One of the hottest areas of innovation in crypto right now is Bitcoin DeFi, which has the potential to unlock close to $2 trillion in largely idle capital.
Bitcoin is presently valued at $98,600 per coin at the time of writing, giving the world’s largest cryptocurrency a total market cap of $1.95 trillion. That’s an awful lot of money, but the vast majority of it is next to useless thanks to Bitcoin’s lack of programmability, which means its blockchain cannot host its own dApps.
Because Bitcoin lacks its own DeFi ecosystem, Bitcoin DeFi is largely taking place on Layer-2 networks such as Stacks and Rootstock, while other Bitcoin holders simply bridge their tokens to networks like Ethereum. But this has caused Bitcoin’s liquidity to become increasingly fragmented, which holds back the potential of Bitcoin-focused DeFi applications.
As any DeFi investor knows, having plenty of liquidity is essential for maintaining a healthy ecosystem. When a DeFi application has lots of liquidity, it becomes simple for users to buy and sell digital assets at a fair and reliable price, without experiencing slippage. On the other hand, a lack of liquidity makes it much more likely that users will suffer from slippage when trying to trade their assets, which can cause them substantial losses.
Hodlers Will Hodl
As the most capitalized digital asset by far, Bitcoin shouldn’t be facing any liquidity problems. But the fact is that it does, thanks to the widely held ethos that the best thing for investors to do is to “buy and hodl”.
Many Bitcoin investors buy BTC and hold it for the long term, due to their belief that its price is only headed in one direction over the long term. There is a significant number of investors who only ever buy BTC, but never sell it, instead simply adding to their stacks and treating it as a long term investment.
This common practice has resulted in a steadily decreasing amount of Bitcoin available to trade on cryptocurrency exchanges, and the problem has become more acute with the recent upsurge of interest among institutional investors. Early in 2024 we saw a number of Bitcoin ETFs obtain approval, which opened the floodgates for billions of dollars in institutional capital to flow into Bitcoin. The operators of those ETFs – such as BlackRock – began buying up thousands of Bitcoins, scrambling to get their hands on as much as they can, so they can sell shares in their ETF funds to traditional investors.
While this had the effect of sending Bitcoin’s price soaring to record highs, above the $100K mark for the first time, it has also led to a dwindling supply of Bitcoin for sale on crypto exchanges.
The lack of Bitcoin in circulation causes problems for liquidity in Bitcoin DeFi, and it’s made worse by the fragmented nature of the nascent industry. The few decentralized applications that allow BTC holders to generate yield are spread across multiple L2 networks, including Stacks, Rootstock, Merlin Chain, Babylon, Build on Bitcoin and SatoshiVM, and none of these ecosystems can easily interact with the others. Due to this, what little Bitcoin DeFi liquidity there is has been split into multiple pools.
Unlocking Liquidity With New Utility
The good news is that efforts to solve Bitcoin’s liquidity problems are underway, with the ambitious Zeus Network looking to enable the seamless transfer of BTC into the Solana-based DeFi ecosystem, which is the largest after Ethereum.
What Zeus does is unique – it eliminates the complexity and risks associated with “bridging” Bitcoin to alternative networks, and instead allows users to deposit BTC and mint a pegged token known as zBTC on the Solana network with just a couple of clicks. In this way, it brings more utility to Bitcoin, which is the key to freeing up more liquidity.
Zeus’ zBTC tokens are pegged 1:1 with BTC and backed by an equal amount of collateral in native Bitcoin. This ensures that the value of zBTC is fully backed up by something tangible. By using Zeus’s permissionless communication layer, users can lock up their BTC and mint zBTC in a single transaction, and then redeem those zBTC tokens at any time.
With zBTC, Bitcoin holders can interact with any Solana-based DeFi application, meaning simple access to all kinds of yield-generating opportunities.
Zeus has been in the making for a number of months, and last December it finally reached the big time after validating its first BTC transaction on the Solana blockchain.
That transaction was a key milestone for the project as it showcased just how seamlessly it’s able to bridge Bitcoin’s liquidity into the Solana ecosystem. At the same time, it was a pivotal moment for blockchain interoperability more broadly.
When users mint zBTC tokens with Zeus using the Apollo dApp, they’re essentially tokenizing Bitcoin on the Solana blockchain. They can then use those tokens to trade or provide liquidity on any Solana-based DEX platform. Alternatively, they can deposit them into a lending protocol like Solend and earn yield on those deposits, or use it as collateral to borrow another cryptocurrency. In addition, there are other Solana dApps that enable users to stake their zBTC tokens to generate yield that way.
Solana is known as one of the best performing blockchains in the business, with the highest transaction throughput and some of the lowest fees found on any decentralized network, making it the perfect vehicle to facilitate the flow of Bitcoin liquidity. Users no longer need to rely on Bitcoin’s own, fragmented Layer-2 landscape, and can instead tap into one of the fastest-growing blockchain ecosystems around.
No More Need To Hodl
Zeus has taken gigantic strides towards making Bitcoin more interoperable, and it’s likely to make Bitcoin much more liquid as a result. Simply “hodling” Bitcoin is no longer the only viable strategy for investors, as Solana-based DeFi can significantly increase their yield.
The integration of Bitcoin and Solana is likely to be a watershed moment in terms of Bitcoin’s utility, and it will encourage a lot more BTC to change hands, providing a big boost to its available liquidity.
| Disclaimer: The text above is an advertorial article that is not part of Coincu.com editorial content. |
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