Crypto Has a Dormant Capital Problem, and It’s Greater Than You Think

Capital is what makes the world go round. It funds infrastructure, greases the wheels of commerce, and enables liquidity to flow smoothly through the financial rails that criss-cross the web. Through timely injections of capital, struggling businesses can be rescued and emerging ones given the impetus to make it to the big league. From fueling innovation to taming inflation, capital is the ingredient that makes it all possible.

But this capital isn’t deployed for altruistic reasons. Its owner, be it bank, big business, or billionaire, deploys this money in the expectation of receiving more in return. That’s how the financial world works: those with money lend it and earn yield as a reward for the risk they take in entrusting a portion of their net worth to others. As the adage goes, money makes money. Yet despite this capability, a significant proportion of the world’s wealth is lying idle and unutilized.

This dormant capital has the potential to become yield-generating, benefiting owner and recipient alike. But for that to occur, it needs to be activated and made available in a suitable format. Unless that can happen, capital is akin to coins locked into a bank vault and left to gather dust. In a digital age in which value can be transferred instantly and seamlessly, this is inexcusable.

Sleeping on Dormant Capital

Dormant capital describes funds or assets that are not actively being used to generate returns. This can happen for various reasons. In traditional finance, for example, the descriptor applies to money that has been left untouched for an extended period in a bank account.

Technically, any sum that has been lying idle for over a year is regarded as dormant, although some jurisdictions only apply this term after three years. This is a known issue with anonymous bitcoin wallets, but with crypto branching out to other sectors, such as DeFi, this issue has become far more widespread.

In reality, it’s impossible to have capital that is actively managed at all times, and so it is inevitable that there will be periods when money is lying idle. It’s also commonplace for funds that have been earmarked for investment to lie idle including stocks, bonds, and other securities. This might occur if an investor isn't actively managing their portfolio or if they're holding onto cash while waiting for new investment opportunities.

Then we have dormant business capital to contend with. Some companies hold significant cash assets on hand that may be earmarked for future expansion or acquisition. Given that such projects can drag on for years, however, it’s not uncommon for this cash to sit idle for an extended period, during which it could be used to generate significant yield.

And that’s just a portion of all the dormant capital the world is sleeping on: we haven’t even begun to factor in that which falls under the brackets of real estate, unclaimed assets such as insurance policies, or inheritance. In reality, much of the money bundled into these latter categories is harder to utilize. Turning real estate into active capital, for instance, would typically necessitate obtaining a loan against the property.

But in other sectors, there’s no excuse for hoarding idle capital. Not when it can be put to productive use in a few clicks…

Deploying Active Capital Onchain

For assets that reside onchain, opportunities for yield generation are manifold. This capability is at the heart of the programmable money markets that constitute decentralized finance. From humble beginnings, with the emergence of the first yield farms that offered “Token 2 for LP’ing Token 1,” DeFi has evolved in leaps and bounds. Today, it supports a broad array of on- and off-chain assets that can be utilized in ingenious ways to obtain sustainable yield.

Projects such as EigenLayer are at the forefront of this trend, providing a way for idle staked assets, such as stETH, to be used elsewhere to secure other chains and for borrowing against. Part of the LSDfi sector, which has significantly boosted the available liquidity on PoS chains, EigenLayer is seeing demand from stakers who wish to take a more active role in DeFi and earn the rewards.

Then there’s Dolomite, a money market protocol designed to provide greater capital efficiency through a virtual liquidity system. Dolomite supports advanced financial instruments such as over-collateralized loans and yield aggregation for “niche” assets such as rEth, GLP and others. The idea is to squeeze as much juice as possible from attainable yields while safeguarding capital, which Dolomite is delivering through integrating with existing DeFi protocols.

In an environment where assets can be collateralized, LP’d, staked, and borrowed against in a couple of clicks, putting dormant capital to work is relatively simple. While this is a godsend for DeFi users, who can put their assets to good use, there’s still significant work to be done in bringing real world assets (RWA) onchain.

With illiquid assets such as real estate and bonds tokenized, the possibilities for yield generation are enormous. The technology is already there and moves have begun to bring RWAs online. Dormant capital is a greater problem than most people think. But its solution is also closer than most realize. When it comes to putting idle capital to work, all roads lead to DeFi.