Representation of Bitcoin cryptocurrency in this illustration photo taken in Krakow, Poland on … [+]
For years, DeFi has been synonymous with Ethereum and other smart contract platforms. But Bitcoin, the biggest and most secure blockchain, is now emerging as an important player. This holds immense potential for the whole crypto space.
According to DefiLlama, the total value locked in BTCFi protocols has surged from $307 million in January 2024 to $6.6 billion in February 2025—a staggering 2,050% increase.
BTCFi allows users to earn yield, trade, and leverage their coins without relying on centralized intermediaries. Numerous BTCFi protocols already enable restaking, lending-borrowing, and asset tokenization on Bitcoin. The latter includes stablecoins, the lifeblood of DeFi. The recent news about USDT integration with the Lightning Network marks a significant milestone, potentially unlocking massive liquidity for the sector.
How BTCFi Works
The primary way of bringing bitcoin into DeFi has long been through wrapped BTC. This method involves locking BTC on Bitcoin and issuing a tokenized version on Ethereum and other chains. However, this approach carries risks. Wrapped assets rely on custodial or semi-centralized bridges, which are prone to hacks and governance failures.
An alternative approach is the Threshold Signature Scheme. This cryptographic method enables multi-party control over a Bitcoin wallet without exposing private keys. TSS allows native BTC custody without a single point of failure, making it a reliable solution for non-custodial cross-chain applications and yield protocols.
Beyond TSS, Bitcoin layer-2 solutions like Lightning, Liquid, or Rootstock provide additional avenues for BTCFi applications. These networks allow for advanced smart contract features on Bitcoin.
Earning Yield On Bitcoin
Bitcoiners have long taken pride in HODLing. With the emergence of BTCFi, they can put their idle coins to work, all while keeping control of them.
The two most promising yield strategies are restaking and lending-borrowing.
Bitcoin restaking is a novel concept that allows BTC holders to lock their assets in smart contracts that secure other networks or specialized protocols. By doing so, users provide security or utility for additional blockchain layers and DApps. In return, they receive rewards for their participation. Babylon, the largest BTCFi protocol with $5.4 billion in TVL, uses TSS and multi-signature wallets to facilitate restaking across blockchain layers.
Lending-borrowing protocols let users earn interest by lending their BTC. They can also borrow BTC against collateral, usually exceeding the loan amount. Traditional DeFi lending-borrowing protocols, such as Aave, MakerDAO, or Curve, use wrapped bitcoin. The BTCFi lending protocols using native bitcoin mainly operate on Bitcoin sidechains, like Sovryn, built on Rootstock (RSK).
Trading Bitcoin On DEXs
Currently, most decentralized exchanges use wrapped bitcoin. However, there are some DEXs that have enabled the use of native BTC, allowing users to maintain control over their coins.
The most popular one is THORChain (RUNE), which uses the TSS method, enabling native BTC swaps without a centralized bridge. THORChain is built on the Cosmos Software Development Kit and supports eight blockchains.
Other BTCFi DEXs include Stackswap, built on the Bitcoin layer-2 Stacks, and Bisq, an off-chain peer-to-peer DEX that uses a multi-signature escrow process.
Tokenizing Assets On Bitcoin
While Bitcoin wasn’t originally designed for token issuance, new technologies and standards have made it possible.
The Ordinals protocol, launched in January 2023, has quickly gained popularity by enabling the creation of on-chain tokens. As of today, the Bitcoin network records an average of 117,000 fungible (BTC-20) and 5,000 non-fungible (NFT) Ordinals transactions daily, according to Dune Analytics. However, Ordinals might not be the best way for Bitcoin-based tokenization. They are block space-intensive and can hardly be incorporated into DeFi protocols.
Bitcoin layer-2s like RGB, Liquid, and the Lightning Network (with Taproot Assets) offer a more scalable and efficient way of tokenizing assets on Bitcoin.
On January 30, Tether, the stablecoin leader, and Lightning Labs, the team behind Taproot Assets, made an important announcement. Tether will integrate with the Lightning Network, with both on-chain transactions and Lightning Network support. This marks a paradigm shift. Until now, stablecoin supply has concentrated on Ethereum ($138 billion, or 59%) and Tron ($63 billion, or 27%), according to Dune Analytics. This is due to the former’s developed DeFi sector and the latter’s low fees. With USDT moving to Bitcoin, BTCFi could capture a large share or create additional stablecoin supply.
This could unlock new liquidity streams and create significant activity on Bitcoin. As of now, $150 billion of USDT generates over $1 trillion in monthly trading volume across chains, according to CoinGecko. Bitcoin’s current monthly on-chain volume is around $2.1 trillion. If it were to claim its market share of 59% in USDT volume, this would mean a 28% increase in the blockchain’s activity. Consequently, this could also change the fee dynamic to the miners’ benefit.
BTCFi is gaining ground. Despite some bitcoiners’ concerns over a potential rise in fees (both on-chain and on the Lightning Network), BTCFi’s potential upside is immense. As BTC ETFs gain traction, BTCFi offers a decentralized and non-custodial way to actively use bitcoin, staying true to the adage: “Not your keys, not your coins.”
