Bitcoin DeFi takes center stage

Opinion by: Darius Moukhtarzadeh, researcher

A wave of new projects and innovations is increasing utility to the Bitcoin (BTC) ecosystem, expanding its use beyond a static store of value. 

Bitcoin is the oldest, most prominent, most secure blockchain and asset in the crypto space. Recently, it proved critics wrong by setting a new all-time high and breaking the psychologically significant barrier of $100,000, and continuing to break new all-time highs. While its adoption is steadily increasing, its primary use case has changed over the last 15 years since its inception. It was initially created as a peer-to-peer digital currency, but it has evolved to be seen as digital gold.

While the digital gold narrative is attracting increased institutional and retail interest — as can be seen by the record inflows in Bitcoin exchange-traded funds since their launch in January 2024 and the recent new all-time high — the vast majority of Bitcoin is sitting idle in wallets and is unproductive. With a market capitalization of over $2 billion, there is a vast untapped potential to put Bitcoin’s liquidity to work. 

Fortunately, a fast-growing sector of Bitcoin decentralized finance (DeFi) applications and layer-2s is unlocking Bitcoin’s liquidity by creating a native DeFi ecosystem that will be one of the hottest new sectors in crypto during 2025.

Increased activity and adoption of Bitcoin L2 and DeFi projects

Crucial for Bitcoin DeFi to become a reality are Bitcoin L2 solutions, as Bitcoin itself has limited smart contract capabilities. In the last three years, the number of L2s has grown to over 75 projects. Various L2s are gaining traction and maturing, such as Pantera-backed Mezo, which recently launched its testnet and is planning its mainnet launch for Q1 2025. Likewise, BOB, which enables Bitcoin DeFi in Ethereum Virtual Machine-compatible environments, has attracted over 300,000 unique users since its launch in May 2024. 

Recent: What’s next for DeFi in 2025?

Stacks, one of the most established Bitcoin L2s, underwent its Nakamoto upgrade in Q4 2024. The upgrade introduced performance improvements, including faster block times and complete Bitcoin finality. Stacks is also preparing to launch sBTC in mid-December — a decentralized, programmable version of Bitcoin backed 1:1 by BTC. It will enable the transfer of BTC between layer 1 and layer 2. This innovation will open up new possibilities for using Bitcoin in DeFi without relying on centralized solutions like Wrapped Bitcoin (WBTC) on Ethereum.

Binance, the world’s largest crypto exchange, is expanding its Bitcoin DeFi offering, nominating the top three Runes (fungible tokens on Bitcoin) for futures listing. Binance also announced Bitcoin staking with the Babylon protocol as part of Binance Earn, enabling onchain yields. 

Adoption is reflected in increasing TVL

The growing interest in Bitcoin DeFi is reflected in Bitcoin’s TVL, which reached an all-time high of $7.48 billion on December 16 (excluding the TVL of L2s such as Mezo or BOB). This figure represented a sharp increase in Q4 2024, with most of the value locked in restaking protocols like Babylon and Lombard. While Bitcoin DeFi’s TVL is still small compared to Ethereum’s $68.35 billion as of January 17, it showcases the growing interest in Bitcoin DeFi applications. This figure will rise significantly in the coming months and years as more projects mature, launch their mainnets, and issue their own tokens with multiple TGEs expected in 2025. 

Expected regulatory clarity will encourage investors 

Political and regulatory winds have shifted in the United States. With crypto-friendly Paul Atkins leading the Securities and Exchange Commission and David Sacks as the administration’s “AI and crypto czar,” the US appears to be moving toward a more supportive stance on crypto under President Trump’s administration. 

More precise laws and guidelines will make investors more confident in deploying their crypto assets in DeFi applications. This shift in policy and stance toward crypto comes at an ideal moment, as the nascent Bitcoin DeFi sector stands poised to flourish in a regulatory environment far more welcoming than in the past.

Some critics would argue that Bitcoin whales are against added utility, as they see Bitcoin as perfect. The debate around Ordinals and Inscriptions showcased that not everyone is enthusiastic about new features on Bitcoin. Still, it is unclear whether these voices represent most Bitcoin communities. Even if a significant percentage of holders leave their Bitcoin as is and only a tiny fraction of Bitcoin’s supply flows into DeFi, the sector would be substantial.

A calculation by Messari research analyst Kinji Steimetz showed that if taking the same utility penetration percentage of WBTC, which is at 2.87% of its total addressable market, BTC would translate into $47 billion that can be captured in Bitcoin DeFi. The calculation underscores the immense potential of Bitcoin DeFi, as even a tiny level of penetration would create a significant new sector. That would be sizable enough to rank among the top 10 projects by market capitalization, encouraging further innovation and engagement.

Bitcoin DeFi could secure Bitcoin’s security budget

Unlocking Bitcoin’s liquidity through DeFi will enhance its utility beyond serving as a mere store of value. As advanced infrastructure, new applications and favorable policies emerge, Bitcoin will transform from a passive asset into a productive one, offering yield opportunities and fostering a more dynamic and engaged ecosystem on top of the most established blockchain.

In turn, these developments could strengthen Bitcoin’s network security. As more use cases generate fees and revenues, miners will be incentivized to maintain and secure the network beyond the last Bitcoin mined by 2140. That can ensure the long-term security and sustainability of the Bitcoin network.

Darius Moukhtarzadeh is a Web3 researcher focused on Bitcoin DeFi and consumer/social applications. He previously worked as a researcher for Sygnum, for Ernst & Young in blockchain consultancy, and for several startups in the Swiss Crypto Valley. 

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.