Bitcoin-based decentralized finance (DeFi), often referred to as BTCFi, is experiencing significant growth but still faces challenges.
According to DefiLlama data, Bitcoin-based (BTC) DeFi protocols’ total value locked (TVL) went from $304.66 million on Jan. 1, 2024, to $6.5 billion by Dec. 31, 2024. As of publication, DefiLlama data shows that BTCFi has a TVL of $7.05 billion.
This translates to an increase of more than 22 times. A report shared by Bitcoin smart contract layer Arch Network suggests that “this surge was fueled by new protocol launches, emerging token standards, institutional inflows, a major price rally pushing BTC to an all-time high, and the rise of liquid restaking.”
The survey results released in the report show that despite some solutions already on the market, 36% of the respondents do not engage with BTCFi due to a lack of trust. One-quarter avoid interactions with BTCFi due to risk and fear of losses. Most (60%) view smart contract exploits as the top security risk.
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The survey comprised a relatively small sample size of 125 respondents. It included builders, investors and early users, with participation from VoltFi, DPI Capital, Arkova, Ordbit and other Bitcoin-based DeFi teams.
BTCFi development’s hardships
Developing on Bitcoin is still perceived as harder than developing on altcoins like Ethereum. According to the survey results, 44% of the users who chose BTCFi were motivated by its purported security and decentralization.
Still, 43% argued that Bitcoin’s limited smart-contract support is the biggest challenge of building on the protocol. About 45% of the respondents said better infrastructure was needed to scale BTCFi, 43% pointed to wider Bitcoin layer-2 adoption for scalability and 34% cited liquidity.
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How BTCFi experts use Bitcoin
Among respondents, 36% hold their Bitcoin in cold storage. Furthermore, 33% of the people trade on centralized exchanges and 31% use Bitcoin for payments.
About 29% of users utilize Bitcoin as collateral in DeFi protocols, and 22% bridge their Bitcoin to other blockchains as wrapped tokens. Wrapped Bitcoin is a tokenized version of BTC representing a native Bitcoin deposit in custody.
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