Since its launch in 2009, Bitcoin has emerged as a hedge against inflation. Some countries like El Salvador even made it a legal tender. In March 2024, the market valuation of BTC’s circulating supply reached .4 trillion, surpassing silver to become the 8th most valuable property globally.
Despite BTC’s dominance over other cryptocurrencies, most of BTC remained dormant in user wallets. BTC’s huge liquidity reserves stayed underutilized and unproductive due to the network’s limited scalability. Moreover, Bitcoin doesn’t 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 finance services on Bitcoin.
The origins of Bitcoin defi
The lack of defi apps on Bitcoin prevented users from capitalizing on the vast reserves of BTC assets. However, developers have been working for a long time to improve Bitcoin’s functionality and performance to make it suitable for defi.
For instance, the Segregated Witness (SegWit) update in July 2017 reduced transaction time and increased the block capacity beyond 1 MB. It was followed by the Taproot upgrade in November 2021 to introduce protocols like Pay-to-Taproot (P2TR) and Taproot Asset Representation Overlay (Taro). However, during the long crypto winter, developers focussed more on building robust Bitcoin defi protocols.
For example, Casey Rodarmor launched Ordinals in January 2023 to create NFT-like inscriptions on the Bitcoin chain. Ordinals rejuvenated the ‘Building on Bitcoin’ movement and opened a Bitcoin NFT market that can reach .5 billion by 2025.
Rodarmor also launched the Runes protocol after the Bitcoin halving to mint fungible tokens like memecoins on Bitcoin. In the first week, users minted over 11,000 Runes tokens, accounting for 45% of Bitcoin transactions.
Simultaneously, layer-2, like Stacks, launched in 2021, offered smart contract functionalities 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 is expanding Bitcoin’s utility and enhancing scalability, thereby inaugurating the Bitcoin defi moment.
The potential of Bitcoin defi
After a long bear market, the total value locked in defi protocols crossed the billion mark in February 2024. However, the important thing to note is the TVL excludes any liquidity from BTC reserves.
The majority of the funds for defi apps come from Ethereum with almost 60% market dominance. If defi protocols had the opportunity to access even a fraction of Bitcoin’s market cap, the TVL would reach unprecedented levels.
According to a Spartan Research report, Bitcoin defi presents a 7-fold growth opportunity without accounting for any additional liquidity influx. Let’s demonstrate the point with available market data.
In December 2023, Bitcoin’s market capitalization was 0 billion, which is 3.1 times more than Ethereum’s 0 billion. However, Ethereum’s defi app TVL was billion or 28% of its market cap compared to just 0 million for Bitcoin defi.
If we keep the data points constant, then Bitcoin defi presents a 8 billion market opportunity as of December 2023. These figures don’t consider any adoption surges or more inbound capital as we’re witnessing today.
Thus, it is safe to say we have merely touched the tip of the iceberg of the Bitcoin defi market. The market will expand further as more smart contract functionalities and scalable defi apps launch in 2024.
The Bitcoin defi summer is coming
Protocols like Ordinals, Runes, and layer-2 networks like Stacks are crucial for the growth of Bitcoin defi. They enable users to tap into the vast underutilized BTC reserves while leveraging the security and decentralization of the underlying Bitcoin chain.
However, some Bitcoin maximalists think that frivolous memecoins and NFTs have harmed Bitcoin’s legacy and led to network congestion. Despite that, it’s perhaps necessary to harp on crypto’s playful aspect to popularize Bitcoin defi and lead to mass adoption.
Meme tokens might eventually lead to more developer activity and users participating in Bitcoin-based lending-borrowing, trading, yield farming, staking, and GameFi and SocialFi protocols. These apps will finally make Nakamoto’s dream of an alternative financial system come true.
As we approach the defi summer, the true potential of Bitcoin defi will start to unravel as Bitcoin-based permissionless financial services become accessible to users across the globe.
Tổng hợp và chỉnh sửa: ThS Phạm Mạnh Cường
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