Perspective by: Brendon Sedo, Initial Contributor at Core DAO
Bitcoin is evolving beyond its label as “digital gold.” The key factor driving this evolution is the emergence of Bitcoin DeFi (BTCfi), which transcends the simple store-of-value applications.
By 2024, Bitcoin (BTC) had transformed into a yield-generating asset, becoming the focal point of decentralized finance ecosystems similar to Ethereum. The real growth opportunity will present itself in 2025 as these developments take root on innovative Bitcoin sidechains.
Earlier efforts to leverage Bitcoin’s value as a productive asset necessitated substantial modifications to the base layer, which is a major reason for their lack of success. The Bitcoin layer 1 is not built for significant change, leading many Bitcoin enthusiasts to simply hold their assets without much engagement. Consequently, the Bitcoin network and its potential remained underutilized.
Bitcoin sidechains have proven to be the ideal resolution to these challenges, enhancing Bitcoin’s functionality without imposing changes on the base layer. These protocols are positioned to become the most significant catalyst for the growth of BTCfi, especially as BTC climbs above $100,000, captures over 60% of the entire crypto market share, and navigates a new regulatory environment under a supportive US government.
Transforming Bitcoin into a Productive Asset
According to Hal Finney, “Bitcoin itself cannot scale to encompass every single financial transaction […] on the blockchain.” This highlights the necessity for a secondary layer of payments in his perspective.
For an extended period, the blockchain community overlooked Finney’s insights, focusing instead on innovations that separated Bitcoin from the fold. However, features that were once limited to platforms like Ethereum are now making their way into the Bitcoin ecosystem. With sidechains, rollups, and other scaling techniques, holders can now enjoy Ethereum-like utility while staying true to Bitcoin. This evolution has set the stage for BTCfi, allowing users access to various income-generating opportunities like staking, lending, and derivatives.
Nonetheless, the industry is still in the early stages of this Bitcoin transformation. As of November 2024, only 0.8% of the circulating supply is engaged in DeFi applications, as per Galaxy Digital. Out of Bitcoin’s approximate $2 trillion market capitalization, a mere $7 billion forms the total value locked (TVL) in BTCfi.
While this might seem discouraging, it underscores the vast potential that remains untapped. Bitcoin layer 2 infrastructure experienced a sevenfold increase from 2021 to November 2024.
Recent: BTC DeFi TVL has surged 2,000% in a booming 2024 for both price and adoption.
More significantly, it has significantly contributed to the influx of new liquidity into Bitcoin, supplementing institutional products like exchange-traded funds (ETFs).
Even if the Bitcoin supply in BTCfi systems and sidechains grows by only 0.25% annually, Galaxy Digital estimates a total addressable market of $44 billion to $47 billion by 2030. This conservative estimate may accelerate significantly with rising BTC prices or enhanced Bitcoin DeFi adoption.
Venture capitalists are starting to grasp the promise of Bitcoin sidechains, having invested over $447 million thus far, according to Galaxy Digital. Notably, around $174 million of that was allocated in Q3 2024, paving the way for more explosive growth in 2025. Influxes of capital for early-stage projects will lead to more successful launches, innovations, choices for users, and overall value enhancement.
As Bitcoin-native solutions facilitate productive use cases for Bitcoin, users will no longer need to depend on trusted intermediaries or Bitcoin-agnostic smart contract networks. The compromises once necessary to expand Bitcoin’s utility will become unnecessary, unlocking significant value for conscientious BTC holders and potentially benefiting the overall Bitcoin network.
Yields on Bitcoin for Bitcoin
Up to this point, bridging to Turing-complete Ethereum Virtual Machine (EVM) chains has been the predominant method to facilitate yields and other financial functionalities on Bitcoin. For instance, the wrapped Bitcoin (WBTC) market on Ethereum exceeds $10 billion. While solutions like WBTC have worked for some, numerous Bitcoin holders prefer not to place trust in custodians or rely on Ethereum—a platform that does not align with Bitcoin’s consensus principles and offers no support to the network.
BTCfi—or Bitcoin-aligned, Bitcoin-powered infrastructure—is a solution designed to benefit both WBTC users and Bitcoin purists. Users familiar with Ethereum’s smart contract capabilities can continue to revel in that EVM experience while drawing closer to Bitcoin’s foundational principles. Purpose-driven Bitcoin users will gain more utility options for their BTC when the sidechain aligns with the base network.
Additionally, Bitcoin holders gain access to BTC derivatives that surpass Ethereum-based solutions like WBTC. The yield-bearing BTC derivatives on Bitcoin-oriented sidechains mark a substantial advancement, providing self-custody and previously unavailable yield sources for Bitcoin holders.
In essence, BTCfi holds substantial promise for growth. Not only in its current state but also compared to EVM and SVM-based DeFi ecosystems. The momentum provided by Bitcoin sidechains is driving this transition and will persist into 2025. With the right development approach and consistent product pipelines, the potential is enormous.
The trajectory for BTCfi is clear: Deliver practical use cases with market fit to Bitcoin holders on Bitcoin-centric platforms. This will establish a strong foundation for generating added value for the entire Bitcoin community. Ultimately, this could propel a cascade of Bitcoin adoption.
The institutional side has captured headlines throughout 2024. Now it’s time for the onchain community to demonstrate its capabilities and deliver results.
Perspective by: Brendon Sedo, Initial Contributor at Core DAO.
This article serves informational purposes only and should not be construed as legal or investment advice. The views expressed are solely those of the author and do not necessarily reflect those of any associated entity.