Hitting the iceberg’s tip: the untapped potential of Bitcoin defi

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Bitcoin has emerged as a hedge against inflation since its launch in 2009. Some countries, such as El Salvador, have even made it legal tender. In March 2024, the market value of BTC’s circulating supply reached $1.4 trillion, surpassing silver to become the 8th most valuable property globally.

Despite BTC’s dominance over other cryptocurrencies, BTC remained dormant in most user wallets. BTC’s massive liquidity reserves remained underutilized and inefficient due to the limited scalability of the network. Moreover, Bitcoin does not support programmable smart contracts and has a block finality of 10 minutes. These challenges hinder developers’ activities on Bitcoin, impacting growth and hindering the rise of decentralized financial services on Bitcoin.

Origins of Bitcoin defi

The lack of defi applications in Bitcoin has prevented users from tapping into the vast reserves of BTC assets. But developers have long been working to improve Bitcoin’s functionality and performance, making it defi-friendly.

For example, the Segregated Witness (SegWit) update in July 2017 reduced transaction time and increased block capacity to over 1 MB. This was followed by the Taproot upgrade in November 2021 to introduce protocols such as Payment to Taproot (P2TR) and Taproot Entity Representation Overlay (Taro). However, during the long crypto winter, developers focused more on creating robust Bitcoin defi protocols.

For example, Casey Rodarmor launched Ordinals in January 2023 to create NFT-like inscriptions on the Bitcoin chain. Ordinals have revived the ‘Building on Bitcoin’ movement and opened up a Bitcoin NFT market that could reach $4.5 billion by 2025.

Rodarmor also launched the Runes protocol to mint fungible tokens like memecoin in Bitcoin following the Bitcoin halving. In the first week, users minted more than 11,000 Runes tokens, accounting for 45% of Bitcoin transactions.

Simultaneously, layer-2, such as Stacks, launched in 2021, introduced smart contract functions to Bitcoin. Introduced in mid-April 2024, the Stacks Nakamoto upgrade reduces transaction processing time to 5 seconds and provides 100% Bitcoin block certainty.

Therefore, developer activities are expanding Bitcoin’s utility and improving its scalability, thus ushering in the Bitcoin definition moment.

Potential of Bitcoin Defi

After a long bear market, the total value locked in defi protocols exceeded $80 billion in February 2024. But the important thing to note is that TVL excludes any liquidity from BTC reserves.

The majority of funds for defi applications come from Ethereum, which has a market dominance of almost 60%. If defi protocols had the opportunity to access even a tiny fraction of Bitcoin’s market cap, TVL would reach unprecedented levels.

According to the Spartan Research report, Bitcoin defi offers a 7x growth opportunity without accounting for any additional liquidity flows. Let’s illustrate this point with current market data.

In December 2023, Bitcoin’s market cap was $850 billion; This is 3.1 times more than Ethereum’s $270 billion. However, Ethereum’s defi implementation TVL was worth $76 billion, or 28% of its market cap, compared to just $320 million for Bitcoin defi.

If we hold data points constant, Bitcoin defi presents a $238 billion market opportunity by December 2023. These numbers do not take into account any adoption growth or incoming capital we are witnessing today.

Therefore, it would not be wrong to say that we have only touched the tip of the iceberg of the Bitcoin defi market. The market will expand further as more smart contract functionality and scalable defi applications are released in 2024.

Bitcoin defi summer is coming

Ordinals, protocols like Runes, and layer 2 networks like Stacks are crucial to the growth of Bitcoin defi. They allow users to tap into large underutilized BTC reserves while benefiting from the security and decentralized nature of the underlying Bitcoin chain.

But some Bitcoin maximalists think frivolous memecoins and NFTs are damaging Bitcoin’s legacy and causing network congestion. Despite this, it may be necessary to highlight the fun aspect of crypto to popularize Bitcoin defi and lead to mass adoption.

Meme tokens could eventually lead to more developer activity and users participating in Bitcoin-based lending-borrowing, trading, yield farming, staking, and GameFi and SocialFi protocols. These applications will eventually make Nakamoto’s dream of an alternative financial system a reality.

As we get closer to defi summer, the true potential of Bitcoin defi will begin to emerge as Bitcoin-based permissionless financial services become accessible to users worldwide.

Mikhil Pandey

Mikhil Pandey is co-founder and chief strategy officer of Persistence. Founded in 2019, Persistence is a purpose-built layer-1 at the forefront of the proof-of-stake landscape with a mission to maximize efficiency and security through liquid staking and restaking. Persistence Labs has multiple products in its ecosystem, including pSTAKE Finance, Dexter, and more.