Institutions are likely to be interested in Bitcoin DeFi applications

Last updated: May 10, 2024, 5:01 p.m. EDT | 6 minutes of reading

Bitcoin (BTC) is evolving rapidly. Although the Bitcoin network has been primarily used for payment transactions, current activity appears to resemble that of Ethereum during the height of decentralized application (Dapp) projects.

The introduction of Bitcoin Runes and BRC-20 tokens – which emerged at the time of fourth Bitcoin halvedt – likely sparked the evolution of Bitcoin’s native decentralized finance (DeFi).

The emergence of Bitcoin DeFi

Rena Shah, VP of Product at Trust Machines – a team focused on growing the Bitcoin economy – told Cryptonews that two years ago, Bitcoin DeFi was not a narrative the ecosystem was discussing.

However, Shah noted that the emergence of staking platforms and lending protocols on the Bitcoin network have sparked investor interest in transitioning assets from a store of value to a source of value.

“The desire to move from a passive Bitcoin asset to a productive asset is real in 2024,” she said. “We are building this future because we can see that Bitcoin DeFi attracts not only retail investors but also institutional investors.”

Institutions will show interest in Bitcoin DeFi

Data from DeFiLlama watch that the total value locked (TVL) of Bitcoin is approximately $1.2 billion. Yet, according to Shah, nearly $1 trillion in capital is locked on the Bitcoin blockchain.

“Even the smallest percentages of capital that become productive in DeFi will make huge waves in the Bitcoin ecosystem,” Shah emphasized.

This, along with the recent approval of Spot Bitcoin exchange-traded funds (ETFs) in the United States, increases the potential of Bitcoin DeFi applications. In particular, this will likely appeal to Bitcoin-holding institutions and retail investors.

Tycho Onnasch, the co-founder of Zest Protocol, told Cryptonews that he believes BTC is a more institutional asset than the rest of crypto.

“Therefore, I expect institutions to play a larger role in using and starting Bitcoin DeFi,” Onnasch said.

Bitcoin DeFi Apps for Institutions

Although Bitcoin DeFi is still a relatively new concept, a number of projects aim to enable and advance the sector.

For example, Onnasch explained that Zest Protocol is creating a lending protocol specifically for Bitcoin. He mentioned that the aim of the platform is to create permissionless financial infrastructure for BTC lending markets.

“Zest allows users to collateralize BTC to borrow other tokens such as stablecoins,” he said. “The platform also allows users to earn yield on their BTC.”

Indeed, the primary use case for Bitcoin DeFi applications appears to be to ensure that Bitcoin becomes a more productive asset for investors.

Dr. Chiente Hsu, co-founder of ALEX and XLink, told Cryptonews that Alex is a new financial layer for the Bitcoin network.

“Our goal is to seamlessly integrate Bitcoin with Layer 2 (L2) solutions and the Ethereum Virtual Machine (EVM) world,” Hsu said. “This will allow us to grow the Bitcoin economy,” Hsu said.

For example, Hsu explained that investors can earn a return on their BTC by connecting a Bitcoin Wallet to XLink. He noted that XLink is powered by ALEX’s Automated Market Maker (AMM) and Decentralized Exchange (DEX). This will enable cross-chain exchanges between Bitcoin L2 and the EVM world.

“Bitcoin DeFi for institutions will be looking for Bitcoin yield generating assets,” Hsu said.

Hsu believes this is likely to be the case due to the amount of capital present on the Bitcoin network.

“There is well over $1 trillion of Bitcoin capital that is ‘idle’ in the sense that its value rises and falls relative to the Bitcoin spot price,” he said. “But unlike Ethereum, Bitcoin cannot be natively locked to generate yield. This is a solution that ALEX is actively pursuing, which will allow institutions holding Bitcoin to earn a return on their Bitcoin capital.

Bitcoin DeFi resembles its Ethereum counterparts

Another interesting point is that even though Bitcoin DeFi is unique, applications tend to look like DeFi projects on Ethereum (ETH). This is important to consider as institutions have started to show interest in many current DeFi applications.

Digital asset management company Fireblocks have recently seen increased institutional DeFi activity on the Fireblocks platform. According to the firm, there was a 75% jump in the first quarter of 2024.

Fireblocks reported that some of the most popular Dapps that institutional clients interact with when trading, lending, staking, and bridging include Uniswap, Aave, Curve, 1inch, and Jupiter.

Jeff Yin, CEO of Merlin Chain – a Bitcoin L2 facilitating fast and profitable transactions with support for BTC Dapps – told Cryptonews that DEXs, derivatives and lending are all areas where BTC has learned a lot from lending. ‘ETH. He added that many new protocols are emerging.

“For example, “Surf” is a derivatives trading protocol launched on Merlin Chain and now boasts a daily trading volume of over $10 million. These are similar to their Ethereum counterparts,” Yin said.

Yin explained that a specific Bitcoin DeFi application would replicate one of the largest ETH DeFi Protocols, Lido – which holds $28 billion and represents half of Ethereum’s DeFi TVL.

“SolvBTC is currently developing an underlying BTC yield protocol,” Yin said. “Additionally, Unicross has implemented a Rune trading protocol on a BTC L2, allowing users to trade layer 1 (L1) assets at a lower cost on L2. These represent the most innovative aspects of the sector.

Bitcoin DeFi Could Overtake Ethereum

Although Bitcoin DeFi may resemble Ethereum, Shah believes that decentralized finance using BTC could eventually surpass Ethereum.

“Look DappRadar, Ethereum has over 600 active applications with varying volume and activity,” Shah said. “I have no reason to expect that Bitcoin DeFi cannot match Ethereum, and eventually replace it with Dapps in the ecosystem.”

Some solutions also make it easier to introduce Ethereum Dapps on Bitcoin.

Zack Voell, director of marketing at Botanix Labs, told Cryptonews that Botanix has created a “Spiderchain” that easily enables DeFi on Bitcoin.

“Spiderchain creates a fully EVM-equivalent environment for Dapps and smart contracts on Ethereum to be copy-pasted to run natively on Bitcoin,” Voell said. “Botanix Labs is building the Spiderchain to combine the two most Lindy technologies in crypto – EVM and Bitcoin – instead of trying to reinvent a whole new protocol or virtual machine.”

Challenges can slow adoption

Although it is too early to determine the fate of Bitcoin DeFi, there are some challenges that could slow its adoption.

For example, Yin pointed out that liquidity fragmentation often results from the difficulty of implementing DeFi on an L1 network. This in turn forces most activities to disperse through various L2 solutionsbut Yin noted that this could make it difficult to concentrate liquidity.

“One potential solution could be to create omnichain liquidity, similar to the Stone protocol in the Ethereum ecosystem,” he said. “We look forward to future implementations such as M-STONEBTC and Solv Protocol that could unify BTC L2 liquidity.”

Furthermore, Shah mentioned that the challenge of Bitcoin is to keep the base layer secure, stable and unaltered.

“This is where scaling becomes critical,” she said. “A healthy and diverse L2 ecosystem will be what ultimately allows Bitcoin DeFi, as a vertical, to succeed.”

Shah added that programming environments on Bitcoin are inherently difficult because many developers in other ecosystems are less familiar with Bitcoin scripting.

She stressed that one way to combat this phenomenon is to create WebAssembly (WASM) or different runtime environments like Rust, Solidity and Cosmos with L2.

“This approach will likely help attract new developers to the ecosystem,” she noted.

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