Binance Research: Bitcoin is expanding its role in decentralized finance

Moulik Nagesh of Binance Research Institute released a report today stating that Bitcoin is breaking through its traditional function of storing value and expanding into a broader decentralized financial (DeFi) ecosystem. This evolution is led by the Bitcoin DeFi (BTCFi) sector, which aims to improve Bitcoin's capital efficiency through financial applications such as lending, staking, stablecoins, and decentralized exchanges (DEXes).

The potential market size of BTCFi is huge, and only about 0.79% of BTC is currently used in DeFi. The report pointed out that even if the penetration rate of Bitcoin's idle supply reaches single digits, it may bring billions of dollars in capital inflows, opening up new possibilities for financialization.

However, infrastructure remains an important obstacle. Unlike Layer 1 (L1) based on smart contracts, Bitcoin lacks native programmability, which makes Layer 2 (L2) solutions crucial to the development of BTCFi. Although Bitcoin L2 is making progress, it is still in its early stages and requires more development, adoption, and liquidity incentives to achieve effective expansion.

The report also highlights the long-term sustainability challenges of Bitcoin's network security model as block rewards continue to halve. BTCFi may support miner incentives by generating higher on-chain transaction fees, thereby strengthening Bitcoin's long-term security budget.

Despite its clear growth potential, BTCFi faces challenges such as cultural resistance, technical barriers, and regulatory uncertainty. The Bitcoin community has traditionally resisted changes focused on programmability, prioritizing security and decentralization over rapid innovation.

Liquidity and institutional interest also pose challenges. Bitcoin's historically passive investor base requires new incentive mechanisms to activate idle BTC holdings. While institutional players show early interest, adoption may depend on regulatory clarity and user-friendly solutions.

Cross-chain interoperability is critical to BTCFi, as most BTC currently used in DeFi exists in wrapped form on Ethereum and other chains. BTCFi needs to develop secure cross-chain solutions to connect liquidity and attract users from the existing DeFi ecosystem.

The report concludes that BTCFi needs its own development path. Unlike Ethereum's DeFi ecosystem, BTCFi cannot simply copy the existing model. Success may rely on customized solutions that adapt to the Bitcoin holder base, especially in areas such as yield generation, payments, and institutional-grade products.

In its final outlook, the report notes that BTCFi is still in its infancy, and while infrastructure and capital inflows are growing, its long-term viability will depend on successful execution, continued L2 development, and the ability to align with Bitcoin’s unique value proposition.