The Surge of BTCFi: Decentralized Finance Utilizing Bitcoin Exhibits Significant Prospects
For a long time, DeFi has been synonymous with Ethereum and other smart contract platforms. However, Bitcoin, the most secure and popular blockchain, is now making waves in this space. This change has immense potential for the entire crypto industry.
DefiLlama reports a remarkable surge in the total value locked (TVL) in BTCFi protocols. From a mere $307 million in January 2024, the TVL skyrocketed to $6.6 billion in February 2025 – a whopping 2,050% increase!
BTCFi allows Bitcoin users to earn yields, trade, and leverage their coins without relying on centralized intermediaries. There are already numerous BTCFi protocols available, enabling activities like restaking, lending-borrowing, and asset tokenization on Bitcoin. Stablecoins, vital to DeFi, are also part of this growing trend.
The recent news about USDT integration with the Lightning Network is a significant milestone. It could unlock massive liquidity for the sector, contributing to Bitcoin's role in DeFi.
Understanding BTCFi
The primary method of deploying Bitcoin in DeFi has been through wrapped BTC. However, this approach comes with risks due to custodial or semi-centralized bridges, being prone to hacks and governance failures.
An alternative method, Threshold Signature Scheme (TSS), enables multiple parties to control a Bitcoin wallet without revealing private keys. This solution ensures reliable, non-custodial cross-chain applications and yield protocols, making it an attractive alternative.
Other solutions include Bitcoin layer-2 solutions like Lightning, Liquid, or Rootstock, offering advanced smart contract features on Bitcoin.
Earning Yield in BTCFi
Bitcoin enthusiasts have traditionally thrived on HODLing. Now, with BTCFi, they can put their idle coins to profitable use while retaining control.
The two most prominent yield strategies are restaking and lending-borrowing.
Restaking in BTCFi allows BTC holders to lock their assets in smart contracts that secure other networks or specialized protocols, earning rewards for their contribution. Babylon, the largest BTCFi protocol, uses multi-signature wallets and TSS for cross-chain security.
Lending-borrowing protocols let users earn interest while lending their BTC or borrow BTC against collateral, often exceeding the loan amount. These protocols primarily operate on Bitcoin sidechains like Sovryn, built on Rootstock (RSK).
Trading Bitcoin on DEXs
Most decentralized exchanges use wrapped bitcoin, but DEXs like THORChain, Stackswap, and Bisq allow users to use native BTC, maintaining control over their digital assets.
Tokenizing Assets in Bitcoin
Despite not being initially designed for token issuance, new technologies and standards have enabled asset tokenization on Bitcoin. But the question remains – which method is more scalable and efficient?
BTCFi’s potential upside underscores its attractiveness, despite concerns about rising fees. With BTC ETFs gaining traction, BTCFi presents users with a decentralized, non-custodial way to actively use Bitcoin. As the adage goes, “Not your keys, not your coins.”
It's worth noting that the total value locked in BTCFi protocols has experienced some growth and decline, mirroring trends across all protocols. DeFi services offered by BTCFi, such as increased accessibility, enhanced transparency and security, higher potential returns, and fostered innovation, have significant potential to expand Bitcoin's utility beyond speculation.
Top Tip: Keep an eye on the BTCFi trends, as this sector is expected to grow and evolve, providing more opportunities for Bitcoin users.
The use of Tether (USDT) on the Lightning Network could significantly boost Bitcoin's role in the DeFi space, potentially unlocking vast liquidity.
BTCFi's reliance on non-custodial methods like Threshold Signature Scheme (TSS) and Bitcoin layer-2 solutions like Lightning, Liquid, or Rootstock ensure more secure cross-chain applications and yield protocols.
By 2025, the average increase in the total value locked (TVL) in BTCFi protocols was phenomenal, reaching 2,050%.
In the future, actively using Bitcoin through BTCFi in a decentralized, non-custodial manner, as the adage suggests, could become the norm, beyond just speculation.
