Will 2025 Potentially Mark the Year for Mainstream Adoption of Bitcoin-Backed Decentralized Finance (DeFi) Applications.

As the world of decentralized finance (DeFi) continues to evolve, one theme stands out as poised for significant growth in 2025: Bitcoin-native DeFi. With institutional adoption of Bitcoin accelerating and its DeFi ecosystem maturing, several industry executives are bullish on the sector’s prospects.

Growth Potential for BTC Staking

The growth potential for Bitcoin staking is especially strong, with a total addressable market in the hundreds of billions of dollars. As of December 30, 2024, Bitcoin staking commands roughly $5.5 billion in Total Value Locked (TVL), according to Staking Rewards.

"It’s everything aligns for Bitcoin staking being a significant market," said Matt Hougan, Bitwise’s Head of Research. "There’s a lot of demand for Bitcoin yield. Even if you’re getting a 3% yield, it’s attractive compared to other options."

Hougan estimates that Bitcoin staking represents a $200 billion market opportunity.

Maturing DeFi Ecosystem

The total value locked (TVL) in Bitcoin DeFi could increase by approximately 300x, according to Alexei Zamyatin, co-founder and CEO of Build on Bitcoin. "We have spoken with dozens and dozens of large Bitcoin DeFi users and funds keen to put their Bitcoin holdings to work earning yield," Zamyatin said.

The growth of the Bitcoin DeFi ecosystem has been driven by the increasing adoption of Liquid Staking Tokens (LSTs), which represent claims on staked BTC. As of December 30, 2024, Bitcoin LSTs command upward of $2.5 billion in total TVL, according to Staking Rewards.

Institutional Adoption

The institutional adoption of Bitcoin has been a major driver of growth for the DeFi sector. In 2024, Bitcoin surpassed $100,000 per coin for the first time as investors poured more than $100 billion into spot BTC exchange-traded funds (ETFs).

"Bitcoin’s all-time high will spark renewed interest in crypto from institutions and regulators alike and should reinvigorate the entire crypto sector in 2025," said Dean Tribble, CEO of layer-1 network Agoric.

Some protocols are particularly well-positioned to benefit from this growth. Babylon, a Bitcoin layer-2 (L2) scaling network, and EigenLayer, a restaking protocol on Ethereum taking Wrapped Bitcoin (WBTC) as collateral, are seen as legitimate by institutions, Hougan said.

"The tech seems reasonable, even from a high-level perspective," Hougan noted.

As of December 30, 2024, Babylon’s and Eigenlayer’s TVLs exceed $5 billion and $15 billion, respectively, according to data from DefiLlama.

Staking Bitcoin

Staking Bitcoin involves locking BTC as collateral to secure Bitcoin L2s in exchange for rewards. Restaking involves taking a token that has already been staked and using it to secure other protocols simultaneously.

Additionally, staked BTC ETFs could catalyze institutional interest in 2025, Hougan said. In November, asset manager Valour launched a Bitcoin-staking ETF in Europe, which stakes to Core, a Bitcoin L2, and pays upward of 5.65% APR as of December 30, according to Valour’s website.

Whether staked BTC makes it into an ETF structure in the United States, Hougan said he is not sure, but in Europe, "definitely."

Novel DeFi Strategies

As the Bitcoin DeFi ecosystem continues to mature, novel DeFi strategies will emerge across the risk curve with Bitcoin as a collateral asset. From simple buy-and-hold strategies with yield-bearing Bitcoin assets to basis trades and options strategies, Jacob Phillips, co-founder and head of strategy at Lombard, said.

Phillips foresees Bitcoin’s maturing DeFi ecosystem eventually helping cement its status as the world’s reserve currency. "The Bitcoin staking rate will become the ‘risk-free rate,’ flipping the US Treasury bill rate and becoming a benchmark for DeFi lending and borrowing," Phillips said.

Conclusion

As we look to 2025, it is clear that Bitcoin-native decentralized finance (DeFi) is poised for significant growth. With institutional adoption accelerating and its DeFi ecosystem maturing, several industry executives are bullish on the sector’s prospects.

The growth potential for BTC staking is especially strong, with a total addressable market in the hundreds of billions of dollars. The total value locked (TVL) in Bitcoin DeFi could increase by approximately 300x, driven by the increasing adoption of Liquid Staking Tokens (LSTs).

Institutional adoption has been a major driver of growth for the DeFi sector. Some protocols are particularly well-positioned to benefit from this growth, and staked BTC ETFs could catalyze institutional interest in 2025.

As the Bitcoin DeFi ecosystem continues to mature, novel DeFi strategies will emerge across the risk curve with Bitcoin as a collateral asset. With its growing adoption and increasing potential for yield, it is clear that Bitcoin-native decentralized finance (DeFi) is an exciting space to watch in 2025.