Why Bitcoin DeFi Protocols Are Seeing Impressive Growth As BTC Soars

The rising price of Bitcoin (BTC) is having a major impact on Bitcoin decentralized finance (DeFi). Data from DefiLIama shows Bitcoin-based DeFi protocols’ total value locked (TVL) went from $304.66 million on Jan 1, 2024, to a whopping $7.117 billion at the time of writing.

The recent surge in Bitcoin DeFi—often referred to as BTCFi—is also likely due to institutional inflows, new protocol launches, liquid restaking, Bitcoin-backed loans, yield, and more.

Rena Shah, COO of Bitcoin DeFi ecosystem Trust Machines, told Cryptonews that institutions are finally waking up to the notion that Bitcoin is growing at a faster rate.

As a result, the Bitcoin layer-2 ecosystem Stacks recently reported 5,000 sBTC (a 1:1 Bitcoin-backed asset that allows BTC DeFi) bridged in a matter of hours.

sBTC Cap-3: Full.

We reached the 5,000 sBTC cap in less than 2.5 hours.

BTCFI is inevitable. pic.twitter.com/iz08KX4ltA

Shah added that the total loan value across the Stacks ecosystem has increased with Bitcoin price appreciation.

As Bitcoin is recognized as a form of collateral, Shah believes that institutions will also begin to seek a BTCFi strategy, with many more to follow suit this year.

“When everyday users see BTC hit new all-time highs, it creates an opportunity for a second step—Bitcoin DeFi,” Shah said. “The builders who prepared for this moment will have the best opportunity to introduce new users to untapping the full potential of their Bitcoin.”

Ben Sanders, chief growth officer at RootstockLabs, also believes this will be the case. Sanders told Cryptonews that in the coming months there will likely be more crypto exchanges and consumer finance apps integrating Bitcoin layers like Rootstock to give users access to BTCFi.

“As more institutions build Bitcoin stockpiles, it’s also inevitable that more of them will be looking at ways to put their BTC to work in truly Bitcoin-aligned blockchains like Rootstock,” Sanders stated.

Sanders further shared that the usage of Rootstock as Bitcoin’s DeFi layer surged in activity.

“This is reflected in Rootstock hitting new all-time highs in terms of Total Value Locked and active addresses interacting with the network,” he said.

Major protocols like UST0, Solv, Midas, and LayerZero have also recently added support for Rootstock, further sparking the current BTCFi change.

It’s go time. BTCFi, for real. https://t.co/MGazo28xme

Rich Evans, managing director at crypto exchange CEX.IO, told Cryptonews that he believes one of the most promising developments is the introduction of stablecoins to Bitcoin DeFi.

Reimagining Stablecoins on Bitcoin: The Future of DeFi@coinbase just released their quarterly report. One of the major findings? The continued staying power of stablecoins.

Stablecoins broke out in 2024, with on-chain volumes surging to record highs.

And while ETH has… pic.twitter.com/GJqPF2ywnL

“Tether aimed to launch USDT on the Lightning Network via Taproot Assets, while UST0 was recently added to Rootstock,” Evans said. “Stablecoins are indeed the backbone of DeFi activity across other chains. Bitcoin has long lacked a dominant stable asset, so stablecoin expansion could be a game-changer for Bitcoin DeFi.”

This already appears to be the case. Sanders pointed out that two of the biggest use cases on Rootstock currently are Bitcoin borrowing and lending.

“We’re seeing both retail users and institutions harnessing Rootstock to generate yield from their BTC holdings, or borrow stablecoins against them. I’ve heard some incredible stories about people financing home renovations and businesses unlocking capital to expand into new markets,” he said.

Willem Schroé, CEO and co-founder of Bitcoin layer-2 Botanix Labs, told Cryptonews that Botanix is also experiencing steady growth due to these factors.

“As capital flows back into the ecosystem, we’re seeing a surge in interest around Bitcoin-native DeFi, particularly in lending, restaking, and generating yield on BTC,” Schroé said.

He added that Botanix has seen steady growth in new users and applications deploying to enable lending, decentralized exchange activity, and Bitcoin Yield.

While BTCFi is on the rise, the sector may also soon be entering a new growth stage. According to Shah, cross-chain opportunity is the next big opportunity for Bitcoin DeFi.

“Even if you have assets on another layer-1, Stacks is creating bridging opportunities so users can access the best in DeFi, while never having to sell their BTC,” she said.

Evans also pointed out that technical innovations like BitVM2 and recently proposed BitVM3 are setting the stage for more flexible and scalable smart contract functionality on Bitcoin.

“BitVM3, in particular, promises cheaper and more efficient Bitcoin-native bridges, which could reduce reliance on wrapped assets and enable more secure cross-chain activity. These tools could open the door to building Ethereum-style applications on Bitcoin, without compromising Bitcoin’s core principles,” he said.

Although BTCFi has enormous potential, Evans explained that Bitcoin DeFi growth has still been relatively slow.

“While Bitcoin’s price has reached a new all-time high—showing roughly a 28% YTD increase—Bitcoin DeFi hasn’t kept the same pace, growing by only about 8% and still sitting below its previous peak,” he said.

Given this, Evans noted that the recent Bitcoin price rally has sparked renewed interest and momentum, but so far, hasn’t translated into a major wave of activity in BTCFi.

This may be due to a number of challenges. For instance, Schroé believes that in order for Bitcoin DeFi to thrive, long-time holders need to reframe their relationship with the asset.

“For years, the dominant narrative was to ‘buy and hold.’ That mindset worked in the early phases, but for Bitcoin to reach its full potential, it needs to be used. Yield opportunities, for example, can only exist if more BTC enters the ecosystem,” he said.

Additionally, Schroé remarked that security and education are still problematic when it comes to BTCFi.

“Many Bitcoiners are cautious about using new tools, and this is rightfully so,” he stated.

Echoing this, Sanders commented that security has become paramount in order for adoption to thrive.

“It’s critical that Bitcoin treasury companies, infrastructure providers, custodians, and teams building decentralized protocols are aware of the risks and put the right measures and safeguards in place to protect their users moving forward,” he said.

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