BTCFi is set to become an inevitable trend driven by improved capital efficiency, institutional adoption, and advancements in technical infrastructure.

Summary
Bitcoin’s massive capital base remains underutilized, but BTCFi is poised to change this:

Over 14 million BTC are currently idle, as Bitcoin lacks the capital efficiency seen in Ethereum’s DeFi ecosystem. BTCFi unlocks liquidity by transforming BTC into interest-bearing assets, enabling its use in lending, staking, insurance, and other decentralized financial applications built on Bitcoin’s security.

Institutional demand for BTC-native yields is growing, with infrastructure now in place: From compliant custody solutions to real-world yield protocols, the BTCFi ecosystem now includes ETFs, licensed lending, insurance models, and institutional-grade staking protocols.

Technological breakthroughs and Layer-2 innovations have 赋予 BTCFi scalability and programmability. Upgrades like Taproot and emerging Layer-2 platforms now support smart contracts, token issuance, and composable DeFi applications on Bitcoin.

Capital Liquidity Bottlenecks: The Purpose of BTCFi

Two years after the inscription frenzy, can BTCFi lead another bull run in the Bitcoin ecosystem?

Source: Glassnode

Bitcoin now boasts an asset base exceeding $1 trillion, yet most of these assets remain idle. Analysts estimate that 99% of BTC’s market value is "idle"—in other words, nearly all Bitcoin is stored in wallets or cold storage, generating no on-chain returns. On-chain data confirms this: Over 14 million BTC have remained untouched for extended periods.

Two years after the inscription frenzy, can BTCFi lead another bull run in the Bitcoin ecosystem?

Source: DefiLlama

This stands in stark contrast to Ethereum, where vast amounts of ETH are actively deployed in DeFi and staking. For example, Ethereum’s liquid staking protocols have locked up over 14.37 million ETH (approximately $56 billion), transforming ETH into interest-bearing assets and fueling a vibrant on-chain economy.

Ethereum’s DeFi "summer" demonstrated how capital efficiency—via staking rewards, lending interest, and liquidity provision—unlocked immense value for smart contract platforms. In comparison, Bitcoin has long been underutilized; its massive liquidity generates 0% yields and cannot be further composed into financial products at the base layer.

BTCFi (Bitcoin DeFi) aims to unlock this dormant capital. As CoinGecko’s guide explains, Bitcoin DeFi "transforms Bitcoin from a passive asset into a productive one," allowing holders to earn yields on BTC or use it in DeFi applications.

Essentially, BTCFi seeks to achieve for Bitcoin what DeFi did for Ethereum: turning static assets into sources of yield and a foundation for further innovation.

Growing Institutional Demand for Yields

Two years after the inscription frenzy, can BTCFi lead another bull run in the Bitcoin ecosystem?

History of Bitcoin ETFs. Source: Fioderers

Institutional demand may be the strongest catalyst for BTCFi growth, and this trend is already underway. From late 2023 to 2024, major asset managers applied for and launched spot Bitcoin ETFs, ultimately introducing BTC to mainstream investment portfolios.

Two years after the inscription frenzy, can BTCFi lead another bull run in the Bitcoin ecosystem?

Institutions now view Bitcoin as a strategic reserve asset but remain yield-sensitive. In traditional finance, capital is never idle: bonds pay interest, stocks pay dividends, and even cash is deposited in money market funds. Until recently, however, Bitcoin generated no such yields.

BTCFi is changing this. Institutions are now asking a logical question: What can we do with our BTC holdings? A growing number are exploring lending, staking, or using Bitcoin as collateral to unlock yields, mirroring traditional financial models.

As these options emerge, institutional interest in BTCFi is surging. A 3%-5% annual return on BTC may seem modest, but for managing billions in capital, this incremental gain holds significant value.

As BTCFi matures, BTC holders can now earn 10%-20% annual yields via decentralized protocols, making the opportunity even more attractive. If BTC can offer stable, low-risk returns while retaining price appreciation potential, it will become not just a reserve asset but a monetary anchor for DeFi.

As more institutions and individuals adopt BTC as a long-term reserve asset, the demand to earn yields on idle assets becomes clearer. Yield generation is evolving from a niche strategy to a fundamental component of asset management.

Just as U.S. Treasuries underpin traditional capital markets, Bitcoin could become the foundational yield asset in crypto finance, setting benchmarks for everything from lending rates to DeFi protocol valuations.

Infrastructure is in Place

The BTCFi ecosystem is rapidly rolling out new products and frameworks designed for institutional adoption:

Compliant Custody and Liquidity Tokenization

Firms like Fidelity Digital Assets, Coinbase Custody, and BitGo now support DeFi participation under strict custodial compliance. Emerging solutions like Liquid Custody Tokens (LCTs)—such as BounceBit’s BBTC—enable institutions to hold BTC in compliant custody while deploying it on-chain to earn yields. This allows institutions to maintain regulatory compliance while accessing DeFi’s yield potential.

ETFs and Yield-Integrated Products

Two years after the inscription frenzy, can BTCFi lead another bull run in the Bitcoin ecosystem?

Europe’s first yield-bearing Bitcoin ETP. Source: CoreDAO

Yield-bearing Bitcoin ETPs are already live in Europe. Valour’s BTCD ETP stakes BTC on Bitcoin Layer-2s, offering an approximate 5.6% annual yield by late 2024. Meanwhile, institutions are exploring BTC-linked structured notes, dual-yield products, and basis trading strategies, combining traditional financial instruments with crypto-native yield engines.

Two years after the inscription frenzy, can BTCFi lead another bull run in the Bitcoin ecosystem?

BounceBit aims to enable institutions to earn yields on BTC. Source: BounceBit

For example, BounceBit Prime combines tokenized U.S. Treasuries with BTC yield strategies in a single product, offering dual returns familiar to traditional investors like family offices and hedge funds—a Bitcoin yield product designed for Wall Street.

Another example is SatLayer, which launched a decentralized insurance tool backed by yield-bearing BTC. Often called "Bitcoin’s Berkshire Hathaway," SatLayer allows any BTC holder to restake assets into on-chain insurance pools and earn a portion of premium income. It is partnering with crypto-native and traditional underwriters (such as Nexus Mutual and Relm) to build a new class of decentralized BTC insurance products.

Protocol Maturity and Institutional Trust

BTCFi protocols like Babylon and Lombard have surpassed billions in Total Value Locked (TVL), passed security audits, and are pursuing SOC2 compliance. Many have also hired Wall Street veterans as advisors and prioritized risk management in their design. These moves build credibility with global capital allocators.

All this points to a future where BTC yields become a cornerstone of institutional portfolios, much like U.S. Treasuries in traditional markets. This shift will have ripple effects: Institutional inflows into BTCFi will not only benefit Bitcoin holders but also enhance cross-chain liquidity, drive new DeFi standards, and provide a trusted, productive capital base for the entire crypto economy.

In short, BTCFi offers institutions the best of both worlds: the reliability of Bitcoin as a premium asset and the opportunity to earn yields.

Why Now? The Tech Stack Fueling BTCFi’s Breakout

BTCFi is no longer just a theoretical concept—it is becoming a reality, thanks to breakthroughs in three areas: technical upgrades to the Bitcoin ecosystem, growing market demand driven by improved infrastructure, and institutional interest spurred by regulatory clarity.

From Taproot to BitVM

Two years after the inscription frenzy, can BTCFi lead another bull run in the Bitcoin ecosystem?

Taproot upgrade enhances Bitcoin’s privacy and efficiency. Source: chaindebrief

Recent upgrades to the Bitcoin protocol and ecosystem have laid the groundwork for more complex financial applications. For example, the 2021 Taproot upgrade improved Bitcoin’s privacy, scalability, and programmability, even "encouraging the use of smart contracts on Bitcoin" by boosting efficiency. Taproot also enabled new protocols like Taro (now Taproot Assets) for issuing tokens and stablecoins on the Bitcoin ledger.

Two years after the inscription frenzy, can BTCFi lead another bull run in the Bitcoin ecosystem?

BitVM. Source: Bitcoin Illustrated

Similarly, concepts like BitVM—a proposed Bitcoin "virtual machine"—aim to enable Ethereum-like smart contracts on Bitcoin, with a testnet planned for 2025. Equally important, a wave of Bitcoin-native Layer-2 networks and sidechains has emerged.

Platforms like Stacks, Rootstock (RSK), Merlin Chain, and the new BOB Rollup are introducing smart contracts to the Bitcoin ecosystem.

Stacks supports smart contracts via Bitcoin’s hashing power, enables cross-chain tokenization through sBTC, and offers native BTC yields via Proof-of-Transfer (PoX) staking, making Bitcoin more programmable and productive for developers and institutions.

BOB (Build on Bitcoin) is an EVM-compatible Layer-2 using Bitcoin as its finality anchor. It even plans to leverage BitVM to enable Turing-complete contracts secured by Bitcoin.

Two years after the inscription frenzy, can BTCFi lead another bull run in the Bitcoin ecosystem?

Merlin’s TVL currently exceeds that of many ETH Layer-2s, such as ZkSync, Linea, and Scroll. Source: Merlin

Meanwhile, the Babylon protocol introduced Bitcoin staking to secure other chains, attracting tens of thousands of BTC. By late 2024, Babylon had staked over 57,000 BTC (approximately $6 billion), ranking it among the top DeFi protocols by TVL. Merlin, once the highest-TVL Bitcoin Layer-2, reached approximately $3.9 billion in TVL within 50 days of launch, significantly expanding BTCFi’s reach.

These upgrades and new layers combined solve many early obstacles, allowing Bitcoin to modularly support tokens, smart contracts, and cross-chain interactions.

From Ordinals to BRC-20

Two years after the inscription frenzy, can BTCFi lead another bull run in the Bitcoin ecosystem?

2023 was a breakout year for Ordinals and BRC-20 tokens. Source: Dune @dataalways

Over the past two years, demand for more expressive uses of Bitcoin has grown noticeably. A prime example is the 2023 surge in Ordinals and BRC-20 tokens. Users began inscribing assets and NFTs on satoshis (sats), driving a spike in on-chain activity.

By late 2023, over 52.8 million Ordinal inscriptions had been created, growing to approximately 69.7 million by late 2024. Meanwhile, miners collected hundreds of millions in fees—exceeding 6,900 BTC (approximately $405 million) by Q3 2024.

This frenzy demonstrated users’ willingness to leverage Bitcoin’s block space for more than just holding or payments, revealing demand for Bitcoin NFTs, tokens, and DeFi applications.

The Ordinals protocol fundamentally enabled Bitcoin to host these new asset types, while the BRC-20 standard provided a framework for tokenization. Though technically distinct from Ethereum’s ERC-20, it serves a similar role in expanding Bitcoin’s utility.

All these advancements form a tech stack that did not exist just a few years ago. The Bitcoin ecosystem is now ready to build a complete DeFi infrastructure around its core asset.

In summary, these catalysts have matured BTCFi, and this trend is likely to accelerate in the coming years.