Explained – Bitcoin-based Decentralized Finance (BTCFi)

Introduction

Bitcoin-based decentralized finance (BTCFi) is growing very fast in popularity, and now it’s no longer like an exciting dream.

In the last few years, the total value locked price increased by approximately 2400 percent; its initial value was 0.3 dollars and increased to a peak value of 7.47 billion dollars in December 2024, which pushed its ecosystem into the top 5 of the Defi Llama. 

BTCFi reflects a pattern shift in the use of digital gold. Initially, Bitcoin was primarily used for savings, but now it is fully participating in the Defi sphere. BTCFi is possibly one of the most undervalued areas of the crypto market right now, it has more than a trillion-dollar cap of digital gold. 

The Real “Ethereum Killer?”

In the current market cycle, the Bitcoin successful index is showing very strong growth. Bitcoin’s success index has surpassed 60 per cent, the highest in four years. This is a sign that holders and investors are actively gathering, integrating the first cryptocurrency with TradFi, and the manifestation of the Lindy effect.

The successful launch of spot bitcoin ETFs in the US. This launch has given major digital asset managers like BlackRock direct access to digital gold. Companies and even states are seeing cryptocurrency as a trusted financial reserve. 

Analysts at Binance Research expressed that “As BTC volumes grow in different market segments, the desire to make these assets more productive will only increase – similar to how traditional financial instruments like Treasuries and gold are used in financial markets.”

Analysts believe that a change in regulatory rules can accelerate the development of this trend. For example, experts mentioned the abolition of the SAB 121 rule in the USA. This earlier effectively prohibited banks from storing digital assets. 

The simplification of official procedures and the further development of financial infrastructure can pave the way for Bitcoin’s fuller capacity. It is actively used in everyday payments, as collateral and as part of structured financial products. 

Is HODL So Good?

Demand in large amounts, active accumulation and spread of “eternal HODL” by bitcoin maximalists have a downside. The biggest downside is that a large portion of the coins are out of the market circulation stopped fulfilling the function of a medium of exchange and brought no profitability to their owners.

The graph below shows that more than 60 per cent of Bitcoins have not left their wallets for more than a year, and this data is continuously increasing.  

Binance research shared its opinion, “The rise in the share of inactive BTC is primarily due to the fact that bitcoin has already established itself as a means of preserving value. However, it also reflects the limited opportunities for more productive uses of the coins.”

The main barrier to fully unlocking all of Bitcoin’s capacity has long remained the “lack of available financial tools. 

Experts said, “When users have no native ways to get yield from BTC, they simply have no incentive to put the coins into economic circulation.”

In an expert’s opinion, “unlocking even a small part of less used coins” can significantly increase Bitcoin’s cap efficiency. This can turn it from a passive means of saving into an active financial tool and open up some new opportunities for value generation.

The Unplowed Field of BTCFi

Bitcoin’s adoption rate in Decentralized finance remains low.  Binance Research found that only 0.79% of the total digital gold supply is locked in smart contracts in decentralized applications. “Much of the assets remain under centralized control – through ETFs, government reserves or corporate treasuries,” the researchers stressed. 

In the starting phase, Bitcoin was not designed to support complex financial applications and this is the main reason for the current situation. Oppositely, platforms like Ethereum, the first cryptocurrency, did not have built-in programmability. 

This reason left holders with limited option choices, for example, lending against digital gold via custodial services or wrapped tokens on other blockchains. However, each option has its own risk, including low chances of returns and security threats. 

This is different from Ethereum, where holders of ETH and ERC-20 tokens can use without any interruptions, and non-custodial participants can participate in staking, lending and enjoy a wide range of complicated “financial LEGO” tools.

Comparison of popular ecosystems by Total value locked to market capitalization ratio. Data from DeFi Llama, CoinMarketCap, and Binance Research. Even though a market value of over $1 trillion, bitcoin remains one of the least active blockchains. 

As of March 20, Digital Gold’s performance is nearly 0.32 percent with a total value locked of 5.65 billion dollars and a Cap of 1.7 trillion dollars. Similarly, Ethereum’s value is 48.6 per cent, Solana is 23.8 per cent, BNB Chain is 9.5 per cent, and TON is approximately 5.9 per cent.

The Binance Research researchers caught the attention by saying “If just 10% of bitcoin’s market capitalization were activated, it would add more than 150 billion dollars to Total value locked, more than the combined value of the entire DeFi ecosystem on all blockchains today.”

The Landscape of the New Segment

The BTCFi Sector is gaining attraction continuously over time but most of the digital gold still exists in the form of tokens in Decentralized tokens on other blockchains. Binance Research analysts noted, “That said, BTCFi’s infrastructure is still in its infancy, with most activity centred around steaking protocols like Babylon.”

The screenshot below shows the top 5 bitcoin-based Total value protocols, according to DeFi Llama. The first four lines of the table show the ranking are restocking projects led by Babylon.

According to the research of Binance Research analysts, user activity in BTCFi closely resembles general bitcoin market cycles and current market conditions. 

During the phase of strong price growth, demand for digital gold-based financial services, especially in the lending and staking areas, increases noticeably. Market participants try very hard to generate income without parting with coins. 

The development of native Bitcoin applications gives additional appreciation to the activity. Both the number of active BTCFi wallets and the volume of transactions in the network are increasing rapidly.

Binance Research noted that “Analyzing the distribution of activity by the network shows that the leading position in the BTCFi area is now held by Core – it accounts for 25.2 per cent of all active projects. The second and third places are occupied by Rootstock and Bitlayer, each accounting for 13 Percent of projects. They are followed by Merlin Chain with a share of 9.9 per cent.”

Among other notable participants in the sector, experts highlighted:

• BOB (8.4%)
• BSquared (6.9%)

• Stacks (6.1%);
• BEVM (5.3%); 
• BounceBit (3.1%); 
• MAP Protocol (3.1%).

The last three in the above list are gaining momentum at the expense of more highly specialized offerings. The visual representation of information below outlines the key elements of the developing BTCFi ecosystem, including scaling solutions, wrapped tokens, stablecoins, wallets, steaking/restocking services, etc.

60 per cent of WBTC is still used in lending services like Aave and Maker. This means that DeFi-friendly holders are primarily interested in lending protocols.

Binance Research noted that “BTCFi’s ability to compete with the wrapped BTC markets depends on whether native lending protocols can (1) offer higher yields by increasing demand for leveraged BTC and (2) provide sufficient liquidity of stablecoins for lending.”

Investor Interest and Prospects

Interest in the BTCFi Sector is continuously gained over time, this can be seen in the increase in investment volume and fund activity. According to Binance Research, demand is increased by the expansion of native Bitcoin use cases, including Ordinals, BRC-20, Runes, etc.

Over the past two years, the number of deals has increased from 19 to 115, with total investments exceeding 491 million dollars. More than 86% of the funds have been raised after 2024.

As the ecosystem and tier two solutions in particular mature, investor attention is quickly shifting from infrastructure developments to native bitcoin-based applications “capable of unlocking on-chain liquidity and financial activity.”

Binance Research experts shared their prediction: “New product launches expected in 2025 are likely to fuel investor interest – BTCFi continues to strengthen its position as an integral part of the emerging financial ecosystem around bitcoin.”

According to them, if BTCFi follows the path of tokenized versions of Bitcoin like WBTC, the segment could grow to $31.9 billion. According to them, digital gold in the form of tokens has limited access and additional security risks. This can be pointless and attractive to users, especially for those who prefer cold storage.

Binance Research explained, “In contrast, BTCFi is built directly on the infrastructure of Bitcoin itself, which removes such barriers and widens the range of potential participants.”

Pitfalls

The development of bitcoin-based tier two solutions is not only important for BTCFi through the introduction of smart contract functionality, but it is also beneficial for improving the overall programmability and scalability of the network. 

Unspent transaction output in the Bitcoin model is naturally effective for simple transactions, the researchers stressed; however, it “lacks the necessary flexibility to perform complex transactions within DeFi”. 

On the other hand, the accounts-based Ethereum system and Bitcoin’s scripting language are not complete, which limits their capability to handle the complex states that smart contracts handle. The limited block size and slow block formation reduce its capabilities, increase L2 solutions storage costs, and limit throughput compared to DeFi-centric blockchains.

Until Tier 2 solutions for Bitcoin reach proper maturity, such restrictions will continue to disrupt the growth and usability of BTCFi.

BTCFi Is

Luckily, new ideas in the L2 segment continue to develop, defeating structural limitations and providing scalability as well as improved capabilities for smart contracts. The development of BitVM and other trustless solutions has brought attention to the native programmability of Bitcoin. 

BTCFi could increase revenue from transaction fees, partially reducing the effects of regular reductions in block rewards. The development of such areas will allow miners to remain economically motivated to secure the network. 

Conclusions

An inactive market needs new narratives like ICO, institutionalization, DeFi and NFTs once did. The industry is waiting for the next appreciation. 

BTCFi is slowly transforming the first cryptocurrency from an inactive store of value to a key component of the decentralized finance sphere, where the extreme potential is hidden. Infrastructure development will create the foundation for unlocking multi-billion-dollar liquidity.

Bitcoin is limited in programmability and scalability, it makes it more difficult to integrate into a “financial LEGO” as compared to other popular platforms and Ethereum. 

However, the development of new ideas of solutions is slowly removing these obstacles, and secure and profitable alternatives to wrapped tokens are emerging without compromising decentralization.  

The success of the new areas depends on the maturity of tier-two solutions that not only improve Bitcoin’s functionality but also support miners through increased commissions.