Bitcoin-based decentralized finance (DeFi) protocols are on fire! Total value locked (TVL) during the period increased by a staggering $304.66 million as of January 1, 2024, to a remarkable $7.117 billion. This surge shows that people are increasingly interested in using Bitcoin as more than just a store of value. Read on to learn what experts are pointing to as causes of this boom. Among technical innovations, introduction of stablecoins and a “strategic shift” among long-time Bitcoin holders as to why.
The Bitcoin layer-2 ecosystem Stacks recently reported a significant milestone, with 5,000 sBTC (a 1:1 Bitcoin-backed asset enabling BTC DeFi) bridged in just a few hours. This swift uptake is a clear indication of the high demand for Bitcoin-based DeFi solutions.
Catalysts for Growth
Here are a few of the big reasons behind the growth of Bitcoin DeFi. Technical innovations, such as BitVM2 and the proposed BitVM3, are paving the way for more flexible and scalable smart contract functionality on Bitcoin. Combined, these advances allow developers to build richer DeFi applications on top of the Bitcoin network.
Stablecoins are indeed the backbone of DeFi activity across other chains. Bitcoin has long lacked a dominant stable asset, so stablecoin expansion could be a game-changer for Bitcoin DeFi. - Rich Evans, managing director at CEX.IO
The addition of stablecoins to Bitcoin DeFi is a major development. According to Rich Evans, Managing Director at CEX.IO, stablecoins play a crucial role in DeFi activity. So he’s convinced that their growth can come to Bitcoin DeFi and change it forever.
Institutional Interest and Shifting Mindsets
As a result, institutions are jumping on board with Bitcoin DeFi. Rena Shah, COO of Trust Machines, believes that institutions are finally realizing that Bitcoin is growing at a faster rate. She expects that as these institutions continue to develop infrastructure and adopt BTCFi strategies, some of them will want to benefit from this growth.
When everyday users see BTC hit new all-time highs, it creates an opportunity for a second step—Bitcoin DeFi. - Rena Shah, COO of Trust Machines
The builders who prepared for this moment will have the best opportunity to introduce new users to untapping the full potential of their Bitcoin. - Rena Shah, COO of Trust Machines
Willem Schroé, CEO and co-founder of Botanix Labs, emphasizes the need for long-time Bitcoin holders to reframe their relationship with the asset. Hussain argues that Bitcoin DeFi can only prosper if Bitcoin holders change their perspective. So, they’ve got to get beyond “buy and hold” mentality and start to look for ways to spend their Bitcoin.
For years, the dominant narrative was to ‘buy and hold.’ That mindset worked in the early phases, but for Bitcoin to reach its full potential, it needs to be used. - Willem Schroé, CEO and co-founder of Botanix Labs
Yield opportunities, for example, can only exist if more BTC enters the ecosystem. - Willem Schroé, CEO and co-founder of Botanix Labs
Security and Use Cases
Security continues to be the biggest issue for Bitcoin DeFi’s mass adoption. Ben Sanders, chief growth officer at RootstockLabs, stresses the importance of robust security measures to protect users and their assets.
It’s critical that Bitcoin treasury companies, infrastructure providers, custodians, and teams building decentralized protocols are aware of the risks and put the right measures and safeguards in place to protect their users moving forward. - Ben Sanders, chief growth officer at RootstockLabs
Today, the two biggest use cases on Rootstock are Bitcoin lending and borrowing. These decentralized applications open up new possibilities for Bitcoin holders to earn yield on their existing Bitcoin assets or gain access to stablecoins.
We're seeing both retail users and institutions harnessing Rootstock to generate yield from their BTC holdings, or borrow stablecoins against them. - Ben Sanders, chief growth officer at RootstockLabs
I've heard some incredible stories about people financing home renovations and businesses unlocking capital to expand into new markets. - Ben Sanders, chief growth officer at RootstockLabs
As Rena Shah explained, the overall loan value throughout the Stacks ecosystem has naturally risen with Bitcoin due to the value of Bitcoin’s price appreciation. This upward trend indicates a strong demand for Bitcoin-backed loans and other DeFi services.
Challenges and Future Opportunities
Despite this shocking growth, Bitcoin DeFi has a long way to go on multiple fronts. In his reflection on the experience, Willem Schroé highlights that security and education are still difficult topics. I know many Bitcoiners and other folks are tentative about using these new tools, and rightfully so considering the risks that come with the DeFi space.
Many Bitcoiners are cautious about using new tools, and this is rightfully so. - Willem Schroé, CEO and co-founder of Botanix Labs
These challenges, too, create immense opportunities for innovation and improvement. As the ecosystem has matured, developers have doubled down on addressing security issues while making the necessary educational resources available to any user.
As Rena Shah from BitGo puts it, cross-chain opportunity is the next major frontier for Bitcoin DeFi. The capability to move Bitcoin easily between blockchains would open opportunities for usage within DeFi applications on other chains.
Even if you have assets on another layer-1, Stacks is creating bridging opportunities so users can access the best in DeFi, while never having to sell their BTC. - Rena Shah, COO of Trust Machines
Ben Sanders anticipates that more crypto exchanges and consumer finance apps will integrate Bitcoin layers like Rootstock in the coming months. As such, this integration will bring users closer to high yielding BTCFi opportunities.
As more institutions build Bitcoin stockpiles, it’s also inevitable that more of them will be looking at ways to put their BTC to work in truly Bitcoin-aligned blockchains like Rootstock. - Ben Sanders, chief growth officer at RootstockLabs
As capital flows back into the ecosystem, we’re seeing a surge in interest around Bitcoin-native DeFi, particularly in lending, restaking, and generating yield on BTC. - Willem Schroé, CEO and co-founder of Botanix Labs
Botanix is experiencing steady growth due to various factors.
