Bitcoin (BTC) DeFi Summer Expectations Clash with Relatively Low Numbers

The expectations of a Bitcoin DeFi summer are clashing with the relatively low numbers. Despite the positive price performance of BTC, side projects attract

Bitcoin (BTC) price has performed well in H1, recovering from a low of $33,000 to reach highs above $70,000. However, side projects and decentralized finance (DeFi) on the BTC chain have shown lagging figures.

Despite expectations of a Bitcoin DeFi summer, the total value locked (TVL) in BTC-based DeFi protocols remains below $800 million. This figure includes the Lightning Network, which now carries over $362.3 million.

However, the Lightning Network does not pay out significant passive income or attract significant liquidity.

Bitcoin lags in L2 projects launches

One reason for the lack of a Bitcoin DeFi scene is the absence of Layer 2 (L2) chains. On Ethereum (ETH), several rounds of project launches took over the L2 niches.

The issue with L2 projects was that they were also often backed by venture capital and designed to extract value. Still, the recent Bitcoin Builders conference brought up the issue of Bitcoin’s native L2 again, potentially launching scaling projects.

So far, the development of these networks is still at the idea stage, and it is unclear if it will take off. Merlin is the only functioning L2 project, although it only locks in $654K in BTC value, a fraction of other types of wrapped BTC. The protocol draws in 16,933 BTC.

Even without an L2, Bitcoin has tools for tokenization, including BRC-20 tokens and Runes. Those tools, however, had limited adoption. BRC-20 tokens have a total market cap of just $1.7B and are dominated by ORDI and SATS.

After a boom of BRC20 and other Ordinals transactions, the Bitcoin chain returned to showing basic fees for moving BTC coins. On-chain data showed that users moved away from Bitcoin-based tokenization, especially as most retail and speculation shifted towards Solana (SOL).

Runes also slowed down, after expanding to a market cap of $1B in total. The project in total was capped at $440M, of which $420M belonged to DOG, the top Rune.

Runes have the advantage of much lower transaction fees, but did not take off due to the effect of Solana meme tokens, which offered similar utility. It attempted to gain attention with tokenized memes, but failed to compete with Raydium and Pump.fun. Runes became the most transacted asset since April, replacing BRC-20 tokens but both slowed down in Q2.

BTC still flows to other chains

One form of Bitcoin DeFi that has existed for years is inflows into other chains, in the form of wrapped BTC. Around 154K BTC coins have been wrapped on Ethereum, in several forms. The size of wrapped coins is similar to one large whale wallet, with the first type of WBTC dominating. Other types include HBTC, renBTC and sBTC on Synthetix, which have much lower supply.

Another $140M worth of BTC has flowed into the Avalanche blockchain, since the launch of the protocol in 2021. BTC.b was mostly meant for fast transactions and has spread to more than 145K wallets.

In terms of WBTC, Bitcoin’s participation in DeFi is around $10B, which is half the value locked on Ethereum. In a way, BTC is helping Ethereum’s DeFi the most.

Bitcoin itself, however, does not offer native staking or re-staking, which is the big advantage of Ethereum. All ETH holders can rely on a form of passive income through staking, leading to a drive to hold onto the token for the long term, while using tokens for short-term speculation.