Bitcoin’s (BTC) role in decentralized finance (DeFi) is growing as the world’s largest cryptocurrency evolves from more than just a store of value, Binance Research said in a report Thursday.
The Bitcoin network is “evolving into a broader decentralized finance ecosystem with the emergence of Bitcoin DeFi,” analyst Moulik Nagesh wrote.
This is a sector that “unlocks bitcoin’s capital efficiency” with the use of financial applications focused on lending, staking, stablecoins and decentralized exchanges (DEX’s), the report said.
DeFi is an umbrella term used for lending, trading and other financial activities carried out on a blockchain, without the need for traditional intermediaries.
Binance noted that only ~0.8% of the bitcoin supply is currently being used in DeFi, and this presents a large “untapped opportunity.” In fact, last year, Julian Love, a deal analyst at Franklin Templeton Digital Assets, said the opportunity could be as much as $1 trillion.
Binance Research report said that Bitcoin needs layer 2s as the network lacks “native programmability,” unlike smart contract-based layer 1s. A layer 1 network is the base layer or the underlying infrastructure of a blockchain. Layer 2 refers to a set of off-chain systems or separate blockchains built on top of layer 1s.
While there has been some progress on the development of Bitcoin layer-2 networks, these platforms need greater adoption and liquidity incentives to be able to scale up effectively, Binance Research said.
The network’s security model is faced with “long-term sustainability challenges” as block rewards will continue to halve, the report said, thereby reducing miner incentives.
The long-term viability of Bitcoin DeFi is dependent on execution, the further development of layer-2s, and the “ability to align with bitcoin’s unique value proposition,” the report added.
Read more: Ethereum L2 Starknet Seeks ‘Bitcoin’s DeFi Take-Off Moment’ With BTC Wallet Xverse
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