The awakening of the sleeping giant: Bitcoin Defi


Bitcoin, undeniably the poster child of the cryptocurrency movement and the most important coin by market cap size, is often viewed within the crypto ecosystem as a stable yet unexciting platform with few new developments. Although Bitcoin was the first cryptocurrency, real innovation has been occurring elsewhere, notably on Ethereum.

Thus, the narrative that has developed around Bitcoin portrays it as merely a store of value, occupying a passive role within the blockchain space with little beyond basic asset functionality.

However, from 2023, new projects are emerging in the Bitcoin ecosystem and the store-of-value narrative is being transformed. The goal of this post is to present these innovations and their potential implications for the wider DeFi space.

A change in paradigm

The Bitcoin blockchain was not built for smart contracts and dApps. Optimized for robustness, stability, and decentralization, it did not offer a computational platform to build other use cases.

For this reason, the first set of services built on blockchain found their home elsewhere. However, the Taproot upgrade – implemented in November 2021 – significantly improved Bitcoin’s smart contract capabilities, by enhancing privacy and efficiency. Before Taproot, the details of a smart contract were visible on the blockchain, which limited both privacy and scalability. Taproot introduced Schnorr signatures and Merklized Abstract Syntax Trees (MAST), which allow for more complex contract conditions to be executed less visibly and with smaller transaction sizes, making smart contracts more practical and less costly on the Bitcoin network.

The first killer application enabled by the Taproot upgrade was Ordinals, a meta-protocol built on top of Bitcoin that enabled the inscription of data into individual satoshi. Through Ordinals, creating NFTs on Bitcoin became easier, significantly boosting the platform’s traction in the NFT trading space. 

Previously considered irrelevant in that ecosystem, the Bitcoin chain has now become a leading board for almost every month over the past nine.

NFT Volume by Chain – source: The Block [link]

What the NFT success made clear is that Bitcoin has an enormous unleashed distribution potential, and many are trying to capitalise on this.

Bitcoin expansions: Layer2s and metaprotocols

The main players currently active in expanding Bitcoin use cases and scalability are taking different routes and pathways. 

On the one hand, there are Layer2s or sidechains that are built on top of the main layer. The most relevant names here are: Liquid Network, Rootstock, Stacks and Merlin. 

Liquid Network is a sidechain operating on top of BTC without altering its base layer. It was launched in 2018 and has seen very limited adoption so far. Not sure if this could be a good candidate to actually make Bitcoin DeFi explode. 

RootStock is a layer2 smart contract platform, a fork of Ethereum that enables Bitcoin to turn into rBTC and be used in a range of DeFi apps built on RSK. It has achieved approximately $200M TVL and has built a decent ecosystem of dApps.

Stacks (former Blockstack) is another layer2 built on Bitcoin. Stacks has a pretty well developed ecosystem and its own token STX is a security approved by the SEC. The team is pretty solid and working on a new `Nakamoto` release that should make the network fast enough to enable much higher scalability.

Merlin is the latest newcomer of the big Bitcoin layer2s. It integrates ZK Rollup, decentralised oracle network, data availability and its claim is to `make bitcoin fun again`. It is an EVM compatible chain and so far it is the one that managed to attract the biggest amount of deposits. 

Bitcoin Layer2s adoption – source:

A very different approach has been taken by Runes, the latest creation of the developer of Ordinals – Casey Rodarmor. 

Runes is a meta-protocol that allows the creation of fungible tokens on the Bitcoin network. It aims to be an easier and better solution than the BRC20, an experimental standard to create fungible tokens natively on Bitcoin that grew fairly strong and currently has a market cap of ~$2B for ~100 tokens launched. Unfortunately, the BRC20 standard proved to be fairly complex to use and unstable, limiting scalability and, thus, adoption. 

Runes overcomes these limits, as this token issuance mechanism is designed to make the release of a fungible token on Bitcoin extremely easy and transfer-friendly. The explicit goal of Rodarmor is to bring speculative activities, particularly meme coins, to the Bitcoin chain to compensate for the declining rewards caused by the blockchain halving events that have already occurred and will progressively happen in the future.


The tech world is often biased towards product and tech purity. Distribution is often overlooked but it represents, in my opinion, the real game changer for any business. 

And Bitcoin has an enormous distribution advantage.

It is the most popular cryptocurrency and the first choice for beginner users.

Google searches worldwide – source: Google Trends

The number of active addresses on Bitcoin is still constantly bigger than Ethereum.

Number of Active addresses – source: The Block [link]

And also the number of new wallets opened every week.

Number of New Addresses – source: The Block [link]

But the TVL in DeFi applications on Bitcoin is still a fraction of Ethereum

TVL by chain – source:

And even the deployment on Bitcoin of the native BTC is negligible compared to Ethereum: more than $9B wBTC deployed on Ethereum versus $ 150m on the Bitcoin chain.

So to summarise: 

  • The potential distribution is there – wallets and users on Bitcoin are more numerous than any other chain  
  • The use case is there – DeFi TVL on non Bitcoin chains is almost > $90B
  • An existing case study already exists: NFT – Bitcoin NFT market now comparable to Solana and Ethereum  

The logical consequence is, in my opinion, that as soon as Bitcoin will have a decent user experience for DeFi, it will become a major hub for DeFi activities, most likely bigger than Solana and a real competitor to Ethereum.

I’m not in a position to predict any figure, but Pantera estimated the potential Bitcoin DeFi volume at ~$ 200B, considering that Ethereum Defi is approximately 25% of ETH market cap. 

That number is huge but there is a substantial probability that the Bitcoin DeFi space will be a > $100B space. To get there, I do believe that the first real use case of DeFi Bitcoin will most likely be memecoins, which I will fully explore in my next post. Stay tuned.

PS. The first week of June I’ll be in Amsterdam (for Money 20/20) and Berlin. If you are active in the Fintech and DeFi ecosystem and want to hang out, just DM me.



About the author

Giorgio Giuliani
By Giorgio Giuliani