BTC Liquidity Will Stay Centralized Until DeFi Learns To Replace Market Makers

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Market data shows that only 0.79% of Bitcoin’s total supply is currently locked in DeFi. The rest sits comfortably in centralized custody – with exchanges, ETFs, corporate treasuries or nation-states.

Given that BTC is the world’s largest crypto asset, that’s an astonishingly small number to talk about.

Bitcoin remains the face of crypto, yet it’s still treated mostly as ‘digital gold’ – something that people prefer holding rather than using.

It’s not a question whether Bitcoin can go on-chain – it can. The more pressing matter is why it hasn’t.

Despite years of ongoing innovation in DeFi, the development of wrapped tokens and layer-two scaling, BTC liquidity continues to live on CEXs (centralized exchanges).

Why is that the case? The reason is surprisingly simple – DeFi still hasn’t learned to replace market makers.

Why Bitcoin liquidity remains stuck on CEXs

CEXs run on deep order books, maintained by professional market-making firms that adjust bids and asks in milliseconds.

This setup creates smooth price discovery and minimal slippage – a core requirement for institutions and high-volume traders. As a result, that’s where most of the liquidity lives.

DeFi, on the other hand, relies on AMM (automated market makers) and liquidity pools.

These models made Ethereum’s DeFi revolution possible, but they don’t yet rival the efficiency or responsiveness of human – and algorithmic – market makers.

Traders have learned to view CEX liquidity as strategic while DEX liquidity is still viewed with caution.

Market makers don’t move their operations on-chain – because from their point of view, it doesn’t make economic sense – at least not yet.

On CEXs, they have familiar infrastructure, high throughput and the ability to manage risk across multiple trading pairs.

On-chain, they’d have to deal with gas fees and exposure to impermanent loss – which some, though, learned to hedge. Not a desirable position.

So, while DeFi has mastered programmability, it still hasn’t solved for liquidity behavior.

Without a way to automate what market makers do – pricing, rebalancing and absorbing volatility – Bitcoin liquidity will remain centralized.

It’s not about smart contracts

For years, DeFi’s biggest selling point was its trustless execution – smart contracts replacing intermediaries in the spirit of true decentralization.

But the problem Bitcoin faces when it comes to its placement in the DeFi ecosystem is not about trust – it’s the very market structure.

Smart contracts can already wrap BTC into ERC-20 tokens like WBTC or tBTC, making it tradable on Ethereum and other networks.

We’ve seen in practice that this setup works and has already enabled billions in liquidity. According to DeFiLlama, WBTC holds roughly $14 billion in TVL (total value locked).

For now, the wrapped BTC model remains the main bridge between Bitcoin and DeFi.

Such tokens have proven functional and safe enough for most users, and they’ve enabled the early wave of BTCFi growth, where Bitcoin serves as the core asset for trading and yield generation.

Earlier this year, analysts predicted that by 2030 about $47 billion worth of Bitcoin could be active in DeFi (decentralized finance). That’s no small amount of progress – but it could be better still.

The thing is that wrapping and liquidity management are two different problems.

Bitcoin holders – who are typically conservative investors – have little appetite for complex DeFi tools that they don’t understand nor have the inclination to dig into and figure out.

They are less experimental and more focused on security and stability. BTCFi needs to learn how to appeal to those values in order to move forward.

Put simply, until DeFi offers a seamless, straightforward experience, BTC liquidity will stay where it feels safest – with CEXs and custodians.

The success of Bitcoin ETFs proves this point – as of October 2025, this asset type held around seven percent of total BTC market cap, reaching $170 billion in value.

This is clear proof that institutional investors didn’t need decentralized tools to join the market.

What they needed was efficiency, predictability and the level of compliance they are used to from their TradFi (traditional finance) experiences.

DeFi still struggles to offer those at scale.

How can that change

So what is the DeFi sector to do if it wishes to address all of the above?

The answer is this – to compete with CEXs in the truest sense, DeFi must learn to do what market makers do on the centralized side of things – only automatically.

That means solving passive liquidity provision. Right now, most AMMs distribute liquidity evenly across all prices or rely on concentrated strategies that still require human oversight.

Next-generation AMMs would need to dynamically rebalance liquidity in real time, reacting to volatility just like a human expert – but without human involvement. That’s the tricky part.

If that becomes possible, liquidity migration will follow naturally.

Institutions would no longer depend on CEXs to manage trading volume, and retail users could provide liquidity passively, earning yields on their BTC without the need for complex management.

That’s the future DeFi should be building toward.

Decentralized liquidity will rewrite Bitcoin’s market dynamics

If DeFi manages to crack the market-making problem, Bitcoin’s liquidity migration is going to reshape the crypto economy in a big way.

Price discovery would become more decentralized, volatility would smooth out and Bitcoin holders could finally earn passive yields – turning BTC into an active, productive asset.

At the same time, secondary markets would expand around it, creating a new layer of financial products (like yield trading and lending) built directly on the basis of Bitcoin liquidity.

Most importantly, liquidity itself would become democratized – no more dependence on exchanges or sudden liquidity withdrawals by centralized market makers that can cause crashes.

If we can crack the problem of passive liquidity provision, its migration to DeFi would make Bitcoin markets significantly more anti-fragile.

And prices – less vulnerable to abrupt liquidity fluctuations.

But we still have some ways to go before that can happen. The technology is catching up, but the mindset shift isn’t there yet.

When does DeFi learn to automate liquidity the way CEXs coordinate it? That’s when Bitcoin will finally flourish on-chain with deeper and more resilient markets.

Michael Egorov is the founder of leading DeFi exchange Curve Finance and the Bitcoin-focused liquidity protocol Yield Basis. He is a notable figure in the DeFi space, having launched the first DeFi exchange with a focus on stablecoins. A physicist, entrepreneur and crypto maximalist, Michael stood at the origins of DeFi creation.

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Disclaimer: Opinions expressed at The Daily Hodl are not investment advice. Investors should do their due diligence before making any high-risk investments in Bitcoin, cryptocurrency or digital assets. Please be advised that your transfers and trades are at your own risk, and any loses you may incur are your responsibility. The Daily Hodl does not recommend the buying or selling of any cryptocurrencies or digital assets, nor is The Daily Hodl an investment advisor. Please note that The Daily Hodl participates in affiliate marketing.

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