Bitcoin (BTC) has been a terrific store of value but a terrible yield asset. Fortunately, the days of sub-0.5% BTC yields are ending. Emerging opportunities in Bitcoin’s layer-2 (L2) and decentralized finance (DeFi) ecosystems are game changers. Here’s how to prepare for the coming BTC yield boom.
Bitcoin mining used to be the only way to earn meaningful BTC rewards. Regular holders had to settle for sketchy centralized finance (CeFi) platforms — such as now-defunct Celsius and Voyager — or pitiful DeFi yields. As of Sept. 5, DeFi lending platform Aave was paying Wrapped Bitcoin (WBTC) depositors a measly 0.04% APR.
That’s changing. After years of quiet development, Bitcoin’s L2 scaling networks — such as Lightning Network, Core Chain, Rootstock (RSK), and Stacks — are gaining traction. Total value locked (TVL) on Bitcoin’s L2s surged to approximately $1.4 billion as of Sept. 5, according to data from DeFiLlama. That’s up nearly 275% year-to-date and tenfold since 2023.
On Sept. 5, Brendon Sedo of L2 developer CoreDAO told Cointelegraph he expects Bitcoin L2s to capture a significant portion of Bitcoin’s $1+ trillion market capitalization in the coming years.
Bitcoin-native staking
Some L2s — including Core Chain, Babylon, and Spiderchain — are exploring Bitcoin-native staking. Similar to proof-of-stake (PoS) networks such as Ethereum (ETH), Bitcoin L2 stakers lock up BTC as collateral to secure the networks in exchange for rewards.
Meanwhile, liquid staking derivatives (LSD) protocols are bringing BTC staking yield to even more L2s. These protocols issue tokenized claims on staking pools and include Core Earn, Bedrock, Stroom, and Pell Network.
Bitcoin’s layer 2 and DeFi ecosystems as of April 12, 2024. Source: DIA DAO
It’s still early. Spiderchain is still in testnet, and Babylon hasn’t started emitting rewards. But CoreChain’s LSD, stBTC, is live — and touts an 8.8% reward rate.
That’s considerably higher than PoS networks Solana (SOL) or Avalanche (AVAX) — which yield 6.85% and 7.83%, respectively — and far more than Ethereum’s 3.4% APR as of Sept. 5, according to StakingRewards.com.
Crucially, Core Chain pays stakers in CORE, its native token, not BTC. Remember, always do your own research and carefully consider whether a cryptocurrency strategy is right for you before aping in — or you’ll lose money!
Bitcoin L2s aren’t only about staking. Some — including RSK, Merlin, and Stacks — already host Bitcoin-native DeFi ecosystems, including decentralized exchanges (ALEX, Bitflow), lending protocols (MoneyOnChain, Zest), and all-in-one platforms like Sovryn. Merlin even touts a Bitcoin-native derivatives protocol, Surf.
Payment protocol Lightning Network launched in 2018 and remains venerable, with nearly $300 million in TVL, according to DeFiLlama. Node operators — who provide BTC liquidity to Lightning’s payment channels in exchange for fees — earn an average of 5.62% APR in BTC, according to Magma, a marketplace for Lightning channels.
Similar to Bitcoin mining, Lightning nodes are dominated by professional shops — like LQWD Technologies Corp — not retail holders.
Institutional interest
These BTC staking protocols won’t stay under the radar for long. Institutional staking services, including Kiln and Figment, already support staking Stacks’ native token, STX, which pays rewards in BTC from network fees. They might add more networks soon.
In May, asset manager Valour launched the Valour Bitcoin Staking (BTC) SEK ETP, an exchange-traded product (ETP) listed on the Scandinavian exchange Nordic Growth Market. It stakes BTC on Core Chain. Valour launched a Core Chain validator node in June.
On Sept. 3, asset manager 21.co launched its regulated BTC wrapper, 21.co Wrapped Bitcoin (21BTC). Expect more institutional liquidity to follow.
Wrapped Bitcoin
The most compelling possibilities for BTC in DeFi are on Ethereum. Restaking protocol EigenLayer’s 2023 launch has been game-changing for crypto, and BTC is no exception.
EigenLayer supports a growing constellation of “actively validated services” (AVS) — protocols that secure themselves using EigenLayer’s nearly $12 billion pool of restaked ETH. In November, AVSs will start paying for that privilege from protocol revenues, generating yield for restakers.
EigenDA, EigenLayer’s first and largest AVS, added native L2 token restaking in August. This effectively expanded restaking from ETH and EigenLayer’s native EIGEN token to practically any virtual asset — including wrapped BTC.
In August, liquid restaking protocol Swell launched swBTC to pay yield on WBTC. Expect EigenLayer to add wrapped BTC restaking soon.
Another interesting option is Synthetix, a DeFi derivatives platform that launched its next-gen V3 protocol on Arbitrum (ARB) in July. Unlike competitors, Synthetix V3 is designed to accept virtually any token as collateral. Liquidity providers (LPs) earn trading fees, plus added incentives in SNX, the Synthetix native token. Wrapped ETH LPs are earning 7.6% on Arbitrum as of Sept. 5.
Only a handful of pools are currently live, and creating new pools requires signoff from Synthetix governance counsel. Still, expect to see WBTC pools on Synthetix v3 sooner rather than later.
One thing is certain. Whether on an Ethereum scaling chain or a Bitcoin L2, holding BTC is becoming far more interesting. Stay vigilant, or opportunity may pass you by.
Alex O’Donnell is a senior writer for Cointelegraph. He previously founded DeFi developer Umami Labs and worked for seven years as a financial journalist at Reuters, where he covered M&A and IPOs. He is also the crypto growth lead at startup accelerator Expert Dojo.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
