Opportunities for Bitcoin Yield Are Expanding — Here’s What to Keep an Eye On

Historically, Bitcoin has struggled as a yield-generating asset. However, a variety of options for earning interest on Bitcoin are starting to emerge.

Bitcoin (BTC) has often been recognized as a reliable store of value, but it has not been effective for yields. Thankfully, the era of minimal BTC yields is fading. New opportunities within Bitcoin’s layer-2 (L2) solutions and decentralized finance (DeFi) ecosystems are revolutionizing the landscape. Here’s what you should know to navigate the forthcoming boom in Bitcoin yields.

In the past, Bitcoin mining was typically the sole avenue for receiving meaningful BTC rewards. Average holders often resorted to unreliable centralized finance (CeFi) platforms or low-yield DeFi options. As of September 5, DeFi lending platform Aave was offering Wrapped Bitcoin (WBTC) depositors an unsatisfactory 0.04% APR.

That’s changing. With years of development behind it, Bitcoin’s L2 scaling networks, including the Lightning Network, Core Chain, Rootstock (RSK), and Stacks, are gaining momentum. As of September 5, the total value locked (TVL) in these Bitcoin L2s had reached around $1.4 billion, a remarkable 275% rise year-to-date and a tenfold increase since 2023.

According to insights from L2 developer CoreDAO, Bitcoin’s L2 solutions are expected to capture a significant share of Bitcoin’s market capitalization, currently exceeding $1 trillion, in the years ahead.

Bitcoin-Native Staking

Several L2s—such as Core Chain, Babylon, and Spiderchain—are focusing on Bitcoin-native staking. This model resembles proof-of-stake (PoS) systems found in networks like Ethereum (ETH), where Bitcoin stakers lock up their BTC as collateral to secure the network and earn rewards.

Furthermore, liquid staking derivatives (LSD) protocols are enhancing BTC staking yields across numerous L2s. Examples include Core Earn, Bedrock, Stroom, and Pell Network.

While it’s still in its early stages—with Spiderchain in testnet and Babylon yet to distribute rewards—CoreChain’s LSD, stBTC, is operational and currently offers an 8.8% reward rate.

This yield surpasses that of PoS networks Solana (SOL) and Avalanche (AVAX), which deliver 6.85% and 7.83% yields respectively, and far exceeds Ethereum’s 3.4% APR as of September 5, according to StakingRewards.com.

It’s important to note that Core Chain compensates stakers with its native token, CORE, rather than BTC. Always perform thorough research and assess your investment strategy carefully before proceeding.

Bitcoin L2s offer more than just staking. Some—such as RSK, Merlin, and Stacks—already support Bitcoin-native DeFi ecosystems, featuring decentralized exchanges (ALEX, Bitflow), lending protocols (MoneyOnChain, Zest), and comprehensive platforms like Sovryn. Notably, Merlin even offers a Bitcoin-native derivatives protocol named Surf.

The Lightning Network, established in 2018, has remained strong with nearly $300 million in TVL. Node operators providing BTC liquidity to the Lightning payment channels earn an average of 5.62% APR, according to Magma.

Similar to Bitcoin mining, Lightning nodes are primarily operated by professional firms, rather than retail investors.

Growing Institutional Interest

These BTC staking protocols are drawing increasing attention from institutional investors. Staking services like Kiln and Figment already support staking for Stacks’ native token, STX, which yields BTC from network fees. More networks may be added to their offerings in the near future.

In May, Valour launched the Valour Bitcoin Staking (BTC) SEK ETP, listed on the Nordic Growth Market, which directly stakes BTC on Core Chain. Additionally, Valour established a Core Chain validator node in June.

On September 3, 21.co launched its regulated BTC wrapper, 21.co Wrapped Bitcoin (21BTC), signaling more institutional liquidity on the horizon.

Exploring Wrapped Bitcoin

The most attractive applications for BTC in DeFi are currently found on Ethereum. EigenLayer’s 2023 introduction has been transformative for the sector, and BTC is no exception.

EigenLayer facilitates a growing array of “actively validated services” (AVS)—protocols that secure themselves through EigenLayer’s nearly $12 billion pool of restaked ETH. Starting in November, AVSs will remunerate for this security utilizing protocol revenues, thus generating yield for restakers.

EigenDA, the first and largest AVS by EigenLayer, has recently expanded its offerings to include native L2 token restaking, making it feasible to use a wide range of virtual assets—including wrapped BTC—for restaking.

Furthermore, Swell recently introduced swBTC to deliver yield on WBTC, and expectations are high for EigenLayer to soon offer wrapped BTC restaking.

Synthetix (SNX), a DeFi derivatives platform, has launched its next-gen V3 protocol on Arbitrum (ARB). This version is engineered to accept nearly any token as collateral, providing liquidity providers (LPs) with trading fees and additional incentives in SNX, the platform’s native token. Currently, wrapped ETH LPs are earning 7.6% on Arbitrum as of September 5.

Although only a few pools are operational and the establishment of new ones requires governance approval, WBTC pools on Synthetix V3 are likely to appear in the near future.

In summary, whether on an Ethereum scaling chain or a Bitcoin L2, the prospects of holding BTC are becoming increasingly enticing. Stay alert to not miss out on potential opportunities.