.  Entrepot’s marketplace activity clearly exploded in September and has seen steady increases since November.  At this point, Entrepot’s marketplace transactions (users buying NFTs) has accounted for ~12 ICP burned of the total 193 ICP burned for fees (6%).  And this doesn’t even include ICP transactions associated with this activity, such as moving ICP from an exchange account to a Stoic wallet.

Another source of ICP fees is staking on the NNS.  Creating a neuron, topping up a neuron and disbursing rewards all require the 0.0001 transaction fee.  My best guess, from the data I can see, is that approximately 5 ICP have been burned for these reasons.

The remaining purposes of transactions (accounting for approximately 170 ICP burned) are a mystery for me, but certainly the movement of ICP around crypto exchanges account for a large amount of the transactions.  If you know of additional sources of ICP transactions, please put them in the comments below.

Where we are going

The chart for Entrepot transactions shows great growth of NFT transactions and I don’t know of any reason to expect that growth to subside.  There’s also rumors of additional NFT marketplaces coming to the IC, which could further drive additional ICP burned due to NFT transactions.  However, it’s unlikely that the IC NFT market growth will grow by multiple orders of magnitude (reaching tens of millions of transactions per month, for example), meaning NFT marketplace transactions will probably not play a large role in burning ICP through transaction fees (although, as you’ll see in future articles, I think it has another deflationary purpose to play).

However, DeFi can consume A TON of transactions, and thus it is possible that ICP burn from DeFi transactions could play a large role in causing deflation within ICP.  For example, I’ve seen various sources claiming that Solana handles anywhere from 60M to 170M transactions per day.  If the IC can reach that level of transaction activity (feasiblegiven the IT'S technological advances), DeFi on the IC would burn between 6k – 17k ICP a day (180k - 520k a month) just from transaction fees alone (for comparison, node reward providers currently get about ~60k ICP per month meaning DeFi could offset node rewards in just its transaction fees).  And with the launches of Sonic, InfinitySwap and ICPSwap in 2022, along with Bitcoin and Ethereum integration, there’s reasons to believe transaction fees within DeFi could be a big story in the second half of 2022.

Keep your eye on

Keep your eye on the fees chart on https://dashboard.internetcomputer.org/circulation to measure the growth of ICP transactions.  For the time being, the chart is a good measure of the growth of the NFT market on the IC and general usage of the ICP token for activities like staking.  However, once DeFi is launched and established on the IC, my prediction is that DeFi transactions using ICP will absolutely swamp the ICP transaction chart and you will see a massive “hockey stick” on the fees chart.  At that point, the fees chart will be a good measure of DeFi’s growth on the IC.

Let me know your thoughts and questions.  I would love to hear any contrary opinions or ideas.  And if you like this content, feel free to subscribe and/or encourage your friends and colleagues to subscribe.

Next up in the demand series: Computation