Bitcoins Privacy Dilemma: The Impact of BTCFi on User Anonymity

Over the past year, the total value locked (TVL) in BTCFi protocols has surged more than sixfold, climbing from $975 million to over $6.5 billion. According to data from DeFi Llama, Bitcoin now ranks among the top three DeFi ecosystems in terms of locked assets, following Ethereum and Solana.

Platforms like Babylon are providing Bitcoin holders with new avenues for generating passive income. However, engaging with BTCFi can create an environment where tracking users becomes easier through on-chain analytics tools.

Together with the team from the Bitcoin mixer Mixer.Money, we examine the current landscape of BTCFi and explore tools for ensuring privacy.

BTCFi (Bitcoin Finance) refers to a network of decentralized financial applications built on Bitcoin or utilizing BTC as a primary asset. BTCFi protocols enable users to earn returns through staking, lending, and other financial activities.

As of June 2025, the majority of funds within the BTCFi sector are concentrated across four main protocols: Babylon Protocol, Lombard Finance, Threshold Network, and Solv Protocol.

Babylon Protocol has emerged as the primary growth driver for BTCFi, boasting a TVL of approximately $4.85 billion as of June.

The project operates on a network built on the Babylon SDK, consisting of a series of smart contracts that connect Bitcoin with partner PoS networks. Users send their digital gold to a designated address on the Bitcoin mainnet, which serves as collateral for validators that maintain the security of the Bitcoin Supercharged Networks (BSN). In return, stakers receive rewards from the participating PoS networks.

At the time of writing, Babylon’s average yield is around 0.5% annually, depending on the selected partner network. The minimum amount required for participation is 0.005 BTC, with a seven-day unlocking period (1,008 blocks).

Lombard Finance addresses a key issue associated with direct staking: the freezing of funds. While Bitcoin is locked in Babylon, Lombard allows users to obtain a liquid staking token—LBTC on the Ethereum network, pegged to Bitcoin at a 1:1 ratio.

Users deposit BTC into Lombard, which then stakes these assets in Babylon in exchange for an equivalent amount of LBTC being minted. Rewards accumulate directly in the LBTC balance. When users redeem their tokens, they are burned, and the Bitcoin is returned after seven days.

As of June 2025, Lombard ranks as the second-largest protocol within BTCFi, with a TVL of about $1.8 billion. LBTC is integrated with various DeFi platforms, including Aave and Morpho.

Threshold Network tackles the challenge of issuing wrapped Bitcoin on Ethereum without intermediaries, generating a token, tBTC, backed by BTC on a 1:1 basis.

The key difference from popular Wrapped Bitcoin (WBTC) is its decentralization. Instead of being issued by a centralized custodian, tBTC is managed by a network of validators using threshold signature technology. Currently, there are over 100 active validators supporting the protocol’s security.

In June 2025, Threshold launched support for tBTC on the Starknet network, paving the way for Bitcoin to enter the world of ZK-rollups.

The team at Solv Protocol has developed the Staking Abstraction Layer, a solution that simplifies the connection between Bitcoin and various protocols. Their primary product is SolvBTC, issued against BTC on a 1:1 basis.

Analytical firms are continuously enhancing their transaction tracking tools, and the emergence of BTCFi presents new opportunities for them.

«The UTXO model in Bitcoin originally provided a higher degree of anonymity compared to the account model in Ethereum. However, the rise of BTCFi is bringing Ethereum-like behavioral patterns into the Bitcoin network. Users increasingly rely on the same addresses to engage with protocols and generally show less concern for privacy. This significantly eases the work of on-chain analysts and moves Bitcoin away from its original privacy ideals towards ‘ETF-ification’ and ‘Ethereum-ization,'» assert representatives from Mixer.Money.

Beyond the ideological implications, complete transparency can pose significant financial risks. One illustrative case is the story of trader James Wynn, who lost millions on the decentralized exchange Hyperliquid while opening large long positions in Bitcoin—visible to all market participants.

Other players could track his activities and potentially leverage this information for manipulation. Responding to Wynn’s message about closing another losing position, co-founder and CEO of Blockstream Adam Back remarked:

“Just trade with leverage on a platform that doesn’t publicize your liquidation level to the whole world. It makes it easier for people to hunt your stops. They might push the price to liquidate you and profit. Stop doing that,” he advised.

In such scenarios, Bitcoin mixers and other transaction anonymization tools become essential for safeguarding users’ privacy.

«Certainly, blockchain transparency has its advantages, but within the context of BTCFi, it often turns into a vulnerability. Large players can monitor competitors’ fund flows and use that information against them,» representatives from Mixer.Money comment.

They outline several scenarios for utilizing Bitcoin mixers within the BTCFi space:

«Not everyone who uses Bitcoin wants their actions to be visible to the entire world. We believe privacy is an option that should be available to everyone,» conclude the representatives from Mixer.Money.

Modern Bitcoin mixers incorporate multi-layered mixing using thousands of intermediary addresses, time randomization, and integration with exchanges to create additional breaks in the chain.

For instance, Mixer.Money offers three mixing modes: «Mixer,» «Exact Payment,» and «Complete Anonymity.» The «Mixer» mode provides basic anonymity—protecting against manual transaction analysis but not advanced on-chain analytics.

«In the ‘Complete Anonymity’ and ‘Exact Payment’ modes, Mixer.Money sends users Bitcoin directly sourced from major exchanges, ensuring compliance with corresponding standards,» emphasize representatives from Mixer.Money.

On-chain analysis services can track only Bitcoin withdrawals from exchanges to wallets. The involvement of major exchanges minimizes the risk of acquiring tokens of questionable origin.

Mixer.Money randomly selects the timing of transactions and the ratio of transaction amounts to complicate the task of identifying relationships between operations based on timestamps.

«We see tremendous potential in BTCFi, but we also recognize the importance of maintaining a balance between innovation and privacy. Confidentiality has always been one of Bitcoin’s fundamental principles. Today, there are numerous technologies for transaction anonymization—such as CoinJoin or silent payments. However, Bitcoin mixers remain the most versatile and time-tested tool,» said representatives from Mixer.Money.

The BTCFi sector has become a prominent part of the crypto industry. Billions in Bitcoin are locked within Babylon, unlocking new income opportunities for investors.

However, the transparency of the blockchain in the context of BTCFi often becomes a challenge, allowing competitors and on-chain analysts to track users’ transactions. Tools like Mixer.Money are becoming necessities for those seeking to maintain the privacy of their financial operations.