Bankless: Can Bitcoin thrive on-chain?

For more than a decade, Bitcoin has been a cornerstone of the crypto ecosystem—lauded for its decentralization, censorship resistance, and provable scarcity. Yet despite its dominant market cap and recent resurgence in popularity, Bitcoin remains largely disconnected from one of the most active sectors in crypto: DeFi (decentralized finance).

According to Bitcoin Layers, only about $30 billion of BTC, or just 1.875% of its total supply, is being used in DeFi. In contrast, Ethereum has about $50 billion of ETH locked in DeFi, or about 23% of its supply.

This disparity highlights a core contradiction in the Bitcoin narrative today: while BTC holds tremendous value, relatively little of it is actively being used on-chain to provide yield opportunities. This gap is driving a wave of innovation around wrapping, staking, and other methods designed to bring Bitcoin into the DeFi economy and unlock ways to make BTC a productive capital asset.

Ethereum’s DeFi ecosystem has exploded with tools like lending, staking, and trading. In contrast, productive uses of native Bitcoin remain difficult, especially for new users. Transactions are slow, fees are volatile and often high, and Bitcoin’s architecture lacks the programmability that supports Ethereum applications.

As the broader crypto space matures, this raises an important question: Can Bitcoin meaningfully participate in the on-chain economy? If so, how do we onboard average BTC holders without forcing them to go through bridges, wrapped tokens, and unfamiliar applications?

Question: Bitcoin’s Design vs. DeFi’s Utility

Bitcoin was not built for expressive smart contracts as we understand them today. It prioritizes security and decentralization over expressiveness through proof-of-work (PoW), making it a robust store of value — but less suitable for use in smart contracts or complex DeFi applications. As a result, native Bitcoin has been largely excluded from the composable finance ecosystem that has flourished on chains like Ethereum or Solana.

Historically, there have been a few workarounds:

Wrapped Bitcoin: Users convert BTC to ERC-20 tokens to access Ethereum-based DeFi. This introduces custody risk, as token liquidity can be opaque and not always backed 1:1 by third-party custodians with BTC.

Bridging Protocols: Cross-chain platforms allow BTC to be transferred to other ecosystems. But manual bridging adds friction, complexity, and risk — especially for non-technical users.

Custodial Platforms: Centralized services like Coinbase offer BTC yields but require users to give up custody, and often pay returns in points, stablecoins, or proprietary tokens rather than BTC.

Each option comes with trade-offs that challenge Bitcoin’s core ideals: security, simplicity, and user sovereignty.

Barriers to Entry: Why User Experience Still Matters

For Bitcoin holders curious about how to better leverage their assets (earn yield, participate in on-chain governance, or try DeFi), the path to entry remains fragmented, unintuitive, and often daunting. While the infrastructure has matured, the user experience lags, and competitors are not just other blockchains, but also traditional finance (TradFi).

This friction creates a major barrier to entry. Most users don’t want to become advanced DeFi users — they want simple, secure ways to grow their net worth and BTC holdings without having to navigate a maze of apps, bridges, and protocols like most recent Bitcoin buyers who purchase off-chain through brokers, ETFs, and products like Michael Saylor’s Strategy.

To bring the next wave of users on-chain, rather than just off-chain holders, tooling needs to abstract away this complexity without sacrificing control, self-custody, or transparency. This is where emerging protocols and modern wallet experiences start to really shine — providing user-friendly access to DeFi’s foundational features while keeping the core philosophy of Bitcoin intact.

A better user experience isn’t just a nice-to-have, it’s critical infrastructure for the next phase of Bitcoin adoption.

New approaches to on-chain BTC yield and productivity

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

1. Staking, restaking, and points-based yield programs

Platforms such as Babylon and Lombard now offer yield programs tied to Bitcoin through points or reward tokens, typically achieved through staking/re-staking, which are often redeemable for perks or future airdrops. These systems are attractive to early adopters and crypto natives chasing airdrops and platform-specific token economics. These products often involve converting BTC to a wrapped BTC standard and then locking the asset in various programs/products to earn floating yield. For traders who are savvy with on-chain trading, high yields can be achieved, but this requires a deeper understanding of how to use cryptocurrencies, as well as manually bridging, wrapping, and depositing funds.

Pros:

Wide range of yield opportunities

Often self-custody

Cons:

Rewards are not paid in BTC

Lockup period is often required

Uncertain long-term value of rewards

2. Bitcoin Layer 2 and Meta Protocols

Lightning Network, Rootstock (RSK), Alkanes, and emerging Layer 2 networks such as Botanix and Starknet are bringing new functionality, programmability, and speed to Bitcoin. These innovations enable use cases such as fast payments, NFTs, and smart contract-like behavior. As a result, users can now use their BTC to access a variety of DeFi opportunities - such as securing the network by locking up funds, participating in market making, lending, or converting assets to support the Wrapped BTC standard on various protocols. As more teams build these networks, the ecosystem of yield opportunities based on Bitcoin will continue to expand.

Pros:

Expands Bitcoin’s use cases

Aligns with Bitcoin’s architecture

Various ways to earn yield on-chain

Cons:

Still in a relatively early stage and fragmented

Requires intermediate to advanced understanding to use

Requires significant developer resources to build most of the functionality that already exists on other smart contract chains

3. Smart Wallet Integration and Native BTC Yields

Wallets such as Braavos (disclaimer: I work here!) offer features that allow users to earn native BTC yields without having to manually wrap their Bitcoin or give up custody. Users can invest BTC directly through their wallets without having to deal with the usual hurdles of bridging or using external applications. Complex steps — such as depositing, wrapping, and bridging — are seamlessly handled in the background, and BTC is deployed into specific DeFi strategies. This user-friendly approach is designed to make BTC yields accessible to everyone, regardless of their technical background or cryptocurrency experience.

Pros:

Yields are paid in BTC (not points or proxy tokens)

No manual bridging or third-party custody required

Default self-custody

Beginner-friendly

Cons:

Relies on conversion to wrapped BTC

Requires some trust in the bridging mechanism and yield protocol infrastructure

Macro Perspective: Bitcoin’s Evolving Role on-chain

The Bitcoin narrative has long been centered around “store of value” — a role it reliably fulfills. But as the on-chain economy grows, pressure is growing for Bitcoin to integrate into this emerging financial system and fulfill its promise as a reliable payment infrastructure.

To do this without sacrificing decentralization or user trust, new infrastructure must make these opportunities easily accessible without requiring technical expertise or abandoning Bitcoin’s core principles.

This means:

Yields should be paid in BTC in preference to derivative assets

Custody must remain in the hands of the user

Complexity must be abstracted away, not offloaded to the user

Braavos, Lombard, Babylon, and other products mentioned in this article are examples of how these ideas are being implemented. Whether it’s by enabling users to earn yield through staking, or by embedding Bitcoin support directly into self-custody options and automating the complexity behind it, they’re making DeFi more accessible to Bitcoin holders — without requiring them to leave the Bitcoin ecosystem entirely.

Bridging the gap carefully

Bitcoin’s transition to an on-chain economy won’t happen overnight — and it shouldn’t. Caution, simplicity, and self-sovereignty are fundamental to Bitcoin’s philosophy. But as more tools emerge that respect those values and offer new capabilities, BTC’s role in the broader cryptoeconomy is evolving.

The challenge now is to build systems that are open, secure, and most importantly — accessible. If the next billion users are going to come onboard through Bitcoin, they’ll need experiences that meet their existing needs and can be adopted by a wider user base.