DeFi
Bitcoin DeFi is far from failing, its popularity is “not that far away”: Bitlayer co-founder
Key points to remember
- BTCfi tokens are down 23.4% in 2024, but the ecosystem’s TVL has increased by over 100%.
- There are three main factors slowing BTCfi adoption: market distractions, user experience issues, and general cryptocurrency market conditions.
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Decentralized finance tokens Bitcoin (BTCfi) are down 23.4% on average in 2024, according to data Artemis. This contrasts with the hype shared by investors that the Bitcoin decentralized finance (BTCfi) ecosystem would surge this year. However, Charlie Hu, the co-founder of layer-2 blockchain Bitlayer, emphasizes that this narrative is far from dead and lists three reasons why BTCfi is lagging.
“When the BRC-20 came out, there was almost no excitement in the market. The Web3 space was in a bear market, and there was not much to talk about during that period when trading volume was low. Compared to now, we have other things to attract people’s attention, so distraction is the first reason,” Hu explains.
BTCfi is a relatively new ecosystem consisting of blockchains built on the Bitcoin blockchain, which serve as base layers for decentralized applications. The total value locked (TVL) of this ecosystem has increased by more than 100% in 2024, according to to the data aggregator DefiLlama.
However, Hu mentions that BTCfi being something new, its user experience is still not optimized. This creates confusion, which leads to liquidity fragmentation, and this is the second reason why BTCfi has still not taken off.
“I think there are still some things we need to educate the market on. There are a lot of people who still don’t know how to bridge the gap between layer 1 assets and layer 2 of Bitcoin. Now you’re moving out of layer 1 of Bitcoin, but what are the use cases that actually make sense?”
Therefore, by solving user familiarity with Layer 2 Bitcoin applications, Hu believes that a “big wave of liquidity” will occur and emphasizes 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 are trying to connect all these programmable Bitcoins [wrapped tokens] in 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 cryptocurrency market as a whole, as prices and trading volumes have been declining since March. Therefore, the BTCfi narrative needs on-chain activity to return to take off, and the Bitlayer co-founder believes that this is “not that far away.”
An underlying scalability problem
Implementing layer 2 blockchains solves the scalability problem, but only up to the second page. Taking Ethereum as an example, the introduction of a dedicated block space within blocks, called “blobs,” was necessary to handle the growing number of different layer 2 chains created on top of its infrastructure.
As the number of layer 2 blockchains created on Bitcoin also increases, it is quite normal that this ecosystem faces the same problem. However, Charlie Hu is not worried about it, citing the developments made on this front.
“We are still at the very beginning of the infrastructure level. There are a few teams trying to build zero-knowledge proofs on Bitcoin, and we think ZK-snarks have more cost advantages in terms of scalability. Anything you want to write on the Merkle tree and transmit on the Bitcoin block is expensive, so it is important to have a cost-effective way to do the state transition and verify it on Bitcoin,” Hu shares.
The Bitlayer co-founder also discusses the ongoing project of introducing the OP_CAT code on the Bitcoin blockchain, which would facilitate the interaction of data on the network. OP_CAT is an operation code disabled by Satoshi Nakamoto in 2010 to prevent possible exploitation of vulnerabilities while the Bitcoin blockchain was still nascent. However, the idea was taken up by the group known as Taproot Wizards.
The introduction of OP_CAT could significantly improve the ability to build applications using Bitcoin as infrastructure and is also highlighted by Hu as a way to boost scalability. However, this is not a goal for the current bull cycle.
“In this cycle, the goal is to unlock the existing liquidity of Bitcoin, which has not been a yield-generating asset for 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 across these Layer 2 networks.
Users might therefore ask why build an ecosystem around Bitcoin instead of maintaining the current landscape that connects Bitcoin to Ethereum native applications. Hu explains that while Ethereum is an important infrastructure for Web3, Bitcoin offers different values and shows greater long-term sustainability.
“If we look long term, what ecosystem can survive in the next decade or two, we think proof of work is still one of the best consensus for a decentralized network, for a public chain. If we choose a public chain that can survive with solid assets still on the chain, it’s definitely Bitcoin.”
Additionally, the Bitlayer co-founder adds that Bitcoin presents itself as a more decentralized ground to build a DeFi ecosystem, which translates to safer assets. So it makes sense for Hu to integrate battle-tested Ethereum applications with Layer 2 Bitcoin blockchains.
“Security of assets is the most important thing in terms of decentralized finance and so on. I think what’s happening on Ethereum is great, but compared to Bitcoin, it’s just a different level of value, a different level of diversity.”
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