BTCFi: Unlocking the Financial Potential of Bitcoin

Bitcoin, as an asset base of over 1 trillion USD, is largely sitting idle. It is estimated that 99% of the BTC market value is "static," meaning that almost all Bitcoin is stored in wallets and has not generated any on-chain earnings. On-chain data shows that over 14 million BTC have not been used for a long time.

This contrasts sharply with Ethereum, where a large amount of ETH is actively deployed in DeFi and staking. For example, the liquid staking protocol on Ethereum has locked over 14.37 million ETH(, approximately 56 billion USD), converting ETH into interest-bearing assets and driving a vibrant on-chain economy.

BTCFi('s goal is to activate these dormant capitals in Bitcoin DeFi). It aims to transform Bitcoin from a passive asset into a productive asset, allowing holders to earn returns through BTC or use it for DeFi applications. Essentially, BTCFi seeks to realize the DeFi transformation for Bitcoin that Ethereum has brought: converting static assets into sources of yield and becoming a cornerstone for further innovation.

Institutional demand may be the strongest catalyst driving the growth of BTCFi. By the end of 2023 and into 2024, several large asset management companies are expected to launch spot Bitcoin ETFs, bringing BTC into mainstream portfolios. Institutions have viewed Bitcoin as a strategic reserve asset, but they are also sensitive to yields. In traditional finance, capital is never idle, whereas Bitcoin has only recently begun to generate any yields.

BTCFi is changing this. Institutions are now starting to explore ways to borrow, stake, or use Bitcoin as collateral to unlock yields. The annual return rate of BTC at 3%-5% is highly valuable when managing billions of dollars in funds. Some decentralized protocols even offer annual yields of 10%-20%, making this opportunity even more attractive.

The BTCFi ecosystem is rapidly developing, launching new products and frameworks specifically designed for institutions:

1. Compliant Custody and Liquidity Packaging: Some companies support participation in DeFi under strict custody compliance. Emerging solutions such as liquidity custody tokens (LCTs) enable institutions to hold BTC under compliant custody while deploying it on-chain to earn yields.

2. ETF and Yield Integration Products: Europe has launched interest-bearing Bitcoin ETPs. Some products stake BTC in Bitcoin Layer-2, with an annualized yield of approximately 5.6%. Some institutions are beginning to explore BTC-linked structured notes, dual yield products, and basis trading strategies.

3. Protocol Maturity and Institutional Trust: The total locked value of some BTCFi protocols has exceeded billions of dollars, passing security audits and advancing compliance. Many protocols have also hired senior professionals from traditional finance as advisors, prioritizing risk management.

The development of BTCFi benefits from breakthroughs in three aspects: the technological upgrades of the Bitcoin ecosystem, the market demand growth brought by the improvement of infrastructure, and the institutional interest driven by clearer regulations.

The latest upgrades to the Bitcoin protocol and ecosystem lay the foundation for more complex financial applications. For example, the Taproot upgrade in 2021 enhanced Bitcoin's privacy, scalability, and programmability. Concepts like BitVM are expected to enable Ethereum-like smart contracts on Bitcoin. At the same time, a number of Bitcoin-native Layer-2 networks and sidechains have emerged, such as Stacks, Rootstock, Merlin Chain, and BOB Rollup, introducing smart contract functionality to the Bitcoin ecosystem.

In the past two years, the market's demand for more expressive use cases of Bitcoin has significantly increased, such as the explosion of Ordinals and BRC-20 tokens in 2023. By the end of 2024, approximately 69.7 million Ordinals inscriptions have been created. This craze proves that users are willing to utilize Bitcoin's block space for more purposes, rather than just simply holding or making payments.

The goal of BTCFi is to transform Bitcoin from a passive store of value into a financial asset actively deployed in decentralized finance. Its lifecycle typically begins with BTC holders transferring assets to a bridging or custodian party, where the original BTC is locked, and a 1:1 tokenized version is issued. This wrapped BTC enters the asset layer of the ecosystem, enabling it to integrate with smart contracts and DeFi protocols.

During the entire process, BTC holders retain economic exposure to Bitcoin price fluctuations while earning yields from DeFi protocols. These positions are reversible: users can close their positions at any time, redeem wrapped BTC, and retrieve the original Bitcoin ( minus fees or yields ).

The liquidity is supported by diverse profit models. Lending platforms generate revenue by initiating and utilizing fees, DEX charges liquidity fees for each transaction, and staking and bridging services take commissions from the rewards earned. Some protocols use native tokens to subsidize usage, guide activities, or manage the treasury. Custodial products typically charge an annual fee for the assets held or managed. In addition, spread capture is also an important source of income.

These models collectively demonstrate how the BTCFi protocol activates idle Bitcoin while establishing a sustainable income base. As more BTC enters this layered system, it not only circulates but also compounds, generating yields and supporting a Bitcoin-centered parallel economy.