The Bitcoin Season 2 is underway. With the recent boom in Bitcoin Layer-2s (L2s), bitcoin—the asset—is outgrowing the ‘digital gold’ or store of value narrative. New utility and an extended scope for innovation is opening up in the Bitcoin DeFi or BTCfi space.
But these promising developments hide a dark underbelly, i.e. fragmentation. From sBTC (Stacks) to rBTC (Rootstock) to even cbBTC (Coinbase), several BTC variants have emerged. And many more will come as Bitcoin-powered L2s gather more steam.
Similar to DeFi on Ethereum (or Solana, for that matter), moving between various BTC variants is currently a pain for BTCfi users. The UX is clunky, complicated, and laden with security risks—i.e., a rather sizeable obstacle for BTCfi’s adoption once the initial hype dies down. Optimizing for interoperability is thus critical for BTCfi to survive and thrive.
BTCfi’s path has thorns, not just roses
Coming out of months of sell pressure and uncertainty, BTC is set to close Q3 2024 in the green. If so, it’ll defy the ‘September is always red’ narrative for the second consecutive year.
This reversal in BTC’s market dynamics is mainly due to positive macro developments: the much-awaited rate cut by the Fed, the SEC’s approval of Options on BTC ETFs, the upcoming U.S. Presidential Elections, etc. Given these factors, BTC’s dominance has also risen to 40-weeks high, hovering around March-April 2021 levels—roughly 57% to 58%.
Besides the external factors, however, the steady rise of BTC L2s and BTCfi has been a critical contributor to Bitcoin’s recent growth saga. As they expand Bitcoin’s utility set, users finally get to ‘do things’ with their BTCs.
For example, rather than simply waiting for price appreciation, BTC HODLers can now generate yield via staking, re-staking, sequencer mining, etc. This will go a long way in improving BTC’s utilization ratio, which is a meager 0.2% vs. Ethereum’s 17%.
Backed by such value propositions, the top BTC-powered platforms—sidechains, rollups, and so on—have already started driving millions of transactions, per Bitcoin Ecosystem.
As BTC’s increasing market dominance proves, capital from other sectors of the crypto industry are rolling over into this domain. It’s also manifest in the amounts of money both institutional players and retail users have poured into Bitcoin-powered projects in 2024 YTD.
In the second half of 2024 alone, top VCs like OKX Ventures, Polychain Capital, Binance Labs, Galaxy, and many others have invested +$268M into various BTC L2s and BTCfi projects. Also, the TVL on platforms like Bitlayer, Core, etc. has risen significantly, with some crossing $500M.
Source: Bitcoin Ecosystem
However, most of these leading Bitcoin-backed blockchains have a separate native token or some variant of BTC (other than native BTC). Bitlayer has BTR for example, Stacks has sBTC, and so on. As a result, the value generated from their growth and adoption doesn’t accrue to native BTC.
For users to actually leverage the immense value BTCfi unlocks, they must be able to move seamlessly between different BTC variants. It defeats the purpose otherwise.
Interoperability will keep users interested
So far it’s mostly pent up demand and the shiny object syndrome pulling users to BTCfi. But to retain these users long-term—and for BTCfi to actually surpass DeFi on ETH, etc.—projects must deliver a superior UX. And ironically, this requires some critical infra, not simply more apps.
Moving BTC around in all shapes and forms must be as easy and intuitive as buying a bottle of water. That too, without involving centralized exchange frameworks—especially with Coinbase, etc., entering the chat. The BTC community is rooted in decentralization, autonomy, and privacy, which has to be fully respected at all times.
Adopting innovations in cross-chain intents is one potent way of unifying liquidity while ensuring fast and decentralized finality across BTCfi. If there’s one lesson BTCfi must learn from ETHfi or SOLfi’s mistakes, it’s the need to optimize for truly multi-chain capacities from the get-go.
Also because seamless cross-chain liquidity will initiate the positive feedback loop that leads to BTC’s, and by extension crypto’s, mass adoption.
Given adequate liquidity access and an improved UX, more users will come to BTCfi. They will bring more liquidity into the space and also create demand for further innovations, development, etc. More apps and solutions will attract even more users, and so on.
It clearly begins with the user—they’re not a means, but the end itself. And that’s primarily why emerging BTCfi projects must avoid fragmentation—a UX killer—at all costs. Especially now that the tools to achieve protocol-level interoperability are available, there’s no scope for excuses.
Going forward, projects must ensure that getting an optimal share in the industry’s total generated value is seamless, easy, and transparent for users. Anything short of complete inclusion will largely be considered an anti-community approach, and for good reason.
Bitcoin’s strength—as well as promise—lies in being one. So the many that wish to capitalize on the world’s most secure and decentralized L1, must remain true to this principle. BTCfi will work only if it’s holistic, not siloed like its ETH or SOL counterparts. Further, fragmentation is a problem only when it hurts scalability, whereas with efficient interoperability, it’s the basis for rich diversity and thriving innovations.
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