【Cao Yin Column】Bitcoin Halving Could Potentially Raise DeFi Market Lending Rates

The halving will lead to a large amount of BTC being collateralized into DeFi lending platforms, while also driving up DeFi lending rates and asset utilization rates, prompting a significant expansion of stablecoin balances in DeFi.

Original Title: "DeFi Review: The Halving Brings More Than Just a Bull Market, but also the Spring of DeFi"
Author: Cao Yin

Key Takeaways:

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1. The logic behind the bull market from halving lies in supply-demand rebalancing
2. The halving will lead to a large amount of BTC being collateralized into DeFi lending platforms
3. The halving will drive up DeFi lending rates and asset utilization rates, prompting a significant expansion of stablecoin balances in DeFi

In a few days, BTC will experience its third halving since its inception, reducing the block reward from 12.5 BTC to 6.25 BTC. According to the renowned Supply-to-Price model, BTC's price is expected to surge following the halving, as seen in significant price increases after the past two halvings. As the halving approaches, BTC has rapidly climbed out of the deep pit of $312 and recently surpassed the $10,000 mark, setting the stage for the halving drama.

Bitcoin halving has become the hottest investment topic in the cryptocurrency world this year, attracting attention not only from the traditional investment community outside the blockchain industry but also within the DeFi sector. However, within the DeFi community, the Bitcoin halving theme seems to have not exerted its influence, with few DeFi practitioners discussing the impact of Bitcoin halving on DeFi. The main reason for this phenomenon is that BTC assets have not entered the Ethereum-dominated DeFi ecosystem on a large scale. Nevertheless, as Bitcoin represents over 60% of the total cryptocurrency market value, can it be true that the halving will have no impact on DeFi?

Before discussing the impact of halving on DeFi, let's first take a look at the decisive impact of halving on Bitcoin itself. Halving will start to take effect from the supply side, namely from Bitcoin miners, thereby breaking and reshaping the entire supply and demand balance of Bitcoin.

For a long time, miners have been the producers of Bitcoin and have been an important source of selling pressure for Bitcoin because the income of miners is in Bitcoin, but the costs must be paid in fiat currency. Therefore, in order to pay for daily mining operational expenses such as electricity bills and venue rents, miners habitually sell all mined BTC regularly to exchange for fiat currency to cover expenses and settle profits.

According to statistics, in 2019, Bitcoin miners' income was close to $5.5 billion, while electricity expenses were around $4 billion. This means that in 2019, miners had to cash out at least $4 billion on exchanges to pay for the daily operating expenses of mining. Although $4 billion may seem insignificant compared to the annual trading volume of tens of billions of Bitcoin, the selling of coins by miners represents a net capital outflow, as the fiat currency obtained from selling coins is unlikely to re-enter the market, while most other Bitcoin trades are mostly arbitrage trades, with funds moving in and out of Bitcoin dozens or even hundreds of times.

Currently, there are approximately 1 million Bitcoins stored in Coinbase. Based on the current price, this is equivalent to $9.5 billion, which is less than twice the annual income of miners in 2019. Assuming that most miners will sell the majority of the Bitcoins they mine, the selling pressure from miners is equivalent to about half of Coinbase users selling off half of their Bitcoin holdings within a year and permanently exiting the market. Therefore, the selling of coins by miners will actually have a huge impact on the market.

After halving, the selling pressure from Bitcoin miners will also be halved, while the demand remains the same, and it is even likely to increase significantly due to the aggressive monetary policies of global central banks and domestic political crises and geopolitical crises in some hotspots. With this give and take, the supply and demand balance of Bitcoin is disrupted, and a new supply and demand balance is formed at a new price level. According to the most basic microeconomics supply and demand curve, the new price level will inevitably be much higher than the current price.

Of course, for miners, even if the production is halved, the monthly electricity bill remains the same. Therefore, halving will also eliminate a large number of high electricity cost, low-performance mining machines. Faced with these eliminated miners, they have only two options: either exit the market directly, hold coins for price appreciation, and the vacated hash rate will soon be filled by new high-performance mining machines; or upgrade equipment, such as Antminer's S17, or find mining facilities with lower electricity prices, such as in North America. Whether it's elimination or upgrading, it will result in a significant increase in the overall network hash rate of Bitcoin, which will form a new support level for Bitcoin's price.

If, as analyzed above, halving will bring a bull market for Bitcoin, then DeFi will undoubtedly benefit as well, and the specific impact transmission paths may be as follows:

For miners, their primary role is as Bitcoin producers, rather than Bitcoin investors. Their daily operational decisions are similar to those of manufacturing companies. In normal times, without expectations of price increases, miners tend to sell most of the Bitcoins they produce to realize profits rather than choose to hold most of them and bear the risk of Bitcoin price fluctuations. However, when the expectation is that halving will bring a bull market for Bitcoin, the group of miners will shift their focus to being optimistic about the future price trend of Bitcoin for a period of time. They will transform from simple Bitcoin producers into dual identities of producers and investors, and will be more inclined to use the Bitcoins mined through CeFi or DeFi as collateral to borrow stablecoins to pay for the daily operational expenses of mining farms.

Conservatively speaking, assuming that after halving, half of miners choose to hold coins for borrowing, then 450 Bitcoins will enter CeFi and DeFi collateral every day. If the upward trend continues for a full year, after halving, within a year, the BTC collateral from miners in various collateral lending applications will increase by 164,250.

In addition to the expenses for daily operating costs, miners also need to increase investment to purchase new high-performance mining machines, and invest in the post-halving hash rate battle. This repeated investment demand will also promote the collateral borrowing demand of the miner group. It is estimated that the global Bitcoin mining machine market demand in 2020 will be about $300 million. Based on a 150% mortgage rate, and at least a $10,000 Bitcoin price after halving, $300 million will require $450 million in collateral, requiring an additional 45,000 Bitcoin collaterals.

According to industry estimates, currently there are approximately 200,000 Bitcoins collateralized in various types of CeFi, while the amount of BTC in DeFi is still very small, about 500, almost negligible. Therefore, even with conservative estimates, within a year of halving, just one group of miners may double the total amount of BTC collateral in all Bitcoin collateral lending platforms.

With the opening of various BTC DeFi channels, a considerable portion of this new BTC collateral borrowing demand will enter various DeFi platforms. Currently, wBTC, imBTC, XBTC are already online, and post-halving, there will be tBTC, pBTC, renBTC coming online. Furthermore, BTC lending DeFi applications based on Atomic Swap technology, such as Atomic Loan, have also been launched, and more BTC lending protocols based on Atomic Swap technology will be launched in the future. BTC lending based on Atomic Swap technology is more convenient than current ERC format Bitcoin usage, and may attract a large amount of BTC collateral borrowing. Assuming that only 10% of the new BTC collateral enters DeFi platforms, it will still be 42 times the current total amount of BTC in DeFi!

Image: BTC Stablecoin Borrowing Interface on Acala Network Testnet

The upward trend in the price of BTC will inevitably drive the rise of mainstream cryptocurrencies such as Ethereum, and the collateral in DeFi will benefit first, with increased value and decreased leverage rates for users, stimulating users to borrow more stablecoin assets for investment in digital currencies under the condition of unchanged collateral. The result is the simultaneous expansion of both ends of the DeFi balance sheet. However, this expansion does not mean a bubble, because whether it is the balance sheet of the protocol itself or the balance sheet of the borrower, solvency remains healthy, as the value of assets exceeds the value of liabilities.

(Note: Solvency, the ability to pay)

Furthermore, if halving leads to a continuous rise in the prices of the entire cryptocurrency market, it will inevitably push up the borrowing rates and stablecoin utilization rates in the DeFi market, prompting the issuance of more stablecoins. This includes both centralized stablecoins like USDC and decentralized stablecoins like Maker and Acala. Therefore, halving will also promote a significant expansion of DeFi stablecoin balances. Historical data from the past year also proves that the total amount of Dai balances and the number of active Dai addresses have a very strong correlation with the price of ETH.

Image: Correlation between Total DAI Balances and ETH Price

Image: Correlation between Active DAI Addresses and ETH Price

DeFi was born in the depths of a bear market, grew in the shadows of doubt, and has experienced various challenges and attacks. Instead of being knocked down, it has become more vibrant. This halving may mark the end of this bear market and the beginning of a major bull market. DeFi is very likely to step onto the financial stage formally with this bull market and become a new option for users outside of centralized finance.

This article is authorized for reposting by ChainNews, article source: ChainNews (ID: chainnewscom)

Further Reading

• Third Halving Approaches, Analyst Willy Woo: Exchanges Will Become the Main Sellers of Bitcoin
• ICO Resurgence? Ethereum Co-founder: Will Conduct a Large Number of Token Sales Again

• 【Dapp Pocket】DeFi Weekly Report - Second Week of May

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