Crypto fundamentals 101 Chapter 4: Total Addressable Market

1. Introduction

You might have heard many times people saying TAM this, TAM that, but what the heck TAM means?

Well it makes reference to “Total Addressable Market” which in short is “how big the market for your product is”.

This should be one of the first checkmarks in your due diligence sheet if you aim to achieve an objective value of how big your product can really be

The bigger the better right? As a rule of thumb that is correct, sometimes you can find small niches that are really profitable and thus very attractive also, but most mature industries usually end up in a pricing competition that kills margins, so the bigger the available pie, the better.

2. Crypto TAM by market segment

Most common way to measure the TAM of a business segment, is the annual revenue of that segment, based on data from defillama, tokenterminal and other venues, we arrive at a rough estimation of the size of each vertical in crypto:

Crypto TAM by segment - Estimation

Clearly, at the moment the biggest TAM are found off-chain, as those are the most matured industries and the easiest to scale but I expect on-chain business models to pick up the pace within next years to close part of that gap.

Binance revenue in 2022 was $12B and represents aprox 50% of total market, while Tether being the biggest stablecoin issuer earned $1.48B in Q1 2023 due mainly to the exceptionally high rates. This is probably not sustainable long term, but nevertheless it is a really big industry, scalable and with decent margins.

Biggest on-chain TAM is represented by L1s, being Ethereum clearly the biggest competitor, hoarding almost 65% of total market share.

DEXes and liquid staking comes just after reaching quite impressive numbers, Uniswap and Lido Finance are the clear market leaders with more than a 50% of the share.

NFT marketplaces and DEX derivatives sit around the half a billy annual revenue, pretty big numbers considering how nascent both of these verticals are. Opensea leads NFTs and GMX derivatives.

Asset management and lending are the next biggest cakes, pulling more than $200M every year, Convex being the clear leader on Asset management and AAVE among lenders.

L2s, gaming, infrastructure, bridges and insurance belong to the long tail of the market, still very good numbers but not anywhere close to the market leaders at the moment.

Important to note, that this is only a static picture that can evolve with time, some segments will have way higher TAMs if/when the bull resumes and in general every pie should grow overtime as long as the category remains relevant and crypto as a industry keeps growing. Just as an example, there was a time in 2021 where Axie was really printing fees like a top 3 project in all of crypto, so the gaming category would be way higher at that point in time.

3. Realistic TAM

Ok, so the bigger the better but should I expect my favorite altcoin to grab the entire TAM of their vertical?

No, that would not be feasible for a number of reasons. Let’s define a couple of additional terms and present an example to showcase.

SAM makes reference to Service Available Market and SOM to Service Obtainable Market, their definitions can be find in the picture below. No need to focus too much on the names, just know that the SOM is what you should actually strive to grab entirely.

Let’s use the DEX derivative industry as an example. As a category, it includes every type of derivatives (perps, futures, options etc)

Imagine we want to launch a perpetual trading protocol, so even though the total TAM was of $414M, that number is closer to $350M if we exclude options and futures, and will be even less if we take a close look at the platform we are launching.

• Is the platform suitable only for scalpers or swingers?

• Is the platform available in every country or some are excluded due to regulation?

• Is your fee scheme attractive for every trader out there?

As you can imagine, a quick assessment will reduce further our SAM with respect to the total TAM. Once we are comfortable with our SAM, we should calculate how much market share could be really capture under all the other hypothesis. This will depend a lot on the competitive landscape but as a rule of thumb, grabbing 25-30% is already a huge feat.

TAM, SAM and SOM

4. Conclusions

• TAM makes reference to the size of the opportunity we are looking to capture

• The bigger the cake, the better

• Not feasible to capture the entire TAM of the market, 25% is already a big number

• CEXes and stablecoin off-chain issuers remain the biggest fishes in the pond

• DEXes and Liquid Staking protocols are the biggest fully on-chain businesses

• NFT marketplaces DEX derivatives come next making around $500M yearly

• Asset management lending surpass the $200M mark with ease

• Long tail of the market contains L2s ($101M), gaming ($81M), infrastructure($55M), bridges($30M) and insurance($5M)