Written by Hazel J. Greene, Senior Analyst

The circulation of Wrapped Bitcoin (wBTC) on the Ethereum network has witnessed a significant decline, shedding 44% since May 2022. Data from Dune Analytics reveals that wBTC on Ethereum has dropped to around 158,000 BTC in July 2023, compared to the 282,000 BTC recorded in May 2022. This contraction in tokenized Bitcoin mirrors the broader state of decentralized finance (DeFi) activity across various platforms.

Bitcoin holders have been actively tokenizing their coins by converting them into ERC-20 tokens on Ethereum, enabling them to participate in the vast array of DeFi opportunities available. These activities include staking to enhance returns, yield farming to maximize profits, and lending and borrowing to receive other coins, such as USDT or DAI, through platforms like MakerDAO. Notably, the most prominent tokenized Bitcoin on Ethereum is wBTC, with over 158,000 tokens circulating. Meanwhile, alternative platforms have gained popularity for minting hBTC and renBTC.

The decrease in tokenized Bitcoin on Ethereum reflects a broader trend of declining DeFi activity observed across Ethereum, BNB Chain, Avalanche, and Polygon. According to DeFiLlama data, the total value locked (TVL), a crucial metric for measuring demand, has plummeted from over $177 billion in November 2021 to below $50 billion. Although Ethereum dominates the DeFi landscape with a TVL share of over $24 billion, the overall decline in TVL indicates a challenging period for the DeFi sector.

The crypto winter of 2022 played a significant role in the contraction of DeFi activity. This period of bearish sentiment and reduced market activity impacted asset prices, including the native currency of Ethereum, ETH. ETH went from around $4,800 to a low of $1,100, resulting in deep losses for tokens associated with top DeFi protocols, such as Uniswap’s governance token, UNI, which plummeted from a peak of approximately $45 to as low as $3.

In addition to the impact of the bearish cycle in 2022, the relatively high transaction fees in Ethereum have also hindered DeFi activity. As of now, a simple ETH transaction incurs a fee of $1.86 on the Ethereum network, while competing protocols like Polygon or Avalanche offer significantly lower fees of just a few cents. This fee discrepancy has led to increased interest and adoption of alternative protocols that provide cost-efficient alternatives, such as Polygon’s zkEVM, where a simple transfer costs only $0.09.

Disclaimer: The information provided in this research report is for informational purposes only and should not be interpreted as financial or investment advice. The cryptocurrency market is highly volatile, and readers should conduct thorough research before making any investment decisions.