The tokens from the Bitcoin decentralized finance (BTCfi) sector are down 23.4% on common in 2024, based on knowledge from Artemis. This contrasts with the hype shared by traders that the Bitcoin decentralized finance (BTCfi) ecosystem would rise this 12 months. Nonetheless, Charlie Hu, the co-founder of layer-2 blockchain Bitlayer, highlights that this narrative is much from useless and lists three explanation why BTCfi is lagging behind.

“When BRC-20 came out, the market had almost zero hype as a whole. The Web3 space was in a bear market, and there weren’t too many things to talk about in the deep bear when trading volume was low. Compared to now, we have other things to draw people’s attention, so distraction is the first reason,” Hu explains.

BTCfi is a comparatively new ecosystem that consists of blockchains created on high of Bitcoin’s blockchain, which function base layers for decentralized functions. The entire worth locked (TVL) of this ecosystem is up over 100% in 2024, in accordance to knowledge aggregator DefiLlama. 

Nonetheless, Hu mentions that since BTCfi is one thing new, its consumer expertise continues to be not optimized. This creates confusion, which ends up in liquidity fragmentation, and that is the second motive why BTCfi nonetheless hasn’t taken off the bottom. 

“I think there’s a couple of things we still need to educate the market. There are a lot of people who still haven’t gotten familiar with how to bridge assets from Bitcoin layer-1 to layer-2. Now, you are moving out of Bitcoin layer-1, but what are the use cases that actually make sense?”

Due to this fact, by fixing the consumer familiarity with the Bitcoin layer-2 functions, Hu believes {that a} “big wave of liquidity,” and factors out that protocols reminiscent of Bitlayer have a key position on this course of. 

“Bitlayer is one of the first destination chains among all these liquidity protocols. We try to bridge all those programmable Bitcoins [wrapped tokens] into our ecosystem and use that liquidity to support all the DeFi protocols because you can’t do much with them without liquidity.”

The third motive is expounded to the crypto market as an entire since costs and buying and selling volumes have been falling since March. Consequently, the BTCfi narrative wants the return of on-chain exercise to take off, and Bitlayer’s co-founder thinks that is “not that far away.”

An underlying scalability drawback

The implementation of layer-2 blockchains helps to resolve the scalability subject, however simply till the second web page. Taking Ethereum for example, the introduction of devoted block area inside blocks, referred to as “blobs”, was essential to deal with the rising quantity of various layer-2 chains created on high of its infrastructure.

Because the variety of layer-2 blockchains created on Bitcoin additionally rises, it’s solely pure that this ecosystem faces the identical drawback. But, Charlie Hu isn’t frightened about it, mentioning developments made on this entrance.

“We’re so early at the infrastructure level. A few teams are trying to create zero-knowledge proofs on Bitcoin, and we believe ZK-snarks have more cost benefits for scalability. Whatever you want to inscribe on the Merkle tree and pass on Bitcoin’s block is expensive, so it’s important to have a cost cost-effective way to make the state transition and verify it on Bitcoin,” shares Hu.

Furthermore, Bitlayer’s co-founder additionally mentions the continuing plan to introduce the OP_CAT code on Bitcoin’s blockchain, which might facilitate knowledge interplay on the community. OP_CAT is an operation code disabled by Satoshi Nakamoto in 2010 to keep away from potential vulnerability exploits whereas the Bitcoin blockchain was nonetheless nascent. Nonetheless, the thought was introduced again by the group often called Taproot Wizards.

The introduction of OP_CAT might considerably enhance the power to create functions utilizing Bitcoin as an infrastructure and can also be highlighted by Hu as a option to increase scalability. Nonetheless, this isn’t a objective for the present bull cycle.

“In this cycle, the goal is unlocking the existing Bitcoin liquidity, which has not been a yield-bearing asset in the last 15 years, sitting in cold wallets doing nothing, to now become programmable money.”

Why not use Ethereum as an alternative?

A standard characteristic of all layer-2 blockchains constructed on Bitcoin is compatibility with the Ethereum Digital Machine (EVM). Which means that the code of Ethereum-native decentralized functions, reminiscent of Aave or Uniswap, will be replicated on high of those layer-2 networks.

In consequence, customers would possibly surprise why to construct an ecosystem on high of Bitcoin as an alternative of sustaining the present panorama of bridging Bitcoin to Ethereum-native functions. Hu explains that, regardless of Ethereum being an essential infrastructure for Web3, Bitcoin provides completely different values and reveals higher sustainability in the long run.

“If we look at the long term, which ecosystem can survive over the next one or two decades, we believe proof of work is still one of the best consensus for a decentralized network, for a public chain. If we pick any public chain that can survive with sound assets still on the chain, that’s definitely Bitcoin.”

Moreover, Bitlayer’s co-founder provides that Bitcoin presents itself as a extra decentralized floor to construct a DeFi ecosystem, leading to safer property. Bringing battle-tested Ethereum functions to Bitcoin layer-2 blockchains then is sensible to Hu.

“Asset security is the most important thing in terms of decentralized finance and so on. I think the things happening at Ethereum are great, but compared to Bitcoin, it’s just a different level of value, a different level of variety.”