Will BTCFi Propel Bitcoin into a New Era of Growth?

Decentralized finance on Bitcoin (BTCFi) has transitioned from a mere dream of enthusiasts to a rapidly evolving and promising sector.

In the past year, the total value locked (TVL) in the Bitcoin segment has surged by approximately 2400% — rising from $0.3 billion to a peak of $7.47 billion in December 2024, placing this fledgling ecosystem among the top five in the DeFi Llama rankings.

BTCFi marks a paradigm shift in the utilization of digital gold. Initially perceived mainly as a savings vehicle, Bitcoin is now a significant player in the DeFi landscape, with diverse use cases including staking, crypto lending, yield farming, and more.

At this moment, BTCFi represents one of the most undervalued niches in the cryptocurrency market, considering the over $1 trillion market cap of digital gold, vast volumes of dormant liquidity, and the untapped potential of Layer 2 solutions.

In the current market cycle, Bitcoin’s dominance index is steadily increasing — capital flows into the first cryptocurrency at a faster pace than into all other crypto assets combined.

This trend reflects active accumulation by holders and retail investors, as well as the deepening integration of Bitcoin with traditional finance (TradFi), alongside the manifestation of the Lindy effect.

The successful launch of spot Bitcoin ETFs in the United States has provided major asset managers like BlackRock direct access to digital gold; companies and even states are increasingly viewing cryptocurrency as a reliable financial reserve.

Experts believe that regulatory changes could further accelerate this trend. They cite the positive example of the repeal of rule SAB 121 in the U.S., which effectively prohibited banks from holding digital assets.

Streamlining bureaucratic processes and further developing financial infrastructure pave the way for Bitcoin’s enhanced utility — leading to its active use in everyday payments, as collateral, and within structured financial products.

However, the «whale» demand, active accumulation, and the promotion of “eternal HODL” by Bitcoin maximalists have a flip side: a significant portion of coins exits circulation, ceasing to function as a medium of exchange and earning no yield for their holders.

The graph below illustrates that over 60% of Bitcoins have remained in their wallets for over a year — and this share continues to grow. Such a trend indicates an increasing number of long-term holders focused on a passive accumulation strategy.

According to experts, for a long time, the primary barrier to fully realizing Bitcoin’s potential has been the «lack of available financial instruments.»

They argue that «unlocking even a small portion of underutilized coins» could significantly enhance Bitcoin’s capital efficiency — transforming it from a passive store of value into a more active financial instrument and opening new paths for value generation.

The adoption rate of Bitcoin in DeFi remains low. According to Binance Research, only 0.79% of digital gold’s total supply is locked in smart contracts of decentralized applications.

One of the main reasons for this situation is that Bitcoin was not initially designed to support complex financial applications. Unlike platforms like Ethereum, the first cryptocurrency lacked built-in programmability.

As a result, holders were left with limited choices for “advanced” use cases, such as collateralized lending through custodial services or wrapped tokens on other blockchains. Nevertheless, each of these options carries its risks, including low yields, centralization, and security threats.

This contrasts with Ethereum, where holders of ETH and ERC-20 tokens can seamlessly and non-custodially engage in staking, lending, liquidity provision, and take advantage of a broad array of intricate “financial LEGO” tools.

Despite having a market value exceeding $1 trillion, Bitcoin remains one of the least active blockchains. This is clearly illustrated by the diagram below, which compares the TVL to market capitalization ratios of leading platforms.

Bitcoin’s figure stands at around ~0.32% (with a TVL of $5.65 billion and a market cap of $1.7 trillion as of March 20). In comparison, Ethereum’s figure is 48.6%, Solana’s is 23.8%, BNB Chain’s is 9.5%, and TON’s is around 5.9%.

The BTCFi sector is gaining momentum, but most of the digital gold utilized in DeFi is still represented by wrapped tokens on other blockchains.

A considerable portion of the first cryptocurrency is employed as collateral in lending protocols or for yield farming.

The screenshot below displays the top five Bitcoin-based protocols by TVL, according to DeFi Llama. The first four spots are held by restaking projects, headed by Babylon.

Binance Research analysts have observed that user activity within BTCFi closely correlates with Bitcoin’s overall market cycles and current market conditions.

During periods of rapid price growth, demand for financial services based on digital gold noticeably increases — particularly in lending and staking segments. Market participants are eager to earn income without parting with their coins.

The development of native Bitcoin applications adds an additional boost to this activity: both the number of active BTCFi wallets and transaction volumes on the network are increasing.

Researchers emphasized that the race to establish the dominant execution layer is still ongoing — no Layer 2 platform has yet gained widespread support.

Among other notable participants in the sector, experts highlight several that are gradually gaining traction «due to their more specialized offerings.»

The infographic below outlines key components of the emerging BTCFi ecosystem, including scaling solutions, wrapped tokens, stablecoins, wallets, staking/restaking services, and more.

Although WBTC commands 60% of the tokenized Bitcoin market, custodial and other TradFi-associated risks heighten demand for alternatives. Native BTCFi solutions possess undeniable advantages — they rely directly on Bitcoin’s security and virtually eliminate storage risks.

A significant portion of WBTC is still utilized in lending services such as Aave and Maker. This indicates that DeFi-friendly holders are primarily interested in lending protocols.

Interest in BTCFi continues to rise — evidenced by increased investment volumes and the activity of funds.

According to Binance Research analysts, demand is spurred by the expansion of native Bitcoin use cases, including Ordinals, BRC-20 tokens, Runes, and more.

The ecosystem — from infrastructure and Layer 2 solutions to DeFi projects — is increasingly attracting investors. Over the past two years, the number of deals has surged from 19 to 115, with total investment surpassing $491 million. More than 86% of these funds were raised after 2024.

As the ecosystem matures, particularly with Layer 2 solutions, investor attention is gradually shifting from infrastructure development towards native applications built on Bitcoin, «capable of unlocking on-chain liquidity and financial activity.»

Experts believe that if BTCFi follows in the footsteps of tokenized versions of Bitcoin like WBTC, the segment could expand to $31.9 billion.

They assert that wrapped digital gold implies «limited access» and additional security risks, making it less appealing to users, especially those who favor cold storage for maximum security.

The development of Layer 2 solutions based on Bitcoin is crucial not only for BTCFi through the introduction of smart contract functionality but also for improving the overall programmability and scalability of the network.

Researchers noted that Bitcoin’s UTXO model was originally optimized for simple transactions; however, it lacks the necessary flexibility for executing complex operations within DeFi.

Unlike the account-based systems of Ethereum, Bitcoin’s scripting language is not Turing complete, which limits its ability to handle complex states managed by smart contracts. The limited block size and their slow formation reduce scalability, raising costs for L2 storage and limiting throughput compared to DeFi-oriented blockchains.

They also pointed out that existing solutions like statechains or sidechains involve trade-offs, as they «do not always inherit the strong security model of the first cryptocurrency.» Consequently, this introduces additional risks that may impact user trust.

Until Layer 2 solutions for Bitcoin reach adequate maturity, these limitations will continue to hinder the growth and usability of BTCFi.

Fortunately, innovations in the L2 segment are evolving, overcoming structural limitations and providing scalability and enhanced smart contract functionalities. The emergence of BitVM and other trustless solutions has drawn attention to Bitcoin’s native programmability.

Different approaches to Layer 2 offer various compromises between decentralization, security, and scalability, but they all play a critical role in shaping the «next phase of the financialization» of the first cryptocurrency.

BTCFi could increase revenue from transaction fees, partially offsetting the impacts of regular block reward halving. The growth of this segment will enable miners to maintain economic incentives for securing the network.

A stagnating market necessitates new narratives — just like ICOs, institutionalization, DeFi, and NFTs did in the past. The industry is awaiting the next impulse.

BTCFi is gradually transforming Bitcoin from a dormant store of value into a pivotal component of the decentralized finance realm, where immense potential lies. The development of infrastructure will lay the groundwork for unlocking multi-billion dollar liquidity.

Bitcoin’s limitations in programmability and scalability complicate its integration into the “financial LEGO” compared to Ethereum and other popular platforms. However, the advancement of innovative solutions is gradually removing these obstacles, introducing secure and lucrative alternatives to wrapped tokens without compromising decentralization.

The success of this new segment hinges on the maturity of Layer 2 solutions, which will not only enhance Bitcoin’s functionality but also support miners through increased fees.

Overcoming technical and regulatory barriers could make BTCFi a crucial driver of truly mass adoption of digital gold and sustainable growth in the broader market.