The role of Bitcoin (BTC) within decentralized finance (DeFi) is expanding as the leading cryptocurrency develops beyond its original purpose as a mere store of value, according to a recent report.
The Bitcoin network is transitioning into a larger decentralized finance ecosystem with the rise of Bitcoin DeFi,” stated analyst Moulik Nagesh.
This sector “enhances bitcoin’s capital efficiency” utilizing financial applications geared towards lending, staking, stablecoins, and decentralized exchanges (DEXs), the document indicated.
DeFi serves as a broad category for activities such as lending, trading, and other financial operations conducted on a blockchain, eliminating the need for conventional intermediaries.
The report highlighted that only around 0.8% of the bitcoin supply is currently engaged in DeFi, suggesting a substantial “untapped opportunity.” Indeed, last year, a deal analyst from a prominent digital assets firm noted that this opportunity could potentially reach $1 trillion.
The report asserted that Bitcoin requires layer 2 solutions, as the network lacks “native programmability,” which is characteristic of smart contract-enabled layer 1s. A layer 1 network refers to the fundamental layer or the underlying structure of a blockchain, while layer 2 denotes off-chain systems or distinct blockchains built atop layer 1s.
Although some advancements have been made in developing Bitcoin layer-2 networks, greater adoption and liquidity incentives are necessary for these platforms to scale effectively, the report concluded.
Moreover, the network’s security model faces “long-term sustainability challenges,” as block rewards will continue to halve, consequently decreasing miner incentives.
The long-term success of Bitcoin DeFi hinges on execution, the continued development of layer-2 solutions, and the “ability to align with bitcoin’s unique value proposition,” the report further stated.
Read more: Ethereum L2 Starknet Seeks ‘Bitcoin’s DeFi Take-Off Moment’ With BTC Wallet Xverse