The emergence of Bitcoin DeFi, or BTCFI, is rapidly evolving within the crypto ecosystem. Rena Shah, VP of Products at Trust Machines, noted that just two years ago, Bitcoin DeFi wasn’t a prominent narrative within the ecosystem. However, the introduction of staking platforms and lending protocols across the Bitcoin network has sparked interest among investors in transitioning assets from being a store of value to a source of value. This shift is attributed to the desire to make Bitcoin a more productive asset for both retail and institutional investors.
Institutions are beginning to show interest in Bitcoin DeFi, as evidenced by the significant amount of capital already locked on the Bitcoin blockchain. Despite Bitcoin DeFi’s TVL being around $1.2 billion, the potential for growth is enormous considering the trillions in capital available on the Bitcoin network. With the recent approval of spot Bitcoin ETFs in the United States, the potential for Bitcoin DeFi applications is increasing, appealing to both institutions and retail investors. Tycho Onnasch, co-founder of Zest Protocol, believes that BTC is more of an institutional asset compared to other cryptocurrencies, which is why institutions are likely to play a significant role in Bitcoin DeFi.
Numerous projects within the Bitcoin DeFi ecosystem are working towards enabling and advancing the sector with innovative applications. For example, Zest Protocol is creating a lending protocol specifically designed for Bitcoin to create a permissionless financial infrastructure for BTC lending markets. Similarly, ALEX is a new finance layer for Bitcoin aiming to integrate BTC with layer-2 solutions and the Ethereum Virtual Machine world to expand the Bitcoin economy and allow users to earn yield on their BTC.
Bitcoin DeFi applications are primarily focused on ensuring that Bitcoin becomes a more productive asset for investors by offering opportunities to earn yield on BTC. Projects like Zest Protocol and ALEX are working towards creating solutions that allow users to collateralize BTC, borrow other tokens, and earn yield on their Bitcoin holdings. Additionally, cross-chain swaps between Bitcoin L2s and the EVM world are expected to enable institutions to generate yield through their Bitcoin capital, making Bitcoin DeFi an attractive proposition.
Although Bitcoin DeFi applications are unique, they often resemble DeFi projects on Ethereum, which is currently leading in terms of active apps and overall activity. With the increasing institutional interest in DeFi applications on Ethereum, Bitcoin is learning extensively and developing new protocols in areas like DEXs, derivatives, and lending. Projects like Surf and Unicross are examples of Bitcoin DeFi applications that replicate Ethereum counterparts and indicate the innovative aspects of the sector.
Despite the challenges that Bitcoin DeFi may face, including liquidity fragmentation and the difficulty of implementing DeFi on L1 networks, the sector is poised for growth and evolution. Solutions like omnichain liquidity and infrastructure developments like WebAssembly and different runtime environments are expected to address these challenges and drive the success of Bitcoin DeFi. With the potential for Bitcoin DeFi to surpass Ethereum in the future and solutions like Spiderchain making it easier to bring Ethereum Dapps to Bitcoin, the sector is poised for significant growth and adoption in the coming years.
