Bitcoin’s Role in Decentralized Finance (DeFi)

Bitcoin’s (BTC) role in decentralized finance (DeFi) is growing as the world’s largest cryptocurrency evolves beyond being a mere store of value, according to a Binance Research report released Thursday.

The report highlights that the Bitcoin network is “evolving into a broader decentralized finance ecosystem” with the advent of Bitcoin DeFi. Analyst Moulik Nagesh noted that this sector “unlocks bitcoin’s capital efficiency” through financial applications focused on lending, staking, stablecoins, and decentralized exchanges (DEXs).

DeFi is a term that encompasses lending, trading, and other financial activities conducted on a blockchain without requiring traditional intermediaries.

Currently, Binance reports that about 0.8% of the total bitcoin supply is utilized in DeFi, indicating a significant “untapped opportunity.” Last year, Julian Love from Franklin Templeton Digital Assets suggested that this opportunity could reach as much as $1 trillion.

The report emphasized that Bitcoin requires layer 2 solutions, as its network lacks “native programmability,” unlike smart contract-based layer 1 blockchains. A layer 1 network serves as the primary infrastructure of a blockchain, while layer 2 comprises off-chain systems or separate blockchains built on top of layer 1s.

Despite some advancements in Bitcoin layer-2 networks, greater adoption and liquidity incentives are necessary for effective scalability, according to Binance Research.

The report also pointed out potential long-term sustainability challenges for the network’s security model, as block rewards will continue to halve, diminishing miner incentives.

The future of Bitcoin DeFi hinges on effective execution, the ongoing development of layer-2 solutions, and aligning with Bitcoin’s unique value proposition.

Read more: Ethereum L2 Starknet Seeks ‘Bitcoin’s DeFi Take-Off Moment’ With BTC Wallet Xverse