Is the DeFi train gaining momentum, or is it just ahead of derailment? Amid fears of retraction and the repeat of the ICO bubble, Decentralized Finance (DeFi) keeps drawing in Bitcoin holders as an easy way to set up passive income via high-interest rates.
Bitcoin Continues to Enter DeFi
What was four months ago the total value of DeFi, now accounts for 98,300 BTC, worth about $1.05 billion. Following this massive growth trend, you will likely see many graphs like this one, related to the DeFi space.
Thanks to the Federal Reserve’s money-printing schemes, the post-corona perception of Bitcoin is shifting toward a safe haven against the forces of inflation. Nonetheless, just over 1% of cryptocurrency users participate in the DeFi market — which is sufficient to spur its rapid growth.
June 2020 – DeFi TVL (total value locked) was estimated at $1.05 billion. Bitcoin represented 4.7% of that value, or $47.5 million.
September 2020 – DeFi TVL reached $7.88 billion (now $8.52 billion) on August 30. Bitcoin represents about 12% of that value, accounting for over 98,000 BTC, worth just over $1 billion, which is the TVL of the entire DeFi space just four months ago.
As the Bitcoin adoption rate increases, in the hopes of repeating or surpassing its 2017 milestone peak of $20,000 per BTC, DeFi presents a potentially perfect vehicle to harness all those idling crypto coins. Ethereum-powered protocols (smart contracts) mimic traditional financial instruments like loans but without the exhaustive background checking and mediation.
Therefore, everyone with some coins in their crypto-wallets, and some patience, would be able to simulate their own private virtual bank, but without a government breathing down your neck. The latter is especially beneficial to those who cannot access traditional banking services.
Bitcoin Tokenizing Protocols Used in DeFi
To interact with DeFi protocols/networks, Bitcoin first has to be locked in with a minted ERC-20 token, making it possible to interface with smart contracts on the Ethereum Network. Here are the most dominant forms of tokenizing Bitcoin in the DeFi space:
Tokenized Bitcoins in the form of Wrapped Bitcoin (WBTC) constitute the majority of the increase, with over 56,000 BTC this year alone.
Next is Ren’s Virtual Machine (RenVM) with over 21,000 tokenized Bitcoins. It grew from June’s 5,800 BTC to September’s 27,000 BTC. After RenVM is Aave with over 17,000 BTC and Balancer with over 9,000 BTC.
Lastly, the Ethereum’s competitive smart-contract network, the Lightning Network, is barely tagging along with just 1.2% of Bitcoins (about 1,060) invested, accounting for only a 0.02% increase in September.
What Percent of BTC’s Total Supply is in DeFi?
Altogether, the total quantity of Bitcoin locked in DeFi represents merely 0.47% of the total Bitcoin supply. This is in contrast to the 5% of all Ether locked in the DeFi space.
The DeFi space may offer plenty of opportunities for lottery-like fortune gains, but be aware that you have to know what you are doing in such a chaotic environment. When more people are drawn in from such stories of mouth-watering success, there will be more hacks and more scams, just like there was during the ICO craze.
The post-corona economic environment is an ideal setup for nurturing the quick-buck impulse, more so than usual. While the comparison to the ICO craze is quite distant from the DeFi space, it bears going through some of the lessons from the past.
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird's US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firms specializing in sensing, protection and control solutions.