Original Title: Can Bitcoin Thrive Onchain?
Original Author: Jean-Paul Faraj, Bankless
Original Translation: BitpushNews
Despite sitting at the top of the cryptocurrency market capitalization, Bitcoin's participation in the DeFi field is relatively low, which is sparking a profound discussion about its future role.
For over a decade, Bitcoin has been the cornerstone of the crypto ecosystem - praised for its decentralization, censorship resistance, and provable scarcity. However, despite its dominant market capitalization and recent resurgence of interest, it remains largely disconnected from one of the most vibrant areas in the crypto space - DeFi.
According to Bitcoin Layers data, only about $30 billion of Bitcoin (just 1.875% of its total supply) is used in DeFi. In contrast, Ethereum has locked approximately $50 billion of ETH in DeFi, about 23% of its supply.
This gap highlights a core contradiction in today's Bitcoin narrative: while BTC holds enormous value, relatively little BTC is actively utilized on-chain to provide yield opportunities. This gap is driving innovation around wrapping, staking, and other methods to bring Bitcoin into the DeFi economy, thereby unlocking ways to make BTC a productive capital asset.
Bitcoin Layers: BTC Supply by Network, showing all wrapped BTC
Ethereum's DeFi ecosystem has emerged with tools for lending, staking, and trading. In contrast, native Bitcoin remains difficult to use effectively, especially for new users. Transaction times are slow, fees are variable and often high, and Bitcoin's architecture lacks the programmability to support Ethereum-based applications.
As the broader cryptocurrency space matures, this raises an important question: Can Bitcoin meaningfully participate in the on-chain economy? If so, how can we bring users in without forcing them through a series of bridges, wrapped tokens, and unfamiliar applications?
The Problem: Bitcoin's Design vs. DeFi's Utility
Bitcoin's underlying architecture is not optimized for today's highly programmable smart contracts. It prioritizes security and decentralization through its Proof of Work (PoW) mechanism, rather than pursuing complex logical expressions - a design choice that makes it a reliable store of value but limits its adaptability in smart contracts and complex DeFi applications. As a result, native Bitcoin struggles to integrate into the composable financial ecosystems thriving on public chains like Ethereum and Solana.
We've seen some workarounds in the past:
· Wrapped Bitcoin: Users convert BTC to ERC-20 tokens to access Ethereum-based DeFi. This introduces custodial risks, as token liquidity may be opaque and not always backed 1:1 by third-party custodians.
· Bridge Protocols: Cross-chain platforms allow BTC to transfer to other ecosystems. However, manual bridging adds friction, complexity, and risk - especially for non-technical users.
· Custodial Platforms: Centralized services like Coinbase offer BTC yields but require users to surrender custody and typically pay returns in credits, stablecoins, or proprietary tokens rather than BTC.
Each option comes with trade-offs that challenge Bitcoin's core principles: security, simplicity, and user sovereignty.
Onboarding Barriers: Why User Experience Still Matters
BTC Accumulation in 2024, river.com
For Bitcoin holders curious about doing more with their assets - earning yields, participating in on-chain governance, or exploring DeFi - the entry paths remain fragmented, unintuitive, and often intimidating. While infrastructure has matured, user experience lags behind, with competition coming not just from other blockchains, but from TradFi.
This friction creates a significant onboarding barrier. Most users don't want to become advanced DeFi users - they want to simply and safely increase their net assets and BTC holdings without navigating a maze of applications, bridges, and protocols like recent Bitcoin buyers through brokers, ETFs, and products like Michael Saylor's Strategy.
To convert the next wave of users from simple off-chain holders to on-chain users, tools need to eliminate this complexity while not sacrificing control, self-custody, or transparency. This is where emerging protocols and modern wallet experiences begin to truly make a difference - providing user-friendly DeFi basic functionality access while maintaining Bitcoin's core principles.
A better user experience is not just a nice-to-have; it's critical infrastructure for Bitcoin adoption's next phase.
New Approaches to On-Chain BTC Yields and Productivity
Many emerging solutions aim to make Bitcoin more usable in DeFi - each with different trade-offs:
1. Staking, Restaking, and Points-Based Yield Programs
Platforms like Babylon and Lombard now offer Bitcoin-related yield programs through points or reward tokens, typically via staking/restaking, which can often be exchanged for benefits or future airdrops. These systems are attractive to early adopters and crypto-native users chasing airdrops and platform-specific token economics. These products typically involve converting BTC to wrapped BTC standards, then locking assets in various plans/products to earn variable yields. Savvy on-chain traders can achieve high yields, but this requires deeper understanding of crypto usage and manual bridging, wrapping, and fund depositing.
Pros:
· Broad yield opportunities
· Often self-custodial
Cons:
· Rewards not paid in BTC
· Often require lock-up periods
· Uncertain long-term value of rewards
2. Bitcoin Layer 2 and Meta-Protocols
Developments like Lightning Network, Rootstock (RSK), Alkanes, and emerging Layer 2s like Botanix and Starknet are bringing new functionality, programmability, and speed to Bitcoin. These innovations enable use cases like fast payments, Non-Fungible Tokens, and smart contract-like behaviors. As a result, users can now use their BTC to access a wide range of DeFi opportunities - such as locking funds to secure networks, participating in market-making, lending, or converting assets to support wrapped BTC standards across various protocols. As more teams build these networks, the ecosystem of Bitcoin-based yield opportunities will continue to expand.
Pros:
· Expand Bitcoin's use cases
· Aligned with Bitcoin's architecture
· Broad options for on-chain yield generation
Cons:
· Still relatively early and fragmented
· Requires intermediate to advanced understanding to leverage
· Requires significant developer resources to build most utilities already existing on other smart contract chains
3. Smart Wallet Integrations and Native BTC Yields
Wallets like Braavos offer features that allow users to earn native BTC yields without manually wrapping their Bitcoin or surrendering custody. Users can invest BTC directly through their wallet without dealing with typical bridging or external application barriers. Complex steps - such as depositing, wrapping, and bridging - are seamlessly handled in the background, with BTC deployed into specific DeFi strategies. This user-friendly approach aims to make BTC yields accessible to everyone, regardless of their technical background or crypto experience.
Pros:
· Yields paid in BTC (not points or proxy tokens)
· No manual bridging or third-party custody
· Self-custodial by default
· Beginner-friendly
Cons:
· Dependent on BTC converted to wrapped form
· Requires a certain level of trust in bridging mechanisms and yield protocol infrastructure
· Broader perspective: Bitcoin's continuously evolving role on-chain
The narrative of Bitcoin has long revolved around "value storage" - a role it has reliably fulfilled. However, as the on-chain economy develops, the pressure increases for Bitcoin to integrate into this emerging financial stack and fulfill its promise as a reliable payment infrastructure.
To achieve this without compromising decentralization or user trust, new infrastructure must make these opportunities easily accessible without requiring technical expertise or abandoning Bitcoin's core principles.
This means:
· Yields should be prioritized in BTC, not derivative assets
· Custody must be retained by users
· Complexity must be abstracted, not transferred to users
Products like Braavos, Lombard, Babylon, and others mentioned in this article are examples of how these ideas are being implemented. Whether through staking to generate yields or by directly embedding Bitcoin support in self-custody options and automating their underlying complexity, they make it easier for Bitcoin holders to access DeFi without completely leaving the Bitcoin ecosystem.
Cautiously Bridging the Gap
Bitcoin's transition to the on-chain economy will not happen overnight - nor should it. Caution, simplicity, and self-sovereignty are the foundations of Bitcoin's core principles. However, as tools emerge that respect these values and offer new functionalities, BTC's role in the broader cryptocurrency economy continues to evolve.
The current challenge is to build systems that are open, secure, and most importantly - accessible. If the next billion users are to join through Bitcoin, they will need experiences that meet their existing needs and are acceptable to a broader user base.
