Author: Darius Moukhtarzadeh Source: cointelegraph Translator: Shan Eoba, Jinse Finance
A series of emerging projects and technological innovations are enhancing the utility of the Bitcoin ecosystem, expanding its use cases beyond traditional store of value.
Bitcoin is the oldest, most influential, and most secure blockchain and asset in the crypto space. Recently, it has proven its strength by breaking through the psychological barrier of $100,000 and continuously setting new all-time highs. While Bitcoin's adoption is steadily rising, its primary use case has evolved since its inception 15 years ago. From being created as a peer-to-peer digital currency, it has developed into being viewed as "digital gold".
While the "digital gold" narrative has attracted more and more institutional and retail investors - as evidenced by the record inflows following the launch of the Bitcoin ETF in January 2024 and the recent all-time highs - the vast majority of Bitcoin remains dormant in wallets, underutilized. Considering its market capitalization of over $2 trillion, Bitcoin's liquidity holds immense untapped potential.
Fortunately, a rapidly growing Bitcoin decentralized finance (DeFi) applications and Layer 2 (L2) solutions are unlocking Bitcoin's liquidity, creating a native DeFi ecosystem that is set to become one of the hottest new frontiers in the crypto space by 2025.
Increasing Activity and Adoption of Bitcoin L2 and DeFi Projects
Due to Bitcoin's limited smart contract functionality, Bitcoin L2 solutions are crucial for Bitcoin DeFi to become a reality. In the past three years, the number of L2s has grown to over 75 projects. Various L2s are gaining traction and maturing, such as Mezo, backed by Pantera, which recently launched its testnet and plans to launch its mainnet in Q1 2025. Similarly, BOB, which supports Bitcoin DeFi in an Ethereum Virtual Machine-compatible environment, has attracted over 300,000 unique users since its launch in May 2024.
As one of the most mature Bitcoin Layer 2s, Stacks completed the Nakamoto upgrade in Q4 2024. This upgrade introduced performance improvements, including faster block times and full Bitcoin finality. Additionally, Stacks is preparing to launch sBTC - a decentralized and programmable version of Bitcoin - pegged 1:1 to BTC, in mid-December. This innovation will enable the transfer of Bitcoin between Layer 1 and Layer 2 without relying on centralized solutions like Wrapped Bitcoin (WBTC) on Ethereum.
The world's largest crypto exchange, Binance, is expanding its Bitcoin DeFi offerings, nominating three of the most popular Runes (non-fungible Bitcoin tokens) for futures listing. Furthermore, Binance announced the provision of Bitcoin staking services through the Babylon protocol as part of Binance Earn, enabling on-chain yield.
Adoption Reflected in Increasing TVL
The growing interest in Bitcoin DeFi is reflected in Bitcoin's TVL, which reached a new all-time high of $7.48 billion on December 16 (excluding the TVL of L2s like Mezo or BOB). This figure saw a significant increase in Q4 2024, with most of the value locked in re-staking protocols like Babylon and Lombard. While Bitcoin DeFi's TVL is still small compared to Ethereum's $68.35 billion as of January 17, it demonstrates the increasing interest in Bitcoin DeFi applications. As more projects mature, launch their mainnet, and issue their own tokens (multiple TGEs are expected in 2025), this figure is set to rise significantly in the coming months and years.
Regulatory Clarity Expected to Encourage Investors
The political and regulatory environment in the US is undergoing a shift. Under the Trump administration, crypto-friendly figures like Paul Atkins as SEC Chair and David Sacks as the government's "AI and Crypto Lead" suggest the US is moving towards a more supportive stance on cryptocurrencies.
More precise legal and policy guidance will give investors more confidence in utilizing their crypto assets for DeFi applications. This policy and attitudinal shift comes at a critical juncture, as the nascent Bitcoin DeFi space is poised for growth in this more favorable regulatory environment.
Some critics argue that the Bitcoin whale community may oppose increasing Bitcoin's utility, as they believe Bitcoin is already perfect enough. The debate around Ordinals and Inscriptions suggests that not everyone is excited about new features on Bitcoin. However, it is unclear if these voices represent the views of the broader Bitcoin community. Even if a significant portion of holders choose to keep Bitcoin as is, with only a small fraction of the Bitcoin supply entering the DeFi space, the industry could still reach a substantial scale.
Calculations by Messari research analyst Kinji Steimetz show that if Bitcoin's DeFi penetration matched WBTC's (2.87% of its total addressable market), the value of Bitcoin in DeFi would reach $47 billion. This calculation highlights Bitcoin DeFi's immense potential, where even a small penetration rate could create a significant new industry. This scale would be enough to propel it into the top 10 projects by market cap, further encouraging innovation and greater participation.
Bitcoin DeFi May Strengthen Bitcoin's Security Budget
Unlocking Bitcoin's liquidity through DeFi can enhance its utility beyond just a store of value. With the emergence of advanced infrastructure, new applications, and favorable policies, Bitcoin can transition from a passive asset to a productive one, offering yield opportunities and building a more vibrant and engaged ecosystem on the most mature blockchain.
These developments may, in turn, strengthen Bitcoin's network security. As more use cases create fees and revenue, miners will have an incentive to continue maintaining and protecting the network even after the last Bitcoin is mined in 2140. This will help ensure the long-term security and sustainability of the Bitcoin network.
