Decentralized applications enable anyone with an internet connection to access a variety of financial products and services spanning crypto asset exchange, margin trading, financial derivatives, synthetic assets, algorithmic trading, and lending markets.
Two of the killer use cases of DeFi include high-yield savings accounts and access to credit. Holders of ether, dai, USDC, tether, and other crypto assets can lend out their assets and achieve high, single digit annual returns. On the other side of the trade, borrowers can post their crypto assets as collateral and gain access to stablecoins tied to fiat currencies to trade with leverage or access a line of credit.
Beyond being built on Ethereum (the protocol), DeFi projects have mainly used ether (the protocol’s native monetary unit) as the base asset and primary source of collateral. However, the industry is now seeing efforts to inject bitcoin into the DeFi ecosystem. These “bitcoin-pegs” attempt to bridge bitcoin and Ethereum, combining bitcoin’s superior liquidity, trading volume, and user base with Ethereum’s composability and ecosystem of open source financial applications. A few of the projects bringing bitcoin to DeFi include WBTC (Wrapped bitcoin), imBTC (TokenIon), tBTC (Keep Network), sBTC (Synthetix), renBTC (Ren), and pBTC (ptokens).
Although WBTC has seen a significant rise, ether remains the largest form of collateral in DeFi with 2.6 million ETH locked in DeFi protocols, worth $520 million at time of writing. However, the trend is clearly falling in recent months with the arrival of alternative assets.
It may seem that bitcoin and ether are in direct competition to serve as DeFi’s primary reserve asset; however, even if bitcoin asserts dominance, ether will also benefit since DeFi applications require users to spend, and thus demand, bits of ether to process transactions. This assumes the Ethereum blockchain remains the dominant platform for decentralized applications, and other competing platforms such as Blockstream’s Liquid, Algorand, Cosmos, and Tezos are unable to steal meaningful market share.
The introduction of bitcoin to Ethereum’s DeFi ecosystem is in its early days, and it remains to be seen whether bitcoin will emerge as the leading reserve asset fueling decentralized applications. The market will dictate which crypto assets are most desirable and deserve monetary premia: value accrued to the token as users demand to hold or lock up the token. User behavior will demonstrate the crypto asset with the most favorable monetary characteristics will serve as the best collateral, and bitcoin and Ethereum will compete for dominance.