DeFi
Touching the tip of the iceberg: the untapped potential of Bitcoin Defi
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Since its launch in 2009, Bitcoin has become a hedge against inflation. Some countries like El Salvador has even made it legal tender. In March 2024, the market valuation of the circulating supply of BTC reached $1.4 trillion, surpassing silver to become the 8th most valuable property in the world.
Despite BTC’s dominance over other cryptocurrencies, most BTC remained dormant in users’ wallets. BTC’s massive liquidity reserves have remained underutilized and unproductive due to the network’s limited scalability. Additionally, Bitcoin does not support programmable smart contracts and has a block finality time of 10 minutes. These challenges hinder developer activity on Bitcoin, affect growth, and prevent the rise of decentralized financial services on Bitcoin.
The origins of the Bitcoin challenge
The lack of defi applications on Bitcoin has prevented users from capitalizing on the vast reserves of BTC assets. However, developers have long been working to improve the functionality and performance of Bitcoin to make it suitable for the challenge.
For example, the Segregated Witness (SegWit) update in July 2017 reduced transaction time and increased block capacity beyond 1 MB. It was followed by the Taproot upgrade in November 2021 to introduce protocols such as Pay-to-Taproot (P2TR) and Taproot Asset Representation Overlay (Taro). However, during the long crypto winter, developers focused more on creating robust Bitcoin challenge protocols.
For example, Casey Rodarmor launched Ordinals in January 2023 to create NFT-like listings on the Bitcoin chain. Ordinals have rejuvenated the “Building on Bitcoin” movement and opened a Bitcoin NFT market that can reach $4.5 billion by 2025.
Rodarmor also launched the Runes Protocol after Bitcoin Halving to create fungible tokens like memecoins on Bitcoin. During the first week, users struck more than 11,000 Runes tokens, representing 45% of Bitcoin transactions.
Simultaneously, Layer 2, like Stacks, launched in 2021, offered smart contract functionality to Bitcoin. The Stacks Nakamoto upgrade, introduced in mid-April 2024, reduces transaction processing time to 5 seconds and provides 100% Bitcoin block finality.
Therefore, developer activity expands Bitcoin’s utility and improves its scalability, ushering in the Bitcoin challenge moment.
The potential of the Bitcoin challenge
After a long bear market, total value locked in defi protocols crossed the $80 billion mark in February 2024. However, the important thing to note is that TVL excludes any liquidity in BTC reserves.
The majority of funds for challenge applications come of Ethereum with a market dominance of almost 60%. If defi protocols were able to access even a fraction of Bitcoin’s market capitalization, TVL would reach unprecedented levels.
According to a Spartan study report, Bitcoin defi presents a 7x growth opportunity without accounting for any additional liquidity inflows. Let’s show this point with available market data.
As of December 2023, Bitcoin’s market capitalization stood at $850 billion, 3.1 times larger than Ethereum’s $270 billion. However, Ethereum’s defi app, TVL, was worth $76 billion, or 28% of its market cap, compared to just $320 million for Bitcoin defi.
If we hold the data points constant, then Bitcoin defi presents a market opportunity of $238 billion in December 2023. These numbers do not take into account surges in adoption or increased capital inflows as we are witnessing Today.
So, it is safe to say that we have only touched the tip of the iceberg of the Bitcoin Defi market. The market will further expand with the launch of more smart contract features and scalable challenge applications in 2024.
Bitcoin Defi summer is coming
Protocols like Ordinals, Runes, and Layer 2 networks like Stacks are crucial to the growth of Bitcoin Defi. They allow users to mine vast underutilized BTC reserves while leveraging the security and decentralization of the underlying Bitcoin chain.
However, some Bitcoin maximalists believe that frivolous memecoins and NFTs have damaged Bitcoin’s legacy and led to network congestion. Despite this, it is perhaps necessary to emphasize the fun aspect of crypto to popularize Bitcoin defi and lead to mass adoption.
Meme tokens could eventually lead to more development activities and user participation in Bitcoin-based lending, trading, yield farming, staking, and GameFi and SocialFi protocols. These applications will finally make Nakamoto’s dream of an alternative financial system come true.
As Challenge Summer approaches, the true potential of the Bitcoin Challenge will begin to unfold as Bitcoin-based permissionless financial services become available to users around the world.
Mikhil Pandey
Mikhil Pandey is the co-founder and chief strategy officer of Persistence. Founded in 2019, Persistence is a purpose-built Layer 1 with a mission to maximize yield and security through liquid staking and re-staking, placing itself at the forefront of the proof-of-stake landscape. Persistence Labs offers several products in its ecosystem, including pSTAKE Finance, Dexter, etc.