Bitcoin-based decentralized finance (BTCFi) has seen a dramatic surge in popularity, with its Total Value Locked (TVL) jumping 22x to over $7 billion. This growth signifies a major shift in how Bitcoin is used, evolving from a simple store of value to an active asset within the DeFi landscape.
Several factors contributed to this increase, including new protocol launches, emerging token standards, institutional inflows, and a significant price rally that pushed Bitcoin to all-time highs. The rise of liquid restaking solutions, such as those offered by Babylon, has also played a crucial role. Babylon, a platform specializing in Bitcoin staking and restaking, accounted for a significant portion of the BTCFi TVL expansion. Its TVL jumped from $1.61 billion in late October 2024 to over $5.2 billion by the end of December 2024, marking a staggering 222% increase in just two months. By the end of 2024, the Bitcoin staking sector as a whole had jumped to $6.5 billion from just $307 million at the beginning of the year.
BTCFi aims to unlock Bitcoin's dormant liquidity, which is currently underutilized in wallets. It strives to inject new vitality into the Bitcoin ecosystem through decentralized financial means. Unlike traditional finance, where intermediaries control assets, BTCFi enables trustless Bitcoin swaps, non-custodial Bitcoin bridge solutions, and sophisticated financial applications that maintain Bitcoin's core principles of self-sovereignty and decentralization.
However, despite this impressive growth, trust remains a significant issue for many potential users. A recent survey revealed that 36% of respondents do not engage with BTCFi due to a lack of trust. Another 25% avoid interactions with BTCFi because of the perceived risk and fear of losses. The primary security concern for most (60%) is smart contract exploits. These concerns highlight the challenges BTCFi faces in gaining wider acceptance.
Several factors contribute to the trust issue. One is the perception that developing on Bitcoin is more challenging than developing on altcoins like Ethereum. Bitcoin's limited smart contract support is considered a major hurdle by 43% of survey respondents. Furthermore, concerns exist regarding the security of cross-chain bridges and the potential for vulnerabilities in smart contracts. The complexity of DeFi protocols can also be a barrier for average users.
To address these challenges, the BTCFi community is focusing on several key areas. One is improving infrastructure to scale BTCFi. This includes wider adoption of Bitcoin layer-2 solutions for scalability. Another focus is on establishing higher standards for asset transparency verification. This involves using tools like zero-knowledge proofs to enable reserves to be verified by anyone, rebuilding user confidence. Additionally, clearer on-chain reporting and user education will help reduce disputes and build trust.
Despite the trust concerns and developmental challenges, experts remain bullish on the growth of BTCFi. One executive director for the Stacks Asia Foundation expects the total value locked in BTCFi to triple in 2025. New product launches are expected to fuel investor interest, strengthening BTCFi's position as an integral part of the emerging financial ecosystem around Bitcoin. As the ecosystem matures and layer-2 solutions develop, investor attention is gradually shifting from infrastructure developments to native Bitcoin-based applications capable of unlocking on-chain liquidity and financial activity.
