Prepare Yourself For The Coming BTCfi Tsunami
Co-Authored w/ , Co-Founder of BTOC (Bitcoin Treasury On Chain)
In April 2020, TVL on Ethereum was ~$750M. The launch of Compound ’s governance token, COMP, in May 2020 kicked off what came to be known as DeFi Summer. By the end of 2020, ETH’s TVL was ~$15B. Today, there’s ~$96B in TVL on Ethereum.
In comparison, it feels like Day #1 for yield on Bitcoin. While Ethereum TVL is equal to 17% of Ethereum’s market cap, TVL on Bitcoin is only ~0.4% of Bitcoin’s market cap (per DeFi Llama):
We know there’s latent demand for DeFi on Bitcoin to generate yield and to use as collateral to borrow USD because there is $35B+ in wrapped Bitcoin used in DeFi on various chains other than Bitcoin:
We believe that BTCfi is finally scaling due to multiple factors including ever improving infrastructure (e.g. Taproot, BitVM, and BRC-20), a more favorable U.S. regulatory environment, and far greater (institutional driven) liquidity.
The Sources Of Bitcoin Yield Today
Per the graphic below, we’ve identified four sources of Bitcoin yield, with additional context for each source provided below the graphic:
Staking
Staking provides bitcoin denominated returns from blockchains and staking networks that use BTC as collateral for validation. Staking BTC is often pitched as having high security with locking directly on bitcoin chain. It’s a new idea, with little traction, in part, due to the modest ~1% yield offered today. However, yields can be boosted when coupled with token rewards for longer duration placements, or for holding non-bitcoin protocol tokens,
There is a thriving market in “liquid restaking tokens” that wrapped BTC or liquid staking tokens from the previous category, and add yield with rewards for what (in theory) will become other uses. Some of these tokens may be unbacked, and users of these tokens should verify that the tokens are actually redeemable for underlying assets.
These tokens end up in DeFi lending and trading strategies that may add additional yield.
Lending
The core yield for USD is provided by borrowers who want USD. BTCfi has markets that lend out BTC in the same way. However, unlike USD, BTC can spike up in price and make it prohibitively expensive to repay loans. Thus, while there’s lots of BTC available in lending pools, there’s little demand to borrow BTC. That’s why native lending rate down are 1% or less.
There is some demand to borrow BTC for shorting, or for market making (essentially short-term shorting). There is also a demand to arbitrage between different types of wrapped and LST BTC. And, there are pools that are boosted up to 8% by protocol rewards.
Trading
Bitcoin is one of the world’s most active and liquid markets. Participants in these markets can earn LP and arbitrage fees by trading BTC. They can provide LP positions in pools that trade between different types of BTC, or hedge in pools that trade BTC with other assets, or do cross-chain marketmaking. They can use BTC as collateral for perps and option trading strategies. A yield-focused derivative strategy will typically sell options in order to satisfy demand for leverage.
A proven BTC trading strategy is short-term arbitrage between CEX exchanges that offer BTC. Some DeFi vaults offer tokenized positions in hedge funds that run this strategy. Trading in BTCfi is a growing category as more volume moves into DeFi and DeFi becomes more efficient.
USD Strategies
BTC can be used as collateral to borrow USD at low-risk rates. That USD can then be invested in higher-yielding USD strategies.
Borrowers can typically borrow up to 60% of the Bitcoin value locked. So, a borrower that is paying 5%, and getting returns of 10%, makes a 5% spread on 60% of their BTC value, for a total of 3% yield on the BTC locked.
The terms for borrowing USD are important variables in any USD strategy. BTCfi markets provide variable rates based on utilization, fixed rates, or CDP rates that are fixed until liquidation. A borrower will look for markets that are competitive on cost and scale, and then optimize for LTV and interest rate stability.
The two most popular investment strategies today are DeFi high yield and basis.
A DeFi high yield strategy works well when the invested amount is small. This fits into reward boosted strategies with providers like Pendle, Morpho, and various lending venues. Yields can be 15%+, providing a 6%+ yield to BTC (at 60% loan-to-value and 5% cost of borrowing).
A basis strategy places delta neutral positions that are long crypto / short perpetual futures on perp exchanges. This earns the “funding rate” that provides leverage to long perp buyers. It’s scalable and makes money from perp traders wanting to be long crypto and willing to pay a positive funding rate. The funding rate is volatile, but has averaged 11%+ recently. You can place a basis trade by buying staked Ethena, which passes through basis earnings. Or, you can place with a specialty provider like Hermetica, or run your own positions with exchanges or Hyperliquid.
Identifying The Major Players In BTCfi
The list below is our first pass at the different players in BTCfi:
We look forward to adding others as they emerge an/or we become aware of them.
What’s Next
As BTCfi matures, it will increasingly look like the fixed income market, providing market-neutral and scalable solutions. BTCfi will become more structured, more risk-managed, more institutional, and, well, more like CeFi.
The winners will be the players that deliver fair, transparent BTC-denominated yield with real infrastructure and consistent returns, and it’s just getting started.
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This content is for educational purposes only. It does not constitute trading advice. The author of this article may hold assets mentioned in the piece.
