Author: Darius Moukhtarzadeh Source: cointelegraph Translation: Shan Ouba, Golden Finance
A series of emerging projects and technological innovations are enhancing the utility of the Bitcoin ecosystem, expanding its use beyond traditional value storage.
Bitcoin is the oldest, most influential and most secure blockchain and asset in the crypto space. Recently, it has proven its strength to skeptics by breaking through the psychologically important $100,000 mark and continuously setting new all-time highs. Although Bitcoin's acceptance has steadily increased, its main use has changed since its birth 15 years ago. From being originally created as a peer-to-peer digital currency, it has developed into being regarded as "digital gold".
While the narrative of "digital gold" has attracted more and more institutional and retail investors - as shown by the record inflows after the launch of the Bitcoin exchange-traded fund (ETF) in January 2024, and the recent all-time high - the vast majority of Bitcoins are still sitting in wallets and are not fully utilized. Considering its market cap of over $2 trillion, Bitcoin’s liquidity holds tremendous untapped potential.
Fortunately, a rapidly growing group of Bitcoin decentralized finance (DeFi) applications and second-layer solutions (L2) are unlocking Bitcoin’s liquidity and creating a native DeFi ecosystem, which will become one of the hottest new tracks in the crypto space in 2025.
Bitcoin L2 and DeFi projects are growing in activity and adoption
Because Bitcoin’s own smart contract capabilities are limited, Bitcoin L2 solutions are critical to making Bitcoin DeFi a reality. Over the past three years, the number of L2s has grown to over 75 projects. Various L2s are gaining traction and maturing, such as Pantera-backed Mezo, which recently launched a testnet and plans to launch a mainnet in the first quarter of 2025. Similarly, BOB supports Bitcoin DeFi in an Ethereum Virtual Machine-compatible environment and has attracted more than 300,000 unique users since its launch in May 2024. As one of the most mature Bitcoin second layers, Stacks completed the Nakamoto upgrade in Q4 2024. The upgrade introduced performance improvements, including faster block times and full Bitcoin finality. In addition, Stacks is preparing to launch sBTC in mid-December - a decentralized and programmable version of Bitcoin that is backed 1:1 with BTC. 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.
Binance, the world's largest crypto exchange, is expanding its Bitcoin DeFi products, nominating three of the most popular Runes (fungible tokens on Bitcoin) for futures listing. Additionally, Binance announced that it will offer Bitcoin staking services through the Babylon protocol as part of Binance Earn, enabling on-chain yields.
Adoption is reflected in the increase in TVL
The growing interest in Bitcoin DeFi is reflected in Bitcoin’s TVL, which hit an all-time high of $7.48 billion on December 16 (excluding TVL of L2s such as Mezo or BOB). This number grew significantly in the fourth quarter of 2024, with most of the value locked in re-staking protocols such as 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 growing interest in Bitcoin DeFi applications. This number will rise significantly in the coming months and years as more projects mature, launch mainnets, and issue their own tokens (multiple TGEs are expected in 2025).
Expectations of regulatory clarity will encourage investors
The political and regulatory environment in the United States is changing. Under the Trump administration, with crypto-friendly Paul Atkins as chairman of the Securities and Exchange Commission (SEC) and David Sacks as the government's "AI and crypto chief," the country appears to be moving in a more pro-cryptocurrency direction.
More precise legal and policy guidance will give investors more confidence when using their crypto assets for DeFi applications. This shift in policy and attitude comes at a critical time, as the nascent Bitcoin DeFi sector is poised to thrive in a more friendly regulatory environment than in the past.
Some critics believe that Bitcoin whales may oppose increasing Bitcoin's utility because they believe that Bitcoin is already perfect enough. The debate around Ordinals and Inscriptions shows that not everyone is excited about new features on Bitcoin. However, it is not clear whether these voices represent the views of the majority of the Bitcoin community. Even if a significant portion of holders choose to leave Bitcoin as is, and only a small portion of Bitcoin supply enters the DeFi space, the industry could still reach significant scale.
Messari Research Analyst Kinji Steimetz's calculations show that if Bitcoin's DeFi penetration rate is the same as WBTC's (2.87% of its total potential market), then Bitcoin's value in DeFi will reach $47 billion. This calculation highlights the huge potential of Bitcoin DeFi, even a small penetration rate, is enough to create a new and important industry. This scale will be enough to make it one of the top ten projects by market capitalization, further encouraging innovation and more participation.
Bitcoin DeFi may consolidate Bitcoin's security budget
Unlocking Bitcoin's liquidity through DeFi can enhance its utility beyond value storage. As advanced infrastructure, new applications, and favorable policies emerge, Bitcoin will transform from a passive asset to a productive one, providing income opportunities and building a more vibrant and engaged ecosystem on the most mature blockchains.
These developments, in turn, are likely to strengthen Bitcoin's network security. With more use cases creating fees and revenue, miners will have an incentive to continue maintaining and protecting the network after the last Bitcoin is mined in 2140. This will help ensure the long-term security and sustainability of the Bitcoin network.
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