Investigating the Unused Possibilities of Bitcoin DeFi: An Outlook

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Since its creation in 2009, Bitcoin has become a popular means of protection against inflation. Some countries, including El Salvador, have even designated it as a legal tender. In March 2024, the circulating supply of BTC reached a market valuation of $1.4 trillion, surpassing silver to become the 8th most valuable asset globally.

Despite its dominance in the crypto market, the majority of BTC remains untouched in user wallets. Due to limited scalability, the vast reserves of BTC liquidity are not being fully utilized and productive. Additionally, Bitcoin lacks support for programmable smart contracts and can take up to 10 minutes to finalize a block. These limitations have hindered developer activity and prevented the growth of decentralized finance services on Bitcoin.

## The beginnings of Bitcoin defi

The lack of defi applications on Bitcoin has prevented users from taking advantage of its large reserve of assets. However, developers have been working to improve Bitcoin’s functionality and performance to make it suitable for defi.

For example, the Segregated Witness (SegWit) update in July 2017 reduced transaction time and increased the block capacity beyond 1 MB. This was followed by the Taproot upgrade in November 2021, which introduced protocols such as Pay-to-Taproot (P2TR) and Taproot Asset Representation Overlay (Taro). During the crypto winter, developers focused on building strong Bitcoin defi protocols.

One such example is Ordinals, launched by Casey Rodarmor in January 2023, which allows for NFT-like inscriptions on the Bitcoin chain. This sparked a resurgence in the ‘Building on Bitcoin’ movement and created a Bitcoin NFT market that could potentially reach $4.5 billion by 2025.

Rodarmor also launched the Runes protocol after the Bitcoin halving, which mints fungible tokens like memecoins on Bitcoin. In its first week, over 11,000 Runes tokens were created, accounting for 45% of all Bitcoin transactions.

At the same time, layer-2 solutions such as Stacks, introduced in 2021, provided smart contract capabilities for Bitcoin. The Stacks Nakamoto upgrade, launched in mid-April 2024, shortened transaction processing time to 5 seconds and achieved 100% Bitcoin block finality.

Overall, developer activity is expanding Bitcoin’s use cases, improving scalability, and ushering in the era of Bitcoin defi.

## The potential of Bitcoin defi

After a long bear market, the total value locked in defi protocols surpassed $80 billion in February 2024. However, this figure does not account for any liquidity from BTC reserves.

Currently, the majority of funds in defi come from Ethereum, with a market dominance of nearly 60%. If defi protocols could access just a fraction of Bitcoin’s market cap, the total value locked would skyrocket.

According to a report by Spartan Research, Bitcoin defi presents a 7-fold growth opportunity without even considering additional liquidity. Let’s look at the data from the market.

In December 2023, Bitcoin’s market capitalization was $850 billion, which is 3.1 times more than Ethereum’s $270 billion. However, Ethereum’s defi TVL was $76 billion, accounting for 28% of its market cap, while Bitcoin’s defi TVL was only $320 million.

Based on these data points, Bitcoin defi presents a $238 billion market opportunity as of December 2023. These figures do not factor in any potential spikes in adoption or influx of capital that we are currently witnessing.

In summary, the potential for the Bitcoin defi market is just scratching the surface. As more smart contract capabilities and scalable defi apps are introduced in 2024, the market will continue to expand.

## The rise of Bitcoin defi is imminent

Protocols like Ordinals, Runes, and layer-2 networks such as Stacks are crucial components for the growth of Bitcoin defi. They allow users to access the vast reserves of underutilized BTC while leveraging the security and decentralization of the Bitcoin chain.

However, some Bitcoin maximalists believe that frivolous tokens and NFTs have damaged Bitcoin’s reputation and caused network congestion. Nevertheless, emphasizing the playful aspect of crypto may be necessary to increase awareness and popularity of Bitcoin defi, leading to widespread adoption.

Meme tokens may ultimately lead to more developer activity and encourage users to participate in Bitcoin-based financial services such as lending, borrowing, trading, yield farming, staking, and GameFi and SocialFi protocols. These applications could bring to life Satoshi Nakamoto’s vision of an alternative financial system.

As we approach the summer of defi on Bitcoin, the full potential of Bitcoin defi will unfold, making permissionless financial services accessible to users around the world.

Disclosure: The views and opinions expressed in this article are those of the author and do not necessarily represent the views and opinions of crypto.news.