<aside> 💡 We define the DeFi Utilization Rate of a token to be the ratio of TVL in DeFi to the Market Cap of the Token.
$u_{t} = \frac{TVL_t}{MarketCap_t}$
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The past few years have seen a remarkable expansion in the utilization of Ethereum's decentralized finance (DeFi) ecosystem, with Uniswap serving as a key indicator of this growth. Launched in 2018, Uniswap quickly climbed the ranks to become a significant player in the DeFi sector. As illustrated in the chart below, by 2021, its total value locked (TVL) peaked at nearly $10B, accounting for a substantial share of the $106B locked in Ethereum's DeFi platforms.
The chart showcases a steady increase in Ethereum's DeFi metrics. The TVL and market capitalization have seen a pronounced rise, especially around 2021. This coincides with Uniswap's most significant contributions, solidifying its role as a pioneer and major catalyst for Ethereum's DeFi boom. Its unique liquidity model and the consistent growth in TVL emphasized its impact on the larger ecosystem.
Data composited from DeFiLlama and CoinMarketCap
The history of Ethereum's DeFi Utilization Rate provides another compelling narrative. Starting from almost negligible percentages, the utilization rate witnessed explosive growth, reaching over 20% of Ethereum’s market cap. This translates to a whopping $105B of ETH being engaged within DeFi. The timing of this surge suggests a correlation with the last Bitcoin halving, indicating that broader crypto market events, such as the halving, can have ripple effects across the wider crypto space.
Data composited from DeFiLlama and CoinMarketCap
In our DeFi utilization calculations for Bitcoin, we omit wrapped Bitcoin (wBTC) due to its reliance on centralized KYC/AML procedures. These procedures are at odds with DeFi's decentralization ethos and hinder the flow of native Bitcoin into DeFi. We explore these barriers further later in the paper.
Starting in April 2021, Bitcoin's DeFi utilization rate is almost negligible. However, as we approach January 2022, there's a sharp spike, which quickly subsides and returns to lower levels by April 2022. From there, the utilization rate maintains some consistency, with minor increases and decreases but never reaching the peak seen in January 2022. As seen by the chart, as of July 2023, the current utilization rate stands at 0.006504% with a TVL of $34M, a minuscule portion of the overall Bitcoin market cap.
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💡 This number (0.006504) was derived by subtracting the TVL in the Lightning Network from the Total TVL of Bitcoin, since the Lightning Network is not a Decentralized Finance Protocol in the same sense that Uniswap is. The resulting number is then divided by the Market Cap of Bitcoin to get the Utilization Rate of Bitcoin in DeFi.
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Bitcoin's engagement in the DeFi sector has been notably low, a fact that stands in stark contrast to its status as the foremost cryptocurrency in terms of market capitalization and adoption. This surprisingly low utilization rate in the world of DeFi is due to a lack of true decentralized on-ramps for Bitcoin. To date, there has not been a single truly decentralized path for Bitcoin to participate in DeFi.
At the core of DeFi is the principle of decentralization, where operations are not overseen or controlled by a single entity. However, for Bitcoin, there are hardly any genuine decentralized on-ramps to introduce it into the DeFi ecosystem. This means that users wanting to leverage their Bitcoin in DeFi platforms often find themselves without a direct pathway.
Wrapped Bitcoin (wBTC) has emerged as one of the primary solutions to this problem. It's essentially a token on the Ethereum blockchain that represents Bitcoin at a 1:1 ratio. However, the process of converting Bitcoin to wBTC isn't truly decentralized. Acquiring wBTC typically involves undergoing KYC/AML procedures[1], which are the very centralized processes that many crypto enthusiasts wish to avoid. This process can deter many potential Bitcoin holders from diving into the DeFi world.
The need to go through centralized processes to access DeFi opportunities is in direct opposition to the foundational ethos of decentralized finance. DeFi's allure largely stems from its promise to democratize finance, eliminating the need for traditional intermediaries, and providing open access to financial tools and services. By having centralized bottlenecks like KYC/AML procedures for Bitcoin's entry into DeFi, we essentially reintroduce intermediaries, undermining the very principles that DeFi stands for.