Bitcoin’s (BTC) role in decentralized finance (DeFi) is growing as the world’s largest cryptocurrency evolves from more than just a store of value, according to a report from Binance Research released on Thursday.
The Bitcoin network is “evolving into a broader decentralized finance ecosystem with the emergence of Bitcoin DeFi,” analyst Moulik Nagesh highlighted in the report.
This sector “unlocks bitcoin’s capital efficiency” through financial applications focused on lending, staking, stablecoins, and decentralized exchanges (DEXs), the report noted.
DeFi is an umbrella term used to describe lending, trading, and other financial activities executed on a blockchain, eliminating the need for traditional intermediaries.
Binance pointed out that currently, only approximately 0.8% of the total bitcoin supply is utilized in DeFi, which signifies a substantial “untapped opportunity.” Last year, Julian Love, a deal analyst at Franklin Templeton Digital Assets, estimated that this opportunity could be worth as much as $1 trillion.
The Binance Research report emphasizes that Bitcoin requires layer 2 solutions, as the network lacks “native programmability,” in contrast to smart contract-based layer 1s. A layer 1 network serves as the foundational layer or infrastructure of a blockchain, while Layer 2 refers to a set of off-chain systems or distinct blockchains developed atop layer 1s.
Despite some advancements in developing Bitcoin layer-2 networks, these platforms are in need of increased adoption and liquidity incentives to scale effectively, according to Binance Research.
Furthermore, the network’s security model faces “long-term sustainability challenges” as block rewards continue to halve, which may diminish miners’ incentives.
The long-term viability of Bitcoin DeFi is contingent on effective execution, the continued development of layer-2 solutions, and the ability to align with Bitcoin’s unique value proposition, the report concluded.
For further insights, read more about the topic in this article: Ethereum L2 Starknet Seeks ‘Bitcoin’s DeFi Take-Off Moment’ With BTC Wallet Xverse.
