BTCFi, or Bitcoin DeFi, refers to all protocols and dApps facilitating decentralized financial services on the Bitcoin network and they are predominantly powered by Bitcoin’s layer-2 networks and sidechains, which enhance scalability and expand Bitcoin’s functionality.
As the first and most valuable cryptocurrency by market capitalization, Bitcoin is renowned as a peer-to-peer medium of exchange and a reliable store of value.
However, its inherent lack of support for smart contracts and scalability constraints have historically limited its role to these foundational use cases, preventing it from evolving into a broader ecosystem like Ethereum or Solana.
Ethereum currently accounts for 54.8% of the TVL in DeFi, which is $67.29 billion
Source: Defillama
BTCFi seeks to change this narrative by unlocking Bitcoin’s dormant liquidity, which is currently underutilized in wallets. In contrast, networks like Ethereum and Solana boast thriving DeFi ecosystems that maximize the utility of their native assets.
Bitcoin DeFi aims to bridge this gap, opening up new possibilities for Bitcoin as both an asset and a network.
Let’s explore how BTCFi is reshaping the future of Bitcoin.
Meaning of Bitcoin DeFi (BTCFI)
BTCfi, which stands for Bitcoin DeFi, encompasses protocols and applications offering decentralized financial services such as lending, staking, yield farming, and trading, without intermediaries on the Bitcoin network or its layer2s and sidechains.
Bitcoin DeFi expands the utility of the BTC asset by introducing on-chain yield opportunities which could potentially unlock BTC’s dormant liquidity while leveraging Bitcoin’s decentralization and security allowing the network to protect more than just BTC assets but safeguard an entire decentralized financial ecosystem
Key Drivers Powering Bitcoin DeFi
According to DefiLlama, the total value locked (TVL) on Bitcoin sidechains currently stands at $2.65 billion
Source: Defillama
The 2021 Taproot upgrade expanded Bitcoin’s capabilities and programmability. However, even after the Taproot fork, Bitcoin’s smart contract functionality remained less robust than that of Ethereum and Solana.
Nevertheless, Bitcoin layer-2 networks are pushing the boundaries and building on these improvements to achieve scalability and enhanced smart contract support.
Here are some of the drivers of BTCFi:
Sidechain – Leading the charge are various Bitcoin sidechains, some of which not only support smart contracts but are also EVM-compatible. These sidechains power Dexs, lending, derivatives, staking protocols, and stablecoins.
The top 8 Bitcoin Sidechains by TVL are:
Core – $846.5m
Bitlayer – $392m
Bsquared – $353.27m
Rootstock – $225.45m
BOB – $221.82m
AILayer – $205.85m
Merlin – $170.28m
Stacks – $126.25m
Wrapped BTC – has greatly improved interoperability between Bitcoin and Ethereum, allowing for asset transfers and interactions across both networks. EVM-compatible sidechains support WBTC, which enhances its utility and broadens Bitcoin’s integration with Ethereum-based decentralized applications (dApps).
Use Cases of BTCFi
Bitcoin Defi unlocks decentralized Finance on the Bitcoin network as such everything possible within DeFi can be integrated or built on Bitcoin as such some of the use cases or potential use cases of BTCFi are;
Staking
Lending
Trading (Dex)
Liquidity provision
Derivatives
Yield farming
Advantages of Bitcoin DeFi
Unlocking Dormant Liquidity: BTCFi activates Bitcoin’s vast idle liquidity, enabling productive use through lending, borrowing, and staking.
Expand BTC Use Case: BTCFi transforms Bitcoin from digital gold into an asset for yield farming, lending, and trading.
Cross-Chain Interoperability: BTCFi enables seamless interactions with other blockchains as highlighted by the success of WBTC which has grown from a market cap of $422 million in 2020 to over $12 billion in 2024.
Challenges and Risks in BTCFi
Overdependence on Nascent Layer-2 and Sidechain Solutions
Bitcoin’s Layer-2 networks and sidechains are still in their early stages, which limits the range and complexity of DeFi applications that can be effectively built on Bitcoin. Additionally, statechains, off-chain processing, and sidechains do not always share Bitcoin’s robust security profile which can expose users to additional risks and reduce confidence in these solutions.
Interoperability and Security Concerns with Wrapped Tokens
Bridging Bitcoin with other blockchain ecosystems without compromising security or decentralization can be concerning, as these chains and ecosystems may not be as secure as Bitcoin itself, increasing vulnerability to attacks. Furthermore, wrapping and unwrapping tokens incur extra transaction costs, which may deter some users.
Closing Thoughts
In essence, BTCFi represents an emerging ecosystem of decentralized finance applications built on the Bitcoin network and its Layer-2 solutions.
Despite the aforementioned challenges, a growing number of users are interacting and exploring Bitcoin DeFi, as evidenced by the over $2.6 billion TVL (Total Value Locked) in Bitcoin sidechains. Collectively, the market cap of sidechain tokens stands at $3.7 billion.
Looking ahead, advancements in Layer-2 technologies and increased interoperability with other blockchain ecosystems will likely drive further adoption and innovation in BTCFi.
[Author’s Note: This article does not represent financial advice, everything written here is strictly for educational and informational purposes. Please do your own research before investing.]
Author: Godwin Okhaifo
Also Read: Bitcoin Layer2s: What Are and How They Work
