What is DeFi?
Decentralized finance, or DeFi, are financial instruments or services on blockchains such as Ethereum. It enables users to perform traditional banking activities such as lending, borrowing, earning interest, insurance, and trading assets. It is faster than its conventional counterpart and does not require intermediaries. It expands on the basic premise of digital money, creating an alternative digital economy where markets are more open, free, and accessible. You only need an internet connection to get started with DeFi. It helps remain anonymous as it does not ask for any personal information. You can move digital assets without asking for permission, paying hefty fees, or having long wait times.
DeFi on Bitcoin and Ethereum
According to a Chainanalysis report, Ethereum (ETH) was the most widely distributed crypto, with about 79 million wallets holding it as of July 2023. Bitcoin was held by just more than 50 million wallets, according to the report. The numbers on the distribution of any crypto asset show investors’s expectations of a future price rise or their sentiment around its utility. The tremendous growth of DeFi in recent years has played a vital role in driving Ethereum adoption, as most DeFi applications are built on top of it.
The degree of decentralization in ownership is another crucial factor in their adoption dynamics. Bitcoin is the most decentralized asset, with 0.009% of all wallets storing 50% of its supply, according to the same Chainanalysis report. The report says Ethereum is top-heavy, with 131 entities, or 0.0002% of all wallets, owning 50% of its tokens. Bitcoin trading activities have slowed since the crypto winter of 2022, and users have exhibited a holding mentality in 2023 as most Bitcoin wallets remain dormant. On the other hand, the 2021 bull market and the DeFi summer of 2020 have provided a significant boost in Ethereum adoption. ETH tokens were extensively used on thousands of protocols built on its platform.
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Smart contracts aided the development of dApps, increasing ETH adoption. In contrast, Bitcoin was mostly used as a transactional token. Most Ethereum supply is locked up in various DeFi protocols, whereas Bitcoin has a negligible share in DeFi. Ethereum’s supply to centralized exchanges has stayed over 30%, but Bitcoin’s share has never gone beyond 20%. According to the Chainanalysis report, Ethereum was the most liquid crypto, with 4.8 million wallets remaining active as of July 2023. Bitcoin was second, with about 1.9 million wallets actively trading it.
The influence of DeFi on Bitcoin adoption
It was not possible to develop Smart contracts on the Bitcoin blockchain earlier, but the Taproot upgrade is opening DeFi for it. The Bitcoin network faced scalability issues when developing decentralized applications in the past. Many Bitcoin scaling solutions have emerged in the market recently, such as Stack, Rootstock, and Liquid Network. DeFi has started emerging on the Bitcoin network but still has a long way to go. NFTs on Bitcoin are also still in their early stages, but given that they laid the foundation for crypto, experts are confident that developers will join the Bitcoin network to create new decentralized financial instruments that are not available on other networks, helping their adoption.
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