Can Bitcoin Thrive Onchain?

Despite holding the top spot in cryptocurrency market capitalization, Bitcoin's participation in decentralized finance (DeFi) remains relatively low

Original Title: Can Bitcoin Thrive Onchain?

Original Author: Jean-Paul Faraj, Bankless

Original Translation: BitpushNews

Despite holding the top spot in cryptocurrency market capitalization, Bitcoin's participation in decentralized finance (DeFi) remains relatively low, prompting a profound discussion about its future role.

For over a decade, Bitcoin has been the cornerstone of the crypto ecosystem—lauded for its decentralization, censorship resistance, and provable scarcity. However, despite Bitcoin's dominant market cap and recent resurgence in popularity, it largely remains disconnected from one of the most vibrant areas of the crypto space—DeFi.

According to data from Bitcoin Layers, only about $30 billion worth of Bitcoin (just 1.875% of its total supply) is utilized in DeFi. In contrast, Ethereum has approximately $50 billion worth of ETH locked in DeFi, accounting for about 23% of its supply.

This gap highlights a core contradiction in today's Bitcoin narrative: while BTC holds immense value, relatively few BTC are actively utilized on-chain to provide yield opportunities. This disparity is driving a wave of innovation around wrapping, staking, and other methods to bring Bitcoin into the DeFi economy, unlocking ways to make BTC a productive capital asset.

Bitcoin Layers: BTC supply segmented by network, showing all wrapped BTC

Ethereum's DeFi ecosystem has seen the emergence of tools for lending, staking, and trading. In contrast, native Bitcoin remains challenging to use effectively, especially for new users. Slow transaction times, variable and often high fees, and Bitcoin's architecture lack the programmability that supports Ethereum-based applications.

As the broader cryptocurrency space matures, an important question arises: Can Bitcoin meaningfully participate in the on-chain economy? If so, how can we bring ordinary BTC holders into the fold without forcing them to navigate a maze of bridges, wrapped tokens, and unfamiliar applications?

The Issue: Bitcoin's Design vs. DeFi's Usability

Bitcoin's underlying architecture is not optimized for the high programmability of today's smart contracts. Its proof-of-work (PoW) mechanism prioritizes security and decentralization over complex logical expressions—this design choice makes it a reliable store of value but also limits its adaptability in smart contracts and complex DeFi applications. As a result, native Bitcoin struggles to integrate into the thriving composable finance ecosystems on public chains like Ethereum and Solana.

In the past, we have seen some workarounds:

· Wrapped Bitcoin: Users convert BTC into ERC-20 tokens to access Ethereum-based DeFi. This introduces custodial risks, as token liquidity may be opaque and not always backed 1:1 by third-party custodians.

· Bridging Protocols: Cross-chain platforms allow BTC to move into other ecosystems. However, manual bridging adds friction, complexity, and risk—especially for non-technical users.

· Custodial Platforms: Centralized services like Coinbase offer BTC yield but require users to forfeit custody and often pay returns in points, stablecoins, or proprietary tokens instead of BTC.

Each option comes with challenges that weigh against Bitcoin's core principles: security, simplicity, and user sovereignty.

Entry Barriers: Why User Experience Still Matters

Accumulation of BTC in 2024, river.com

For Bitcoin holders curious about doing more with their assets (earning yield, participating in on-chain governance, or trying DeFi), the entry pathways remain fragmented, non-intuitive, and often daunting. While the infrastructure has matured, user experience lags behind, and competitors are not just other blockchains but also TradFi.

This friction creates a significant entry barrier. Most users do not want to become advanced DeFi users—they want to simply and securely increase their net worth and BTC holdings without navigating a maze of applications, bridges, and protocols like recent Bitcoin buyers who have made substantial off-chain purchases through brokers, ETFs, and products like Michael Saylor's Strategy.

To transition the next wave of users from simple off-chain holders to on-chain users, tools need to eliminate this complexity while not sacrificing control, self-custody, or transparency. This is where emerging protocols and modern wallet experiences begin to play a crucial role—providing user-friendly access to DeFi's foundational functionalities while keeping Bitcoin's core principles intact.

A better user experience is not just a nice-to-have; it is a key infrastructure for the next phase of Bitcoin adoption.

New Ways for On-chain BTC Yield and Productivity

Many emerging solutions aim to make Bitcoin more usable in DeFi—each with different trade-offs:

1. Staking, Re-staking, and Points-based Yield Programs

Platforms like Babylon and Lombard now offer Bitcoin-related yield programs through points or reward tokens, often achieved via staking/re-staking, which can typically be redeemed for benefits or future airdrops. These systems appeal to early adopters and crypto-native users chasing airdrops and platform-specific token economics. These products often