Will 2025 become the year of Bitcoin DeFi?

As a seasoned crypto investor with over a decade of experience under my belt, I can confidently say that the future of Bitcoin-native decentralized finance (DeFi) is undeniably promising. Having witnessed the evolution and maturation of various blockchain projects, I’ve learned to spot trends early and seize opportunities when they present themselves.

The accelerating institutional adoption of Bitcoin (BTC), which broke the $100,000 mark in 2024, has ignited a renewed interest in crypto from institutions and regulators alike. This surge not only reinvigorated the entire crypto sector but also opened up new avenues for yield generation through Bitcoin staking and other DeFi use cases.

The growth potential for BTC staking is particularly intriguing, with a total addressable market estimated in the hundreds of billions of dollars. As someone who has seen numerous projects come and go, I can attest that everything seems to align perfectly for this market to take off. Even a 3% yield, compared to other investment options, sounds attractive enough to draw significant interest from both institutional and retail investors.

Moreover, the emergence of staked Bitcoin ETFs in Europe could serve as a catalyst for further institutional adoption in 2025. I’ve always been a firm believer in diversifying one’s portfolio, so having an ETF option that allows me to participate in BTC staking without directly holding the asset is a welcome development.

The maturing Bitcoin DeFi ecosystem will also pave the way for novel DeFi strategies, as more complex use cases emerge across the risk curve with Bitcoin as a collateral asset. As a long-time observer of the crypto market, I’m excited to see how these innovative strategies unfold and contribute to cementing Bitcoin’s status as the world’s reserve currency.

In closing, let me share a little joke that I find amusing in this context: As they say, the only constant in life is change. But in crypto, even change can be staked for yield!

2025 is likely to see a surge of interest in Bitcoin-native decentralized finance (DeFi), with increased adoption by institutions and the continued growth of its DeFi ecosystem, as predicted by several key figures within the crypto industry.

The opportunity for Bitcoin staking is exceptionally promising, boasting a potential market size in the hundreds of billions, as suggested by two executives. As per Staking Rewards, the value locked in Bitcoin staking was approximately $5.5 billion as of December 30th.

According to Matt Hougan, the chief researcher at Bitwise, it appears that conditions are favorable for Bitcoin staking to become a substantial market sector.

As a seasoned investor who has navigated through various market cycles and witnessed the rise of cryptocurrencies like Bitcoin, I can confidently say that there is a significant demand for Bitcoin yield. Even in today’s economic climate, where returns on traditional investments are dismal, a 3% yield from Bitcoin seems quite attractive compared to other available options. My personal experience has taught me to always seek out opportunities with the potential for high returns, and Bitcoin appears to be one of those opportunities at the moment.

From my perspective as a crypto investor, Hougan’s estimation suggests that the Bitcoin staking market could be worth around $200 billion. Moreover, according to Alexei Zamyatin, the co-founder and CEO of Build on Bitcoin, the total value locked (TVL) in Bitcoin DeFi could potentially expand up to 300 times its current size.

Based on my extensive interactions with numerous large-scale Bitcoin DeFi users and investment funds, I can confidently say that there is a strong desire among them to utilize their Bitcoin holdings productively and earn yield. As someone who has been closely following the crypto market for years, this trend is particularly interesting, as it underscores the growing maturity of the industry and its increasing focus on generating returns. The fact that these institutions are looking to deploy their assets in DeFi is a testament to the potential of decentralized finance, and I believe we will see more and more of this activity as the ecosystem continues to evolve.

Institutional adoption

2024 marked the historic milestone where Bitcoin’s value exceeded $100,000 per coin for the first time. This significant increase was driven by massive investments totaling over $100 billion into Bitcoin spot Exchange-Traded Funds (ETFs) made by investors.

“Dean Tribble, CEO of Agoric, a layer-1 network, predicts that when Bitcoin hits its highest record price in the future (possibly 2025), it could reignite curiosity and involvement from both institutions and regulators in the world of cryptocurrency. This renewed interest is expected to energize the entire crypto market as well.

Certain protocols, such as the Bitcoin layer-2 scaling network Babylon and the EigenLayer protocol that leverages Wrapped Bitcoin (WBTC) for restaking on Ethereum, have gained institutional recognition according to Hougan. In simpler terms, these two platforms – Babylon for Bitcoin’s scalability and EigenLayer for Ethereum’s restaking with WBTC as collateral – have been deemed credible by large organizations.

“The tech seems reasonable, even from a high-level perspective,” Hougan noted.

By December 30th, the Total Value Locked (TVL) in Babylon and Eigenlayer has surpassed $5 billion and $15 billion, respectively, as per data from DefiLlama.

In simpler terms, staking Bitcoin means keeping Bitcoin as a guarantee to validate transactions on the Bitcoin Layer 2 network (Bitcoin L2s), and you receive compensation for this service. On the other hand, restaking refers to utilizing a token that has already been staked to provide security across multiple protocols at the same time.

Additionally, staked BTC ETFs could catalyze institutional interest in 2025, Hougan said.

In November, an asset management firm named Valour introduced a Bitcoin-staking Exchange Traded Fund (ETF) in Europe. This ETF stakes Bitcoins to a second layer platform called Core and currently offers a return of over 5.65% annually as per Valour’s website, up until Dec 30th. At present, staking for Bitcoin ETFs is not allowed in the United States.

Regarding whether staked BTC will be structured as an ETF in the U.S., I’m uncertain, but it will undoubtedly be so in Europe, according to Hougan.

Maturing DeFi ecosystem

Tokens that stand for claims on locked-up Bitcoin (BTC) are becoming increasingly popular, opening up intricate Decentralized Finance (DeFi) possibilities. As reported by Staking Rewards, the total value locked in these Bitcoin Liquid Staking Tokens (LSTs) currently exceeds $2.5 billion as of December 30th.

Certain Bitcoin Layer 2 solutions, like RSK, Merlin, and Stacks, currently support Bitcoin-native DeFi environments. This includes decentralized trading platforms, lending systems, and comprehensive services such as Sovryn. Notably, Merlin showcases a Bitcoin-native derivatives platform called Surf.

In the near future, diverse DeFi approaches will arise along the risk spectrum, utilizing Bitcoin as collateral. These strategies could range from straightforward buy-and-hold models involving yield-generating Bitcoin assets to more complex trades like basis swaps and options maneuvers, according to Jacob Phillips, co-founder and strategic head of Bitcoin staking protocol Lombard, speaking to CryptoMoon.

According to Phillips, the growing and refining decentralized finance (DeFi) system associated with Bitcoin could ultimately strengthen its position as the global standard currency.

According to Phillips, the interest rate at which Bitcoins are staked is set to function as the ‘risk-free rate,’ effectively replacing the rate of US Treasury bills and serving as a foundation for decentralized finance (DeFi) lending and borrowing activities.

2025-01-01 17:03

Institutional adoption

Maturing DeFi ecosystem

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