Bitcoin-Based DeFi Sees Remarkable Growth Amid Challenges

According to Cointelegraph, Bitcoin-based decentralized finance (DeFi), commonly known as BTCFi, is witnessing substantial growth, yet it continues to encounter significant challenges. Data from DefiLlama reveals that the total value locked (TVL) in Bitcoin-based DeFi protocols surged from $304.66 million on January 1, 2024, to $6.5 billion by December 31, 2024. As of now, the TVL stands at $7.05 billion, marking an increase of over 22 times within a year. A report by Bitcoin smart contract layer Arch Network attributes this growth to new protocol launches, emerging token standards, institutional investments, a major price rally pushing Bitcoin to an all-time high, and the rise of liquid restaking. Despite the impressive growth, a survey highlighted in the report indicates that trust issues remain a barrier for many potential users. Among the respondents, 36% refrain from engaging with BTCFi due to a lack of trust, while 25% avoid it due to perceived risks and fear of losses. A significant 60% of participants identified smart contract exploits as the primary security concern. The survey, which included 125 respondents such as builders, investors, and early users from teams like VoltFi, DPI Capital, Arkova, and Ordbit, underscores the ongoing challenges in the BTCFi space. Developing on Bitcoin is perceived as more challenging compared to altcoins like Ethereum. The survey results show that 44% of users are drawn to BTCFi for its security and decentralization. However, 43% of respondents cited Bitcoin's limited smart-contract support as a major hurdle. Additionally, 45% believe that improved infrastructure is necessary for BTCFi to scale, while 43% emphasize the need for broader adoption of Bitcoin layer-2 solutions for scalability, and 34% point to liquidity issues. In terms of Bitcoin usage among BTCFi experts, 36% of respondents hold their Bitcoin in cold storage, 33% trade on centralized exchanges, and 31% use Bitcoin for payments. Furthermore, 29% utilize Bitcoin as collateral in DeFi protocols, and 22% bridge their Bitcoin to other blockchains as wrapped tokens. Wrapped Bitcoin represents a tokenized version of BTC, backed by a native Bitcoin deposit held in custody. These insights reflect the diverse ways in which Bitcoin is being utilized within the DeFi ecosystem, despite the challenges that persist.