Bitcoin's dormant capital has finally awakened.

Introduction

Most people buy Bitcoin today and then never use it.

They hold Bitcoin, calling it digital gold, and proudly proclaim that they are "looking to invest for the long term." There's nothing wrong with that; after all, Bitcoin has indeed earned such a reputation.

But such a massive holding creates one of the largest pools of idle funds in the crypto ecosystem today. Approximately 61% of Bitcoin hasn't been moved in over a year, and nearly 14% hasn't been moved in over a decade. Despite Bitcoin's market capitalization exceeding $2 trillion, only 0.8% of Bitcoin is currently involved in any form of decentralized finance (DeFi) activity.

In other words, Bitcoin is the most valuable asset in the cryptocurrency market, but also the least used.

Now, let's compare these to other aspects of cryptocurrency: Stablecoins facilitate large-scale global payment settlements. Ethereum powers smart contracts, decentralized autonomous organizations (DAOs), wallets, and the entire economic system. Layer 2 networks (L2) run a complete ecosystem encompassing lending, trading, gaming, and thousands of applications. Meanwhile, Bitcoin, as the largest, most secure, and most widely held asset, fails to achieve any of these. In contrast, it holds trillions of dollars in idle value, generating neither yield nor liquidity, and contributing nothing to the overall economy except for security and price appreciation. As people tried to solve this problem, various solutions introduced new problems. Wrapped BTC, while popular at one time, required trusting custodians. Cross-chain bridges allowed you to transfer Bitcoin to another chain, but this also introduced security risks. Bitcoin holders wanted to use their Bitcoin, but the infrastructure never provided a secure and native way to do so. But this situation has finally changed. In the past few years, a completely new ecosystem has been forming around Bitcoin, attempting to unleash all this "dormant capital" without forcing people to wrap their Bitcoin, trust intermediaries, or transfer it to the custody of others. Let's find out! Why has Bitcoin come to this point? Bitcoin becoming a passive asset is no accident. Its entire architecture has evolved in this direction. Long before decentralized finance (DeFi) emerged, Bitcoin made a clear trade-off: security above all else. This decision shaped its culture, its developer environment, and ultimately influenced the types of economic activity that flourished around it. The result was an extremely immutable blockchain, which, while facilitating fund transfers, severely hampered innovation. Most people only see the surface symptoms: low liquidity, high dormancy rates, and Bitcoin's monopolistic position in the blockchain space, but the root of the problem runs much deeper. The first limitation is Bitcoin's scripted model. It deliberately avoids complexity, thus maintaining predictability and making it difficult to exploit. This means no general-purpose computing power, no native financial logic, and no on-chain automation. Ethereum, Solana, and all modern L1 blockchains are built on the assumption that developers will develop them. Bitcoin, on the other hand, is built on the assumption that developers shouldn't develop it. The second limitation is Bitcoin's upgrade path. Any change, even a minor functional alteration, requires coordination and consistency across the entire ecosystem. Hard forks are virtually impossible at the societal level, while soft forks can take years. Therefore, while other cryptocurrencies iterate and update their entire design paradigms (e.g., automated market makers, account abstraction, secondary networks, modular blockchains), Bitcoin has almost stagnated. It became the settlement layer, but never truly became the execution layer. The third limitation lies at the cultural level. Bitcoin's developer ecosystem is inherently conservative. This conservatism protects the network but also stifles experimental spirit. Any proposal that introduces complexity is met with skepticism. This mindset protects the underlying infrastructure but also ensures that new financial infrastructure cannot emerge on Bitcoin as readily as it does elsewhere.

Furthermore, there is a structural limitation: Bitcoin's value growth **outpaced** the growth of its surrounding infrastructure. Ethereum had smart contracts from the beginning; Solana adopted a high-throughput design from the outset. Bitcoin's value had already inflated into an asset class before its "usable applications" expanded.

Federated systems attempt to alleviate this trust burden by distributing control among multiple entities. Unlike a single custodian, Bitcoin, backed by an asset, is collectively held by a group. This is an improvement, but far from eliminating trust entirely. Users still rely on a coordinated set of operators, and the strength of the anchoring effect depends solely on their incentives and trustworthiness.

• Bitcoin-backed rollup

• Trust-minimized cross-chain bridges

• Programmable Bitcoin vaults

• Off-chain computation, on-chain verification

2. Upgrades like Taproot have quietly expanded the scope of Bitcoin's applications:Taproot was not initially promoted as a DeFi upgrade, but it provides the necessary cryptographic foundation for BTCFi: lower-cost multi-signature, more flexible key path spending, and better privacy protection. More importantly, it enables architectures such as Taproot Assets (used for stablecoins) and more advanced vault systems.

3. The Emergence of Bitcoin Native Assets:With the emergence of Taproot and newer proof systems, projects began launching assets based on or with security derived from Bitcoin, without needing to encapsulate BTC. Combining Taproot, Schnorr signatures, and new off-chain verification technologies, developers can now build assets on top of Bitcoin itself, or directly inherit assets with Bitcoin's security. This includes the following: Taproot Assets (Tether mints USDT directly on the Bitcoin/Lightning Network stack) This does not rely on Ethereum, Solana, or... Cosmos's Bitcoin-Native Stablecoin: A Synthetic Asset Backed by BTC Without Custody Pegs. Previously Unfeasible Programmable Vaults and Multi-Signature Structures. For the first time, Bitcoin-issued assets can be used without leaving Bitcoin. Furthermore, Bitcoin-issued assets do not require removing Bitcoin from self-custody. 4. Bitcoin Yields Become Possible: Bitcoin itself has never yielded. Historically, the only way to "earn" yield on Bitcoin was by packaging it, sending it to a custodian, lending it on a centralized platform, or bridging it to other blockchains. All of these methods were risky and completely deviated from Bitcoin's security model. BTCFi introduces a completely new way to yield Bitcoin. How does it work? By creating systems that allow Bitcoin to contribute to network security, three types emerge: Bitcoin Staking (for other networks): BTC can now secure PoS networks or application chains without leaving the Bitcoin chain. Bitcoin Restaking: Similar to Ethereum's ability to secure multiple protocols through shared security mechanisms, Bitcoin can now be used as collateral to support external chains, oracles, DA layers, etc. Lightning Network-based Yield Systems: Protocols like Stroom allow BTC used in Lightning Network channels to earn yield by providing liquidity, again without needing to be encapsulated or rely on custodian bridges. Before BTCFi, none of this would have been possible. 5. Bitcoin finally has an execution layer: Recent advances in off-chain verification allow Bitcoin to enforce computations it wouldn't otherwise perform. This allows developers to build Rollups, cross-chain bridges, and contract systems around Bitcoin that rely on Bitcoin for verification rather than computation. The base layer remains unchanged, but the outer layer can now run logic and prove its correctness to Bitcoin when needed. This gives Bitcoin unprecedented capabilities: enabling applications, contract-like behavior, and new financial infrastructure without transferring Bitcoin to a custodian system or rewriting the protocol. This isn't about "smart contracts on Bitcoin," but rather a verification model that maintains Bitcoin's simplicity while allowing for more complex systems to exist around it.

BTCFiOverview：What is actually being built

With the maturation of underlying verification and portability tools, the Bitcoin ecosystem has finally begun to expand in a way that no longer relies on custodians or encapsulated assets.

Protocol Layer: As asset liquidity becomes more secure, the next phase of innovation focuses on how Bitcoin can play a role in these environments. Yield markets and security markets have emerged in this context. For much of Bitcoin's history, earning any yield with Bitcoin required depositing it with an exchange or encapsulating it in another blockchain. Today, staking and re-staking models allow Bitcoin to contribute to the security of external networks without escaping its control. Yields do not come from credit risk or re-collateralization, but from the economic value of maintaining consensus or verifying computation results.

Meanwhile, native Bitcoin assets are emerging. Instead of simply encapsulating or migrating Bitcoin to Ethereum, developers are using technologies like Taproot, Schnorr signatures, and off-chain verification to issue assets on Bitcoin or anchor assets to Bitcoin's security mechanisms. This includes stablecoins minted directly on the Bitcoin infrastructure, synthetic assets independent of custodians, and vault structures that allow for more flexible spending conditions. All of these expand Bitcoin's utility without introducing it into a different trust model. These developments are interesting on their own. Together, they mark the birth of the first coherent Bitcoin financial system. Computation can be performed off-chain and enforced on Bitcoin. Bitcoin can be securely transferred without custody. It can earn yields without leaving its own custody. Assets can exist natively, without relying on the security of other ecosystems. Each development addresses a different part of the liquidity trap that has plagued Bitcoin for over a decade. My View I think the simplest way to look at BTCFi is this: Bitcoin finally has an ecosystem commensurate with its scale. For years, people have tried to build the Bitcoin ecosystem using tools that were not originally capable of supporting trillions of dollars in liquidity. No serious Bitcoin holder would stake their Bitcoin on custodial anchors, unverified cross-chain bridges, or makeshift sidechains, and they certainly didn't. This wave is different because it embraces Bitcoin entirely according to its own rules. The security model remains intact, self-custody remains intact, and the surrounding system is finally robust enough to support meaningful capital flows. Even if only a small fraction of dormant Bitcoin begins to circulate because the infrastructure is finally worthy of them, the impact will be profound. This new wave differs from previous ones because it addresses the challenges in Bitcoin's own way. The security model remains unchanged, the self-custody mechanism remains intact, and the system surrounding Bitcoin is finally robust enough to support substantial capital flows. Even if only a small fraction of dormant Bitcoin begins to circulate because the infrastructure is finally mature, its impact will be significant.