News
Hitting the Tip of the Iceberg: The Untapped Potential of Bitcoin Defi
Disclosure: The views and opinions expressed herein are solely those of the author and do not represent the views and opinions of the crypto.news editorial.
Since its launch in 2009, Bitcoin has emerged as a hedge against inflation. Some countries like it El Salvador even made it a legal tender currency. In March 2024, the market valuation of the circulating supply of BTC reached up $1.4 trillion, overtaking silver to become the eighth most valuable property globally.
Despite BTC’s dominance over other cryptocurrencies, most BTC has remained dormant in users’ wallets. BTC’s huge liquidity reserves have remained underutilized and unproductive due to the network’s limited scalability. Additionally, Bitcoin does not support programmable smart contracts and has a block finality time of 10 minutes. These challenges hinder developer activity on Bitcoin, impact growth, and prevent the growth of decentralized financial services on Bitcoin.
The origins of Bitcoin defi
The lack of Bitcoin security apps has prevented users from capitalizing on the vast reserves of BTC assets. However, developers have long worked to improve the functionality and performance of Bitcoin to make it suitable for def.
For example, the July 2017 Segregated Witness (SegWit) update reduced transaction times and increased block capacity beyond 1 MB. It was followed by the Taproot update in November 2021 to introduce protocols such as Pay-to-Taproot (P2TR) and Taproot Asset Representation Overlay (Taro). However, during the long crypto winter, developers focused more on building robust Bitcoin Defi protocols.
For example, Casey Rodarmor launched Ordinals in January 2023 to create NFT-like inscriptions on the Bitcoin chain. Ordinals have rejuvenated the “Building on Bitcoin” movement and opened a Bitcoin NFT market that can scope $4.5 billion by 2025.
Rodarmor also launched the Runic Protocol after Bitcoin halving mint fungible tokens like memecoins on Bitcoin. In the first week, users coined over 11,000 Rune tokens, representing 45% of Bitcoin transactions.
At the same time, layer 2, like Stacks, launched in 2021, brought smart contract capabilities to Bitcoin. The Nakamoto Stacks update, introduced in mid-April 2024, reduces transaction processing time to 5 seconds and provides 100% Bitcoin block finality.
Thus, developer activity is expanding Bitcoin’s usefulness and improving scalability, thus ushering in Bitcoin’s definitive moment.
The potential of Bitcoin defi
After a long bear market, total value has been locked into Defi protocols got through the $80 billion mark in February 2024. However, the important thing to note is that TVL excludes any liquidity from BTC reserves.
Most funds for Defi apps Come from Ethereum with a dominant market position of almost 60%. If DeFi protocols had the opportunity to access even a fraction of Bitcoin’s market capitalization, TVL would reach unprecedented levels.
According to Spartan research relationship, Bitcoin Defi presents a 7x growth opportunity without taking into account any additional liquidity inflows. Let’s prove the point with available market data.
In December 2023, Bitcoin’s market capitalization was $850 billion, which is 3.1 times larger than Ethereum’s $270 billion. However, Ethereum’s defi app, TVL, was worth $76 billion, or 28% of its market capitalization, compared to just $320 million for Bitcoin defi.
If we hold the data constant, Bitcoin Defi presents a $238 billion market opportunity as of December 2023. These figures do not consider any increase in adoption or increased incoming capital that we are seeing today.
Therefore, it is safe to say that we have simply touched the tip of the iceberg of the Bitcoin Defi market. The market will expand further with the launch of more smart contract capabilities and scalable defi apps in 2024.
The ultimate Bitcoin summer is coming
Protocols like Ordinals, Runes, and layer 2 networks like Stacks are crucial to the growth of Bitcoin’s definition. They allow users to tap into vast, underutilized BTC reserves, while taking advantage of the security and decentralization of the underlying Bitcoin chain.
However, some Bitcoin maximalists think that memecoins and frivolous NFTs have damaged Bitcoin’s legacy and led to network congestion. Despite this, perhaps it is necessary to insist on the playful aspect of cryptocurrencies to popularize Bitcoin Defi and lead to mass adoption.
Meme tokens could eventually lead to increased developer activity and user participation in Bitcoin-based lending, trading, yield farming, staking, and GameFi and SocialFi protocols. These apps will finally realize Nakamoto’s dream of an alternative financial system.
As we approach defi summer, the true potential of Bitcoin defi will begin to unravel as Bitcoin-based permissionless financial services become accessible to users around the world.
Mikhil Pandey
Mikhil Pandey is the co-founder and chief strategy officer of Persistence. Founded in 2019, Persistence is a purpose-built Tier 1 with a mission to maximize yield and security through liquid staking and restakes, building to the forefront of the proof-of-stake landscape. Persistence Labs has multiple products in its ecosystem, including pSTAKE Finance, Dexter, and others.