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Press Release

BTC DeFi Landscape: A Deep Dive into Layer-2 Networks and Programmability

by Jack

Bitcoin is the largest and most recognized crypto asset, but as the first blockchain, it was designed for security and simplicity—not smart contracts. Programmability was an afterthought. 

Unlike Ethereum or Solana, which were built with DeFi in mind, Bitcoin’s base layer lacks the flexibility to support complex applications.

To address this, developers have introduced Layer 2 solutions that expand BTC’s functionality while preserving its secure settlement layer.

Originally designed as a store of value, Bitcoin is now gaining utility in DeFi through these new primitives, enabling BTC to earn yields on-chain. However, this also raises concerns about ecosystem fragmentation.

This article offers a brief overview of Bitcoin’s programmability constraints and dives into the BTC DeFi (BTCfi) landscape, highlighting its sub-ecosystems and platforms designed for putting idle BTC to work.

TL:DR;

  • Bitcoin lacks native DeFi support because its Layer 1 doesn’t support complex smart contracts, limiting its native use in DeFi.

  • New solutions like L2s, sidechains, and restaked coins are expanding Bitcoin’s role in decentralized finance.
  • BitVM and Tap Protocol extend Bitcoin’s programmability through alternative methods while maintaining its security.
  • The Bitcoin DeFi ecosystem faces challenges with fragmentation.
  • Developers are focused on integrating Bitcoin into DeFi for a more seamless experience.

Primer on BTC Liquidity

The majority of BTC has traditionally been held off-chain or in cold storage due to Bitcoin Layer 1’s inability to support smart contracts. For context, Bitcoin has a market cap of $2.07T, yet only ~$7.14B (0.34% of BTC) is held in smart contracts on-chain (according to DeFiLlama). 

Source: https://defillama.com/chain/Bitcoin 

This is largely because Bitcoin, as the first major public blockchain, was designed with a singular purpose: to support a peer-to-peer network that secures and records transactions involving BTC. Its primary function has always been to maintain BTC as a digital store of value with a hard cap on its supply (21 million BTC).

Unlike competing blockchains such as Solana and Ethereum, Bitcoin is not Turing-complete. This means that Bitcoin’s layer 1 does not natively support smart contract applications like DeFi protocols. This lack of programmability has, in part, led to the low usage of BTC on the blockchain, as there are no native DeFi apps like decentralized exchanges (DEXes) or money markets on Bitcoin.

However, the creation of the Lightning Network in 2015 marked a turning (or turing) point. It enabled off-chain computation for BTC while settling payments while settling transactions on the Layer 1. 

Since then, more Layer 2 networks and other solutions have emerged as a way to bring idle BTC into on-chain ecosystems, enabling Bitcoin DeFi.

These solutions include:

  • Bitcoin Layer 2s
  • Bitcoin restaking
  • Alternative solutions

Bitcoin Layer 2s

Bitcoin Layer 2 networks are built on top of the Bitcoin blockchain to address its scalability challenges, offering solutions that improve transaction speed, lower fees, and enhance functionality.

The main types of Bitcoin L2 solutions include:

  • State channels
  • Sidechains
  • Rollups

State Channels

State channels move transactions off-chain, allowing users to bypass high transaction fees. In practice, two parties lock Bitcoin into a multisig wallet and send payments within the channel, which keeps a record of all transactions until it’s closed. Once they finish transacting, the parties sign and broadcast the final channel state to Bitcoin’s Layer 1 as a single transaction.

This setup significantly reduces costs by reporting only the opening and closing balances to the Bitcoin network, eliminating the need to pay mainnet fees for every transaction. 

Side Chains

A sidechain is an independent blockchain that runs in parallel to Bitcoin’s Layer 1 and is connected to Bitcoin through a two-way bridge. While sidechains often use Bitcoin as their native currency, they can also issue their own native tokens.

Unlike true Layer 2 solutions, Sidechains have separate consensus mechanisms rather than fully leveraging Bitcoin’s security or verification process. However, some sidechains periodically settle on the main chain or leverage Bitcoin’s security to varying degrees.

A defining feature of sidechains is their communication bridge with Bitcoin, which involves locking assets on the Bitcoin network and minting an equivalent amount on the sidechain. 

Rollups

Bitcoin Layer-2 rollups move transaction execution and data off Bitcoin’s Layer 1 to a separate rollup chain while leveraging Bitcoin for data availability and consensus. This solution allows transactions to be executed on the rollup chain, where data is compressed and periodically posted to Bitcoin’s Layer 1 for validation.

Rollups primarily function as an execution layer, maintaining a relationship with the Bitcoin network as the consensus layer.

There are two types of rollups:

  • Optimistic: Optimistic rollups batch transactions without prior validation, providing a challenge period where anyone can challenge the validity of the batch by computing a fraud-proof.
  • Zero-knowledge: Zero-knowledge rollups process batches of transactions and run preliminary validations on transaction data using zero-knowledge validity proofs.  

Here are some of the notable Bitcoin L2 networks:

Stacks

Stacks is a Bitcoin sidechain that operates on a  Proof of Transfer (PoX) consensus mechanism. PoX combines Proof of Stake (PoS) and Proof of Burn to create a system that connects Bitcoin miners with Stack participants, known as “Stackers”.

Similar to PoS, Stackers lock their STX tokens to secure the Stacks network and Bitcoin miners offer BTC to incentivize Stackers for the right to validate blocks. A miner’s selection chances increase based on how much BTC they commit to Stackers. 

When a BTC miner is selected, they validate the block and earn STX rewards in return and their BTC rewards are proportional to the amount of STX they lock.

Stacks DeFi ecosystem

The Stacks network has a TVL of $119.94m (at the time of writing), and is establishing its DeFi ecosystem with foundational apps like DEXes, Money markets, and liquid staking apps. 

Source: https://defillama.com/chain/Stacks 

Stacks allows BTC holders to “liquid stake” their BTC for Stacks BTC (sBTC), a 1:1 bitcoin-backed asset secured via Stacks. By bridging Bitcoin into sBTC users become eligible for rewards paid out in BTC. sBTC can also be used in other apps in Stacks ecosystem.

Stacks top DeFi dApps include:

  • Zest – Lending protocol
  • StackingDAO – Liquid staking protocol
  • ALEX – decentralized exchange (DEX)
  • Bitflow – decentralized exchange (DEX)


Source: https://www.stacks.co/explore/ecosystem?category=All+Teams 

Rootstock Infrastructure Framework (RIF)

Rootstock (RSK) is an EVM-compatible Bitcoin sidechain. It connects to the Bitcoin network via a two-way Proof of Work Peg (PoWPeg) protocol. This mechanism allows users to lock BTC on the Bitcoin network and mint RBTC on Rootstock at a 1:1 ratio.

Rootstock’s consensus layer mirrors Bitcoin’s, sharing the same hash rate through merged mining, where Bitcoin miners can validate blocks on both chains simultaneously. Miners on Rootstock are incentivized with RBTC.

The Rootstock Infrastructure Framework (RIF) operates on top of the RSK blockchain, providing a suite of decentralized services for dApp development. 

Key components of RIF include:

  • Wallet for cryptocurrency transactions
  • DeFi Gateways for accessing decentralized financial services
  • Rollup for scalable payments
  • Relay to simplify gas fee payments
  • Flyover for seamless BTC transfers within the Rootstock ecosystem. 

The RIF token powers the entire system, serving as a utility token for accessing and paying for these decentralized services.

Rootstock DeFi ecosystem

Rootstock has a TVL of $245.4m, and is home to 20 dApps, including DEXes, lending protocols, yield aggregators and more.  

Source: https://defillama.com/chain/Rootstock

Unlike Sidechains like Stacks, Rootstock has access to dApps that are traditionally EVM as well as dApps exclusive to Rootstock.

Rootstock’s top DeFi dApps include:

  • Money on Chain: Partially Algorithmic Stablecoin
  • Sovryn: Lending protocol
  • Uniswap V3: decentralized exchange (DEX)
  • RIF on Chain: Partially Algorithmic Stablecoin
  • Tropykus RSK: Lending protocol

Mintlayer

Mintlayer is a sidechain designed to interact and be interoperable with Bitcoin and The Lightning Network.

Unlike other solutions that require wrapped tokens or other token bridges, Mintlayer uses native BTC cross-chain swaps, also known as atomic swaps. This allows the direct use of native Bitcoin in DeFi applications.

Mintlayer’s DEX uses the smart contracts called HTLC (Hash Time-Locked Contract) which allows two parties to exchange assets minted on Mintlayer with real bitcoins on the Bitcoin network.

By allowing direct use of native Bitcoin in DeFi applications, Mintlayer eliminates the need for wrapped tokens or other forms of token bridges to move liquidity off Bitcoin’s blockchain. This not only enhances security but also maintains true decentralization in cross-chain transactions.

Mintlayer DeFi ecosystem

The Mintlayer DeFi ecosystem is in its early stages and there are currently many app in development. Some of the top dApps include:

  • Kylix finance: native Bitcoin lending and yield
  • Runes Terminal: Runes Protocol launchpad.
  • Orange DX: Hub to trade, bridge, launch, earn, borrow, and lend.
  • BlockInvest: Platform to tokenize Real-World Assets

The Mintlayer team invites developers to create apps on the L2 through its Mintlayer ecosystem fund program. Mintlayer supports development teams through 3 initiatives:

  • Incubator Program
  • Accelerator program
  • Grants

Bitcoin Restaking & Liquid Staking

Bitcoin restaking allows BTC holders to stake their assets to secure proof-of-stake (PoS) blockchains like Ethereum and Binance Smart Chain (BSC). Although Bitcoin operates on a proof-of-work (PoW) consensus mechanism and doesn’t require staked capital for network security, its position as the largest cryptocurrency by market cap makes it an attractive source of liquidity for PoS chains. 

These chains leverage BTC through restaking protocols, which act as security-sharing mechanisms where BTC capital is committed in exchange for rewards. 

Traditionally, each PoS blockchain is secured by its native token—ETH for Ethereum, ATOM for Cosmos Hub, and BNB for BSC Chain. 

However, relying solely on native assets limits economic security to their respective market caps. By enabling cross-staking of external crypto assets like BTC, PoS chains can increase staked market capitalization and enhance security. 

This concept draws inspiration from Eigenlayer on Ethereum, where staked ETH is restaked to secure middleware services such as data availability layers, bridges, and oracle networks, representing a generalized evolution of PoS security.

For BTC holders, staking offers a new way to earn yield on their idle BTC and overcome the limitations of Bitcoins Layer 1. 

Some of the top staking protocols include:

  • Babylon
  • Lombard
  • SolvBTC LSTs

Babylon

Babylon focuses on modular Bitcoin staking, enabling BTC to secure PoS chains through timestamping and slashing mechanisms.

Babylon has a total value locked (TVL) of $5.524B:

Source : https://defillama.com/protocol/babylon 

Lombard

Lombard integrates Bitcoin into DeFi via liquid staking tokens (LSTs), allowing BTC holders to mint LBTC for use in lending, trading, or yield farming.

Lombard has a total value locked (TVL) of $1.781B:

Source: https://defillama.com/protocol/lombard 

SolvBTC LSTs


SolvBTC issues yield-bearing Bitcoin LSTs, combining staking rewards with liquidity across Ethereum, Merlin, and BSC.

SolvBTC LSTs has a total value locked (TVL) of: $1.032B:

Source: https://defillama.com/protocol/solvbtc-lsts 

Alternative BTCFi Solutions

Since Bitcoin’s base layer lacks programmability, new solutions are emerging to enable BTC’s use in DeFi. These approaches enhance Bitcoin’s functionality, allowing users to earn yield and access DeFi apps while preserving its security and decentralization.

StakeStone

StakeStone is an omnichain liquidity infrastructure protocol that allows for BTC liquidity across EVM chains. 

SBTC is StakeStone’s liquid index BTC token, composed of BTCB, WBTC, FBTC, and cbBTC. When users want to move BTC across chains, they can mint SBTC and bridge it to the destination chain. Since SBTC is backed by major BTC derivatives, it maintains robust liquidity on both chains, allowing users to swap it for another BTC token with ease.

StakeStone’s SBTC product has a total value locked (TVL) of $100.64M:

Source: https://defillama.com/protocol/stakestone-sbtc 

StakeStone also supports StoneBTC, a yield-bearing BTC derivative that enables users to earn passive returns on their Bitcoin holdings. Users can deposit SBTC or LBTC (Lombard’s BTC restaking token), which are automatically converted into StoneBTC. 

Upon deposit, StoneBTC begins generating yield through StakeStone’s strategy vaults, which integrate multiple yield sources, including DeFi protocols, CeDeFi institutions, and RWA projects. 

This way, users can put their BTC to work effortlessly while tapping into a diversified and secure yield strategy.

BitVM

BitVM is a scaling solution for Bitcoin that enables complex state changes and smart contract functionality without burdening the network with extensive on-chain computations. It introduces a two-party system where a “prover” executes computations and proves their accuracy, while a “verifier” crafts challenges to detect false claims.

This design mirrors Ethereum’s optimistic rollups by relying on fraud proofs and a system of challenges and responses to ensure data integrity while maintaining minimal on-chain footprints. Originally conceived by Robin Linus as a scaling tool for faster transactions, BitVM’s architecture also hints at a future where Bitcoin users might access Ethereum-like dApps and broader smart contract functionalities.

There are a few projects dedicated to advancing BitVM development including:

  • Bitlayer: Bitcoin Layer 2
  • Citrea: Bitcoin Layer 2 (zk Rollup)
  • Element: Developers responsible for Bitfost, a trust-minimized bridge between Ethereum and Bitcoin
  • Fiamma: Bitcoin Layer 2 (zk Rollup)
  • Strata: Bitcoin Layer 2 (zk Rollup)

Tap Protocol 

TAP is a meta-protocol (built on the Ordinals protocol) enabling native DeFi on Bitcoin’s Layer 1 — without relying on wrapped assets, bridged BTC, or Layer 2 solutions. It achieves this through ordinal inscriptions and Internet Computer (ICP) canisters.

Developers can build applications by packaging their code within ICP canisters, which function as smart contracts capable of managing Bitcoin addresses and public keys.

These canisters connect with ICP’s Bitcoin Canister, a “Bitcoin lite node” that receives, validates, and submits transactions directly to the Bitcoin blockchain. This setup allows the Bitcoin Canister to act as a “co-processor”, bridging communications between ICP canisters and the Bitcoin network.

To safeguard assets, private keys are distributed and managed across all canisters using threshold Elliptic Curve Digital Signature Algorithm (ECDSA) cryptography. ICP implements a cryptographic multi-party protocol to compute ECDSA signatures, ensuring security even if a single canister is compromised.

Conclusion

Bitcoin’s role in DeFi is expanding, but let’s be real — it’s not all sunshine and instant yield farms. Projects like Stacks and Rootstock are building ways to use BTC beyond holding it, unlocking new opportunities for earning and interacting with decentralized finance. We’re finally seeing solutions that don’t force holders to choose between security and yield.

But the road’s still bumpy. Fragmented ecosystems, clunky user experiences, and limited developer adoption are slowing things down.

That said, Bitcoin brings unmatched liquidity and security to the table. It’s clear BTC won’t lead the next DeFi revolution overnight, but slow and steady progress could pay off. 

The real winners? Those who stick around through the grind.

References

 

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Jack
Jack Smith is a well-known author in the world of cryptocurrency. He has been writing about the crypto industry for several years, covering a wide range of topics from blockchain technology and cryptocurrency investments to the potential impact of decentralized finance.

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