Key Takeaways

• BTCfi tokens are down 23.4% in 2024, but the ecosystem’s TVL has increased over 100%.
• Three main factors are slowing BTCfi adoption: market distractions, user experience issues, and overall crypto market conditions.

The tokens from the Bitcoin decentralized finance (BTCfi) sector are down 23.4% on average in 2024, according to data from Artemis. This contrasts with the hype shared by investors that the Bitcoin decentralized finance (BTCfi) ecosystem would rise this year. However, Charlie Hu, the co-founder of layer-2 blockchain Bitlayer, highlights that this narrative is far from dead and lists three reasons why BTCfi is lagging behind.

“When BRC-20 came out, the market had almost zero hype as a whole. The Web3 space was in a bear market, and there weren’t too many things to talk about in the deep bear when trading volume was low. Compared to now, we have other things to draw people’s attention, so distraction is the first reason,” Hu explains.

BTCfi is a relatively new ecosystem that consists of blockchains created on top of Bitcoin’s blockchain, which serve as base layers for decentralized applications. The total value locked (TVL) of this ecosystem is up over 100% in 2024, according to data aggregator DefiLlama. However, Hu mentions that since BTCfi is something new, its user experience is still not optimized. This creates confusion, which results in liquidity fragmentation, and this is the second reason why BTCfi still hasn’t taken off the ground. 

“I think there’s a couple of things we still need to educate the market. There are a lot of people who still haven’t gotten familiar with how to bridge assets from Bitcoin layer-1 to layer-2. Now, you are moving out of Bitcoin layer-1, but what are the use cases that actually make sense?”

Therefore, by solving the user familiarity with the Bitcoin layer-2 applications, Hu believes that a “big wave of liquidity,” and points out that protocols such as Bitlayer have a key role in this process. 

“Bitlayer is one of the first destination chains among all these liquidity protocols. We try to bridge all those programmable Bitcoins [wrapped tokens] into our ecosystem and use that liquidity to support all the DeFi protocols because you can’t do much with them without liquidity.”

The third reason is related to the crypto market as a whole since prices and trading volumes have been falling since March. Consequently, the BTCfi narrative needs the return of on-chain activity to take off, and Bitlayer’s co-founder thinks this is “not that far away.”An underlying scalability problemThe implementation of layer-2 blockchains helps to solve the scalability issue, but just until the second page. Taking Ethereum as an example, the introduction of dedicated block space within blocks, called “blobs”, was necessary to handle the growing amount of different layer-2 chains created on top of its infrastructure.As the number of layer-2 blockchains created on Bitcoin also rises, it’s only natural that this ecosystem faces the same problem. Yet, Charlie Hu isn’t worried about it, mentioning developments made on this front.

“We’re so early at the infrastructure level. A few teams are trying to create zero-knowledge proofs on Bitcoin, and we believe ZK-snarks have more cost benefits for scalability. Whatever you want to inscribe on the Merkle tree and pass on Bitcoin’s block is expensive, so it’s important to have a cost cost-effective way to make the state transition and verify it on Bitcoin,” shares Hu.

Moreover, Bitlayer’s co-founder also mentions the ongoing plan to introduce the OP_CAT code on Bitcoin’s blockchain, which would facilitate data interaction on the network. OP_CAT is an operation code disabled by Satoshi Nakamoto in 2010 to avoid potential vulnerability exploits while the Bitcoin blockchain was still nascent. However, the idea was brought back by the group known as Taproot Wizards.The introduction of OP_CAT could significantly improve the ability to create applications using Bitcoin as an infrastructure and is also highlighted by Hu as a way to boost scalability. Nevertheless, this is not a goal for the current bull cycle.

“In this cycle, the goal is unlocking the existing Bitcoin liquidity, which has not been a yield-bearing asset in the last 15 years, sitting in cold wallets doing nothing, to now become programmable money.”

Why not use Ethereum instead?A common feature of all layer-2 blockchains built on Bitcoin is compatibility with the Ethereum Virtual Machine (EVM). This means that the code of Ethereum-native decentralized applications, such as Aave or Uniswap, can be replicated on top of these layer-2 networks.As a result, users might wonder why to build an ecosystem on top of Bitcoin instead of maintaining the current landscape of bridging Bitcoin to Ethereum-native applications. Hu explains that, despite Ethereum being an important infrastructure for Web3, Bitcoin offers different values and shows greater sustainability in the long term.

“If we look at the long term, which ecosystem can survive over the next one or two decades, we believe proof of work is still one of the best consensus for a decentralized network, for a public chain. If we pick any public chain that can survive with sound assets still on the chain, that’s definitely Bitcoin.”

Furthermore, Bitlayer’s co-founder adds that Bitcoin presents itself as a more decentralized ground to build a DeFi ecosystem, resulting in more secure assets. Bringing battle-tested Ethereum applications to Bitcoin layer-2 blockchains then makes sense to Hu.

“Asset security is the most important thing in terms of decentralized finance and so on. I think the things happening at Ethereum are great, but compared to Bitcoin, it’s just a different level of value, a different level of variety.”