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Since its launch in 2009, Bitcoin has emerged as a hedge against inflation. Some countries, like El Salvador, have even made it a legal tender. In March 2024, the market valuation of Bitcoin’s circulating supply reached $1.4 trillion, surpassing silver to become the 8th most valuable property globally.

Bitcoin’s Dormant Potential

Despite Bitcoin’s dominance over other cryptocurrencies, most of it remains dormant in user wallets. Its vast liquidity reserves are underutilized due to the network’s limited scalability. Additionally, Bitcoin doesn’t support programmable smart contracts and has a block finality time of 10 minutes. These challenges hinder developer activity, affect growth, and prevent the rise of decentralized finance (DeFi) services on Bitcoin.

The Origins of Bitcoin DeFi

The lack of DeFi apps on Bitcoin has prevented users from capitalizing on the vast reserves of BTC assets. However, developers have been working to improve Bitcoin’s functionality and performance to make it suitable for DeFi.

For instance, the Segregated Witness (SegWit) update in July 2017 reduced transaction time and increased block capacity. This was followed by the Taproot upgrade in November 2021, which introduced protocols like Pay-to-Taproot (P2TR) and Taproot Asset Representation Overlay (Taro). During the prolonged crypto winter, developers focused on building robust Bitcoin DeFi protocols.

In January 2023, Casey Rodarmor launched Ordinals to create NFT-like inscriptions on the Bitcoin chain, rejuvenating the ‘Building on Bitcoin’ movement and opening a Bitcoin NFT market projected to reach $4.5 billion by 2025. Rodarmor also introduced the Runes protocol to mint fungible tokens like memecoins on Bitcoin. In its first week, users minted over 11,000 Runes tokens, accounting for 45% of Bitcoin transactions.

Moreover, layer-2 solutions like Stacks, launched in 2021, offer smart contract functionalities to Bitcoin. The Stacks Nakamoto upgrade, introduced in mid-April 2024, reduces transaction processing time to 5 seconds and provides 100% Bitcoin block finality.

As a result, developer activity is expanding Bitcoin’s utility and enhancing scalability, inaugurating the Bitcoin DeFi moment.

The Potential of Bitcoin DeFi

After a long bear market, the total value locked (TVL) in DeFi protocols crossed the $80 billion mark in February 2024. It’s important to note that this TVL excludes liquidity from BTC reserves. The majority of the funds for DeFi apps come from Ethereum, which holds almost 60% market dominance. If DeFi protocols could access even a fraction of Bitcoin’s market cap, the TVL would reach unprecedented levels.

According to a Spartan Research report, Bitcoin DeFi presents a 7-fold growth opportunity without accounting for any additional liquidity influx. 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 app TVL was $76 billion or 28% of its market cap compared to just $320 million for Bitcoin DeFi.

Keeping these data points constant, Bitcoin DeFi presents a $238 billion market opportunity as of December 2023. These figures don’t consider any adoption surges or more inbound capital as we’re witnessing today.

Thus, it is evident that we have merely touched the tip of the iceberg of the Bitcoin DeFi market. The market will expand further as more smart contract functionalities and scalable DeFi apps launch in 2024.

The Bitcoin DeFi Summer is Coming

Protocols like Ordinals, Runes, and layer-2 networks like Stacks are crucial for the growth of Bitcoin DeFi. They enable users to tap into the vast underutilized BTC reserves while leveraging the security and decentralization of the underlying Bitcoin chain.

However, some Bitcoin maximalists believe that frivolous memecoins and NFTs have harmed Bitcoin’s legacy and led to network congestion. Despite that, it’s perhaps necessary to embrace crypto’s playful aspect to popularize Bitcoin DeFi and lead to mass adoption.

Meme tokens might eventually lead to more developer activity and users participating in Bitcoin-based lending-borrowing, trading, yield farming, staking, and GameFi and SocialFi protocols. These apps will finally make Nakamoto’s vision of an alternative financial system a reality.

As we approach the DeFi summer, the true potential of Bitcoin DeFi will start to unravel, making Bitcoin-based permissionless financial services accessible to users across the globe.

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