A More Than $1T Bitcoin DeFi Opportunity

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As a Bitcoin analyst, I’ve observed that while Bitcoin paved the way for cryptocurrencies and blockchain technology, its functionalities have been relatively limited compared to Ethereum, Solana, and other emerging platforms when it comes to smart contracts and decentralized finance (DeFi). However, this landscape is set to transform with the advent of Bitcoin Layers, meta-protocols, sidechains, layer 2 solutions, and other innovations under development on the Bitcoin blockchain. These advancements will bring about faster transactions, lending services, enhanced fungible and non-fungible token capabilities, decentralized exchanges, GameFi, SocialFi, and numerous other applications. By integrating these layers, Bitcoin holders will be able to augment the potential of their assets within a protocol-driven decentralized financial system. The defining characteristic setting Bitcoin DeFi apart from its counterparts lies in the underlying asset (native token) itself. While Ethereum, Solana, and other next-gen blockchains compete on technological merits, Bitcoin DeFi is solely devoted to maximizing the productivity of Bitcoin, establishing a unique position for this ecosystem.

The rationale behind generating value through a Bitcoin-led decentralized financial structure rests on three key suppositions:

There’s already significant interest and demand for the Bitcoin blockchain serving as a foundation for various tokenized assets. The market value for Bitcoin-based non-fungible tokens, known as Ordinals, surged from under $100 million to over $1.5 billion within just half a year.

Despite the substantial growth achieved so far, the greatest potential for Bitcoin’s decentralized finance system lies ahead. The majority of Bitcoin’s market value in its decentralized finance ecosystem will come from fungible tokens. These tokens will enhance Bitcoin’s productivity as an asset through yield-generating instruments and decentralized financial systems via protocols and layer 2 solutions. Compared to Ethereum, Solana, and other chains, the value of fungible tokens on Bitcoin is currently insignificant. We are only at the beginning of exploring programmable functionality on the Bitcoin blockchain.

In January 2023, the pioneering non-fungible token standard for Bitcoin, named Ordinals, made its debut. In comparison, Bitcoin’s primary fungible token standards, BRC20s and Runes, were introduced in March 2023 and April 2024, respectively. Despite these recent introductions, more features are necessary to establish a strong decentralized finance infrastructure on Bitcoin.

Additional functionality is being introduced to Bitcoin in two ways:

The Bitcoin finance ecosystem, which operates decentralized financial services, is currently in its infancy but shows promising signs of expansion based on increasing developer and DeFi engagement. In 2023, approximately 40% of Bitcoin’s open-source developers concentrated their efforts on Layer 2 solutions and scaling techniques. Subsequently, the total value locked (TVL) within the ecosystem surged more than sixfold from $492 million to over $2.9 billion in Q1 2024. With these early developments and considering the growth experienced by other similar ecosystems, we anticipate that the Bitcoin DeFi sector could generate over $1 trillion in value within the next five to ten years.

All investments involve risk, including the loss of principal.

As a researcher studying investments in digital assets, I cannot overlook the unique risks and factors that distinguish this asset class from traditional investments. Some of these risks include, but are not limited to:

1. The emerging technology behind Digital Assets is still young and developing rapidly, but it comes with its own set of challenges.

This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Prospective investors should always consult a qualified financial professional for personalized advice or investment recommendations tailored to their specific goals, individual situation, and risk tolerance. Views expressed are those of the author and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and are subject to change. The information is based on current market conditions, which will fluctuate and may be superseded by subsequent market events. References to specific securities, asset classes and financial markets are for illustrative purposes only and should not be interpreted as recommendations.

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.