Binance Research stated in a report on Thursday that Bitcoin (BTC) is playing an increasingly important role in decentralized finance (DeFi) as it moves beyond being just a store of value.
According to analyst Moulik Nagesh, the Bitcoin network is transitioning into a more extensive decentralized finance ecosystem with the rise of Bitcoin DeFi.
This sector focuses on improving bitcoin’s capital efficiency through financial applications that involve lending, staking, stablecoins, and decentralized exchanges (DEX’s).
DeFi refers to a range of financial activities such as lending and trading that take place on a blockchain without the need for traditional intermediaries.
Binance highlighted that only about 0.8% of the bitcoin supply is currently utilized in DeFi, indicating a significant untapped opportunity. Last year, Julian Love of Franklin Templeton Digital Assets suggested that this opportunity could be worth up to $1 trillion.
The report also mentioned that Bitcoin requires layer 2 solutions due to its lack of “native programmability” compared to smart contract-based layer 1 networks. Layer 1 networks serve as the foundation of blockchains, while layer 2 systems are built on top of layer 1s.
Although progress has been made in developing Bitcoin layer-2 networks, these platforms need increased adoption and liquidity incentives to effectively scale up, according to Binance Research.
Furthermore, the network’s security model faces challenges in terms of long-term sustainability as block rewards continue to halve, reducing miner incentives.
The success of Bitcoin DeFi in the long term will depend on execution, the advancement of layer-2 solutions, and the ability to align with bitcoin’s unique value proposition, the report concluded.
