NEWSLETTER
Disclosure: The views and opinions expressed herein are solely those of the author and do not represent the views and opinions of the crypto.news editorial.
Since its launch in 2009, bitcoin has become a hedge against inflation. Some countries like El Salvador even made it legal tender. In March 2024, the market valuation of the circulating supply of btc reached 1.4 trillion dollars, surpassing silver and becoming the eighth most valuable property worldwide.
Despite btc's dominance over other cryptocurrencies, the majority of btc remained idle in users' wallets. btc's huge liquidity reserves remained underutilized and unproductive due to the network's limited scalability. Additionally, bitcoin does not support programmable smart contracts and has a block finality time of 10 minutes. These challenges hamper developer activity on bitcoin, impact growth, and impede the rise of decentralized financial services on bitcoin.
The origins of the definition of bitcoin
The lack of defi applications in bitcoin prevented users from capitalizing on btc's vast asset reserves. However, developers have been working for a long time to improve the functionality and performance of bitcoin to make it suitable for defi.
For example, the July 2017 Segregated Witness (SegWit) update reduced transaction time and increased block capacity beyond 1MB. It was followed by the Taproot update in November 2021 to introduce protocols such as Pay-to-Taproot (P2TR) and Taproot Asset Representation Overlay (Taro). However, during the long crypto winter, developers focused more on creating robust bitcoin defi protocols.
For example, Casey Rodarmor launched Ordinals in January 2023 to create nft-like inscriptions on the bitcoin chain. Ordinals rejuvenated the 'Build on bitcoin' movement and opened a bitcoin nft marketplace that can bitcoin-ordinals-inscriptions-5-billion-nft-market/” target=”_blank” rel=””>reach 4.5 billion dollars by 2025.
Rodarmor also launched the Runes protocol after bitcoin halving to mint fungible tokens like memecoins on bitcoin. In the first week, users bitcoin-network” target=”_blank” rel=””>coined more than 11,000 Runes tokens, representing 45% of bitcoin transactions.
At the same time, layer 2, such as Stacks, launched in 2021, offered smart contract functionalities to bitcoin. The Stacks Nakamoto update, introduced in mid-April 2024, reduces transaction processing time to 5 seconds and provides 100% bitcoin block finality.
Developer activity is therefore expanding bitcoin's utility and improving scalability, thus ushering in bitcoin's defi moment.
The potential of bitcoin defi
After a long bear market, the total value locked in defi protocols bitcoin.com/defis-total-value-locked-hits-80-billion-in-a-dramatic-turnaround-since-2022/#google_vignette” target=”_blank” rel=””>crossed the $80 billion mark in February 2024. However, the important thing to note is that TVL excludes any liquidity from btc reserves.
Most funds for defi applications. come of ethereum with almost 60% market dominance. If defi protocols had the opportunity to access even a fraction of bitcoin's market cap, TVL would reach unprecedented levels.
According to Spartan research report, bitcoin defi presents a 7x growth opportunity without taking into account any additional liquidity inflows. Let's prove this point with available market data.
In December 2023, bitcoin's market capitalization was $850 billion, which is 3.1 times more than ethereum's $270 billion. However, ethereum's defi application TVL was worth $76 billion or 28% of its market cap, compared to just $320 million for bitcoin defi.
If we hold the data points constant, then bitcoin defi presents a $238 billion market opportunity as of December 2023. These figures do not consider any sudden surge in adoption or more incoming capital as we are witnessing today.
Therefore, it is safe to say that we have simply touched the tip of the bitcoin defi market iceberg. The market will expand further as more smart contract functionalities and scalable defi applications are launched in 2024.
bitcoin Defi Summer Is Coming
Protocols like Ordinals, Runes, and layer 2 networks like Stacks are crucial to the growth of bitcoin defi. They allow users to tap into the vast underutilized btc reserves while taking advantage of the security and decentralization of the underlying bitcoin chain.
However, some bitcoin maximalists think that frivolous memecoins and nfts have damaged bitcoin's legacy and caused network congestion. Despite that, it may be necessary to insist on the playful aspect of cryptocurrencies to popularize bitcoin defi and lead to mass adoption.
Meme tokens could eventually lead to increased developer activity as users engage in lending, trading, yield farming, staking, and bitcoin-based GameFi and SocialFi protocols. These applications will finally make Nakamoto's dream of an alternative financial system a reality.
As we approach defi summer, the true potential of bitcoin defi will begin to unravel as permissionless bitcoin-based financial services become accessible to users around the world.
