What is Rapidly Growing Bitcoin DeFi (Decentralized Finance)?

What Is Bitcoin DeFi?

Bitcoin DeFi refers to decentralized financial services built on the Bitcoin network. Historically, DeFi (decentralized finance) has largely centered on Ethereum and other smart contract-capable blockchains, automating lending, trading (DEX), and asset management services.

Bitcoin was originally designed primarily as a "store of value (digital gold)" and "payment method," with limited smart contract functionality. However, recent technological advances and shifts in community sentiment have accelerated the development of Bitcoin-based DeFi.

Examples of these services include:

• Lending: Borrowing other assets using Bitcoin as collateral or lending BTC to earn interest
• Decentralized exchanges (DEX): Facilitating swaps between BTC and other chain assets without intermediaries
• Staking: Depositing BTC to earn rewards

These services are enabled by Layer 2 (L2) solutions and sidechain technologies. Over the past several years, the total value of BTC locked in DeFi (TVL) has surged, with market expectations that it could grow to hundreds of billions of dollars. Yet, only about 0.8% of the total Bitcoin supply is currently used in DeFi, leaving substantial room for expansion.

Four Reasons Bitcoin DeFi Is Attracting Attention

Interest in Bitcoin DeFi is rising due to a combination of technology innovation, changing market conditions, and evolving community mindsets. Below are four key drivers fueling this trend.

① Massive Untapped Capital

Bitcoin's market size is in the tens of trillions of yen, but most is held long-term (HODL). Currently, only about 0.8% of the total BTC supply is deployed in DeFi. Experts suggest that activating this dormant BTC capital could create a $1 trillion (¥140 trillion) market opportunity.

Toby Lewis, co-founder of the OrdinalsBot project, commented on the Bitcoin DeFi ecosystem:

The Bitcoin DeFi ecosystem could reach a market capitalization of several trillion dollars over the next few years, and is likely to become a primary driver of growth in this crypto cycle.

Bitcoin DeFi is positioned as an attempt to unlock enormous capital efficiency. By bringing liquidity and yield to idle BTC, there is potential to elevate the overall value of the Bitcoin ecosystem.

② Technological Progress and New Protocols

In recent years, technology enabling DeFi on Bitcoin has advanced rapidly. Major developments include:

• Layer 2 (L2) technology growth: Sidechains, statechains, rollups, and other L2 solutions have greatly improved Bitcoin's scalability
• Taproot upgrade: This 2021 upgrade enhanced Bitcoin's smart contract capabilities, enabling more complex conditional transactions
• Ordinals protocol: Launched in 2023, this protocol enables data inscription on Bitcoin's smallest unit, the satoshi, allowing NFTs and tokens (BRC-20) to be issued on Bitcoin

The arrival of the Ordinals protocol especially demonstrated that "NFTs and token issuance are possible on Bitcoin," rapidly boosting developer interest. As a result, projects like Stacks and Rootstock are back in the spotlight, and new projects are proliferating.

③ Macro Factors and Institutional Entry

Changing market dynamics have also supported Bitcoin DeFi's growth. In recent years, key events include:

• Bitcoin halving: Reduced supply increased scarcity, pushing prices to all-time highs (over $100,000)
• Approval of spot BTC ETFs in the US: Lowered the barrier for institutional investors, greatly energizing the market
• Growing institutional demand for yield: Institutions increasingly want to earn returns on BTC, not just hold it

As of the end of recent years, the BTC staking market reached approximately $5.5 billion, with robust demand even for annual yields of 3–5%. The desire among institutions and individual investors to "earn yield on BTC" is a powerful tailwind for Bitcoin DeFi's growth.

④ Changing Attitudes in the Bitcoin Community

The Bitcoin community has long favored a conservative view (Bitcoin maximalism) that BTC should focus on payments and store of value. Concerns over security risks from additional features have led to cautious innovation.

However, since the Ordinals boom, major shifts have occurred:

• Rising competitive awareness: A sense of urgency that "BTC must compete with other blockchains to survive" has spread
• Securing miner revenue: Practical considerations for increasing blockspace demand and miner earnings have become more prominent
• Expectations for new use cases: Developers and users are increasingly motivated to create new applications for Bitcoin

This shift has deepened understanding of Bitcoin DeFi and accelerated technology development and project launches.

Bitcoin DeFi vs. Ethereum DeFi: Key Differences

While Bitcoin DeFi and Ethereum DeFi both belong to the "decentralized finance" category, they differ in technology, ecosystem maturity, and service scope. Key distinctions include:

Technology Foundations

The most fundamental difference is how smart contracts are implemented.

Ethereum offers Turing-complete smart contracts on Layer 1 (L1), enabling complex financial logic directly on-chain. Developers use languages like Solidity to build diverse DeFi apps, including lending, trading, and derivatives.

Bitcoin L1 prioritizes security and stability, with limited programming capability (simple conditional logic). As a result, Bitcoin DeFi is mainly built on L2 and sidechains, where BTC value is bridged and smart contracts are executed.

These differences create:

• Ethereum: Direct smart contract deployment on L1, high developer flexibility
• Bitcoin: BTC value managed on L2 or sidechains, requiring bridging

Ecosystem Scale and Maturity

Ethereum remains dominant in DeFi. Recent data shows a significant gap in scale.

Bitcoin DeFi is still much smaller, but its growth rate is extremely high—TVL jumped roughly 22x year-over-year. The future upside potential is considerable.

Project Diversity and Service Range

Service offerings vary greatly.

Ethereum DeFi features a mature ecosystem with:

• Lending platforms
• Decentralized exchanges (DEX)
• Derivatives (futures/options)
• Stablecoin issuance
• Asset management (yield farming)
• Insurance protocols
• Oracle services
• DAOs (decentralized autonomous organizations)

Bitcoin DeFi is still emerging, currently focusing on:

• Lending
• Decentralized exchanges (DEX)
• Stablecoin issuance
• Staking (earning rewards)

Advanced financial services like derivatives and insurance are still developing. Key platforms include Stacks, RSK (Sovryn), and Lightning. Recently, use cases like oracles and bond issuance protocols have begun to appear.

Security and Decentralization

Security and decentralization standards differ.

Bitcoin itself is highly secure and decentralized via Proof of Work (PoW). However, Bitcoin DeFi often depends on L2 and sidechains, presenting challenges:

• Bridge centralization risk: Moving BTC to L2 requires reliance on specific organizations or technologies
• Node concentration risk: Some L2s have nodes operated by a few entities
• Smart contract bug risk: Vulnerabilities in L2 smart contracts can lead to asset loss

Ethereum is mature in smart contract design and, while project risks vary, L1 generally offers high safety. Still, Ethereum has experienced multiple contract hacks, so it's not entirely risk-free.

Community Culture

Community culture and values differ significantly.

Ethereum community is known for:

• Active support for innovative financial experimentation
• Leading the DeFi boom and welcoming new ideas
• User-driven ecosystem building
• Developer collaboration and open-source ethos

Bitcoin community has traditionally shown:

• Conservative (Bitcoin maximalist) attitudes
• Emphasis on simplicity and stability
• Caution toward adding new features

Recently, the Bitcoin community is changing:

• More active expansion of BTC use cases
• Greater competitive awareness with other blockchains
• Broader understanding of DeFi, NFTs, and new use cases

These shifts are supporting Bitcoin DeFi's development.

Bitcoin DeFi vs. Ethereum DeFi: Comparison Table

The table below summarizes key differences.

Bitcoin DeFi is still less mature than Ethereum DeFi, but it is growing rapidly. With continued development, it is likely to become the stage for a "second DeFi boom."

Future Outlook for Bitcoin DeFi (Mid- to Long-Term)

DefiLlama data shows that Bitcoin DeFi's TVL surged from a few hundred million to about $7 billion over recent years, driven by Bitcoin price gains and new projects. The next few years are expected to bring further rapid growth.

Experts predict the following for Bitcoin DeFi:

• TVL will expand to tens of billions of dollars
• Institutional investors will participate in earnest
• Advanced financial services like derivatives and insurance will mature
• Regulatory clarity will increase reliability

Bitcoin DeFi is expected to become a leading force driving overall crypto asset market growth.

Technical Foundations of Bitcoin DeFi: Layer 2 and Sidechains

Layer 2 (L2) solutions and sidechain technologies are essential for enabling Bitcoin DeFi. Below are major technical platforms and their characteristics.

Lightning Network

The Lightning Network (LN) is a Layer 2 solution for fast, small-value Bitcoin payments. It began widespread adoption around 2018 and is now used globally for everyday transactions.

Technical Mechanism

The Lightning Network uses "payment channels" separate from the main Bitcoin blockchain. Users open multisig accounts (channels) and perform instant transfers within them. Only the final balance is settled on the Bitcoin main chain, enabling fast, low-cost transactions.

Main Features

• Fast, low-cost BTC payments: Transactions complete in seconds with minimal fees
• Scalability: Theoretically supports unlimited transaction volume
• Limited DeFi functionality: Primarily designed for payments; smart contract capabilities are limited
• Network capacity: Approximately 5,000 BTC (hundreds of millions of dollars) locked as of recent years

Use Cases

Lightning Network is used for:

• Retail payments: Implemented at McDonald's and Starbucks (El Salvador)
• Corporate transfers: Used by Walmart (US) for internal payments
• Exchange deposits/withdrawals: Supported by major exchanges and platforms

DeFi Applications

DeFi-style services emerging on Lightning include:

• LN Markets: BTC margin trading on Lightning
• Lightning Pool: Earn rewards by providing liquidity (similar to staking)
• Taro Project (RGB): Planned USD stablecoin issuance compatible with Lightning

The Lightning Network is a foundational payment infrastructure for Bitcoin DeFi and is expected to continue to grow.

Stacks (STX)

Stacks is a Layer 2 chain that adds smart contract functionality to Bitcoin, featuring its own "Proof of Transfer (PoX)" consensus and building a tightly integrated economy with Bitcoin.

Technical Mechanism

Stacks leverages the Bitcoin blockchain as a "trust anchor." Stacks block creation requires actual BTC consumption, inheriting Bitcoin's security while enabling smart contracts.

Main Features

• PoX (Proof of Transfer): BTC-consuming block creation model
• Clarity language: Independent, safety-focused smart contract language
• Native STX token: SEC-recognized legal token in the US
• Strong Bitcoin linkage: Stacks activity directly increases Bitcoin demand

Main Projects

Major DeFi projects on Stacks include:

• ALEX: DEX supporting BRC-20 tokens
• Arkadiko: Protocol for USD stablecoin issuance with STX collateral
• Stacking DAO: Stake STX to earn BTC rewards

TVL and Growth

The Stacks ecosystem is expanding rapidly:

• TVL surged from $13.2 million to $226 million in a few months (1,611% growth)
• STX market cap exceeded $3.9 billion, up 250% year-over-year
• User base reached hundreds of thousands

Upcoming Upgrades

Stacks plans important upgrades:

• Nakamoto upgrade: Reduces block times from 10 minutes to a few seconds, greatly improving user experience
• sBTC introduction: Enables native Bitcoin handling on Stacks for seamless DeFi

Stacks is widely considered the leading platform for "Bitcoin-based DeFi" with strong future prospects.

Rootstock (RSK)

Rootstock (RSK) is a Bitcoin sidechain compatible with the Ethereum Virtual Machine (EVM), featuring "Merged Mining" that links Bitcoin mining with RSK block production.

Technical Mechanism

RSK uses "Merged Mining," allowing Bitcoin miners to mine RSK blocks simultaneously without extra power consumption. This leverages Bitcoin's hash power for RSK security.

Main Features

• Merged Mining: Bitcoin miners mine RSK blocks concurrently
• RBTC: Currency pegged 1:1 to BTC
• EVM compatibility: Direct porting of Ethereum smart contracts
• Fast transactions: Block times of about 30 seconds

Main Projects

Key DeFi projects on RSK include:

• Sovryn: DEX, lending, and stablecoin platform (TVL about $72.5 million)
• Money on Chain: BTC-collateralized stablecoin (DOC) issuance
• RIF protocol suite: Decentralized storage, DNS, and payment infrastructure

TVL and Ecosystem Growth

RSK's TVL has stabilized around $170 million, with steady growth. The Sovryn-centered Rootstock ecosystem is rapidly expanding.

EVM Compatibility Advantages

RSK's strength is EVM compatibility:

• Easy porting of Ethereum DeFi apps
• Developers can use existing Solidity skills
• Access to Ethereum's robust tools and libraries

Rootstock combines Ethereum's usability with Bitcoin's security, making it a vital part of the Bitcoin DeFi ecosystem.

Liquid Network

Liquid Network is a federated sidechain for Bitcoin, mainly serving institutional investors and exchanges for fast transfers and privacy.

Technical Mechanism

Liquid is operated by a consortium of trusted entities (exchanges, financial institutions). While not fully decentralized, mutual oversight ensures security and reliability.

Main Features

• Federated sidechain: Joint operation by multiple trusted entities
• L-BTC: Dedicated currency pegged 1:1 to BTC
• Confidential Transactions: Advanced privacy features for asset amounts and types
• Fast processing: Block times of about 1 minute

Use Cases

Liquid is mainly used for:

• Stablecoin issuance: Tether (USDT) issued on Liquid for fast, private transfers
• Security tokens: Tokenized asset issuance and trading for institutions
• Exchange transfers: Rapid BTC movement between exchanges
• TDEX: P2P decentralized OTC exchange

Advantages and Challenges

Advantages:

• Optimized for institutions: fast, private transactions
• Regulatory-compliant federated governance
• Trustworthiness via Bitcoin security

Challenges:

• Lack of full decentralization
• More focused on B2B than end users
• High dependency on participants

Liquid is mainly specialized for institutional and large-scale transactions, but is increasingly important in the Bitcoin DeFi ecosystem as institutional participation grows.

Comparison Table: L2 and Sidechain Technologies

The table below compares major Bitcoin L2 and sidechain platforms.

Each of these L2 and sidechain technologies plays a distinct role in enabling diverse financial services on Bitcoin. All are expected to continue rapid growth, forming the core infrastructure for the expanding Bitcoin DeFi ecosystem.

Other Bitcoin Expansion Projects

Numerous projects are working to extend Bitcoin's DeFi and functionality beyond the L2s above. Highlights include:

Ordinals and BRC-20

Introduced in 2023, the Ordinals protocol revolutionized the Bitcoin ecosystem by enabling images, text, and other data to be inscribed on satoshis (the smallest Bitcoin unit).

Technical Mechanism

Ordinals assigns a unique identifier to each satoshi, allowing data to be "inscribed." This enables direct issuance of NFTs (digital art) and simple tokens on-chain.

BRC-20 Token Standard

BRC-20, created after Ordinals, is characterized by:

• No smart contracts; simple token format
• Token representation via JSON data inscribed on satoshis
• Tokens like ORDI and PEPE briefly reached markets worth hundreds of millions

Challenges and Evolution

Ordinals and BRC-20's popularity created challenges:

• Fee spikes: Heavy inscription activity drove up Bitcoin transaction fees
• Inefficiency: Large data per transaction consumed significant blockspace

The "Runes" standard, proposed for 2024, aims for more efficient data structures and reduced blockspace consumption.

Market Impact

Ordinals had a major effect on the Bitcoin community:

• Demonstrated NFT and token capability on Bitcoin
• Sparked developer interest and new project launches
• Accelerated investment and development in Bitcoin DeFi

Statechains and Mercury

Statechains enable direct, off-chain transfer of Bitcoin UTXOs, providing fast and private transactions via a different approach than Lightning.

Technical Mechanism

How Statechains work:

• Transfer UTXO ownership directly, not via channels
• Use off-chain signature exchange for settlement
• Only the final owner can withdraw funds on-chain

Mercury Project

Launched in 2024, Mercury advances Statechains with:

• Blinding: Encrypts transfer details even from coordinators
• High privacy: Enables fully private transactions
• Security: Prevents coordinators from stealing funds via blind signatures

Future Applications

Mercury could be used for:

• Lending: Basis for private lending
• OTC derivatives: Building derivatives markets for large/institutional trades
• Privacy-focused payments: Fully private BTC transfers

Statechains and Mercury are expected to become next-generation foundations for Bitcoin DeFi.

Merlin Chain

Merlin Chain, a new L2 project, drew sudden attention in February 2024 with its unique architecture combining ZK rollups, oracles, and fraud detection.

Technical Features

Merlin integrates:

• ZK rollup: Fast, secure transactions via zero-knowledge proofs
• Decentralized oracle: Secure external data feeds
• Fraud detection: Automated attack and anomaly detection

Rapid Growth

Merlin's "Merlin's Seal" campaign made headlines:

• Over $500 million in assets within 24 hours of launch
• Over 1 million participants
• TVL growth across the Bitcoin DeFi market

Planned Services

Merlin plans comprehensive DeFi offerings:

• Merlin Swap: Decentralized exchange (DEX)
• Surf: Derivatives (futures, options)
• Lending: BTC-collateralized lending
• Stablecoins: BTC-backed stablecoin issuance

Risks and Challenges

Risks include:

• Asset lockup: Initial phase may require locked assets
• Operator dependence: High reliance on founding team early on
• Regulatory risk: Regulatory attention due to rapid growth

Despite rapid expansion, careful consideration of risks is essential before investing or participating in Merlin.

DeFiChain (DFI)

Launched in 2020, DeFiChain is an independent blockchain based on Bitcoin, aiming to provide DEX, lending, stablecoin issuance, and other DeFi functions.

Technical Features

DeFiChain is characterized by:

• Forked from Bitcoin's codebase
• Own Proof of Stake (PoS) consensus
• Native DFI token

Past Performance & Current Status

DeFiChain achieved:

• High TVL rankings and attention around 2021
• DEX and lending services with moderate user adoption

But later faced issues:

• Declining token price: Major drop in DFI price
• Centralization criticism: Community-driven claims disputed by actual centralization
• Weak Bitcoin linkage: Limited actual connection to Bitcoin

Position as "Bitcoin DeFi"

Though DeFiChain claims a Bitcoin base, its lack of direct technical or economic linkage to BTC leads some to exclude it from "true Bitcoin DeFi." Unlike Stacks or RSK, it does not directly leverage Bitcoin's security or economy.

Future Outlook

Development continues, but DeFiChain's growth and attention are limited compared to other Bitcoin L2 projects. Future progress depends on stronger Bitcoin integration and unique value propositions.

Key Bitcoin DeFi Use Cases and Services

Bitcoin DeFi delivers a range of use cases comparable to traditional financial services. Here are core services and their practical applications.

BTC Lending and Interest Generation

Lending is a central Bitcoin DeFi service, letting users deposit BTC for interest or use BTC as collateral to borrow other assets.

Main Lending Services

Sovryn Lending

• Lend BTC or USDT for annual interest
• Interest rates vary with market supply/demand (borrowing 5–10%, lending 1–5%)
• Automatic liquidation to protect lenders

Stacks (Arkadiko)

• Use STX as collateral to borrow stablecoin (xUSD)
• BTC collateralization planned for future
• Overcollateralization for system stability

CeFi vs. DeFi

Following the collapse of major CeFi firms in 2022, demand for transparent DeFi lending has surged. Key advantages:

• Transparency: All transactions are on-chain and verifiable
• Non-custodial: Users control assets in their own wallets
• Automated execution: Smart contracts automatically calculate and distribute interest

Yield and Risks

Bitcoin DeFi lending yields are typically 1–5% per year. Risks include:

• Smart contract bugs: Vulnerabilities could lead to asset loss
• Liquidation risk: Sharp drops in collateral can trigger forced sales
• Liquidity risk: Withdrawals may be difficult during market volatility

Careful risk assessment is crucial before participating.

Decentralized Exchanges (DEX) and BTC Trading

Several Bitcoin DeFi DEXes allow asset swaps without intermediaries.

Main DEX Projects

Sovryn AMM and Orderbook

• AMM: Pool-based swaps between RBTC and USDT
• Orderbook: Precise trading via price specification
• Both approaches combine for flexible trading

Stacks (ALEX)

• Popular for STX/BTC and BRC-20 token orderbook trades
• Orderbook enables accurate pricing
• BRC-20 support links with Ordinals ecosystem

Lightning P2P Trading

• OTC trading via Lightning wallets like Mercury Wallet at major exchanges
• Instant settlement and low fees
• Ideal for small trades

DEX Advantages and Challenges

Advantages:

• Anonymity: No KYC required
• Self-custody: Avoid exchange hack risks
• Censorship resistance: Open to all users

Challenges:

• Limited liquidity: DEXes still trail CEXes in liquidity
• Slippage: Large trades may move prices unfavorably
• User experience: Can be complex for beginners

While Bitcoin DeFi DEXes are growing, CEXes remain preferable for large or frequent trades.

Stablecoins and Value Preservation

BTC-backed stablecoins are increasingly used to provide price stability in volatile crypto markets.

Main Stablecoin Projects

Dollar on Chain (DOC)

• BTC-collateralized stablecoin issued on RSK
• RBTC overcollateralized at 150%+ for USD-pegged tokens
• Overcollateralization provides price stability

Bridged USDT/USDC

• Stablecoins from other chains introduced via Merlin and Lightning
• USDT issued by major exchanges used on Bitcoin L2
• Cross-chain bridges enable asset movement between blockchains

Demand Drivers

After the Terra (LUNA/UST) collapse, trust in algorithmic stablecoins dropped, boosting BTC-backed stablecoin credibility. Main reasons:

• Transparency: Collateral is on-chain and verifiable
• Stability: BTC is a proven asset
• Decentralization: No reliance on a central manager

Future Outlook

BTC-backed stablecoins are expected to expand as the Bitcoin DeFi ecosystem grows, institutional adoption increases, and regulatory clarity improves.

BTC Staking and Liquid Staking

Bitcoin employs Proof of Work, so it lacks conventional staking. However, "staking-like" reward models via BTC deposits are gaining traction.

Main Staking Services

Stacks Stacking

• Lock STX tokens to earn BTC rewards
• Annual BTC rewards of 5–10%
• Rewards for contributing to Bitcoin security

BTC L2 Staking

• BTC staking on Stacks, RSK, Merlin, and other L2s is advancing
• Protocols like Babylon and EigenLayer use BTC for security of other blockchains

Liquid Staking Tokens (LST)

Liquid staking solves illiquidity in staking:

• Staking BTC issues tokens like stBTC
• Tokens retain BTC value and can be used in other DeFi protocols
• Earn staking rewards while using assets elsewhere

Example:

1. Stake BTC on Stacks → receive stBTC
2. Trade stBTC or supply to lending platforms
3. Collect BTC staking rewards concurrently

Risks and Considerations

BTC staking and LSTs are new; key risks include:

• Technical risk: Bugs in smart contracts
• Liquidity risk: LSTs may diverge from BTC value
• Regulatory risk: Regulatory treatment is not settled

Understand these risks before participating.

Other Applications

Bitcoin DeFi is expanding beyond core financial services.

Derivatives

• Merlin surf: Planned BTC futures and options
• Sovryn perpetuals: Leveraged BTC trading
• LN Markets: BTC margin trading on Lightning

NFTs and Metaverse

• Stacks NFTs: Game assets as DeFi collateral
• Bitmap: Bitcoin blocks mapped to metaverse, with financial features
• Ordinals NFT: Bitcoin-based digital art as DeFi collateral

Tokenizing Real-World Assets (RWA)

• Liquid Network: Tokenization and trading of real estate and bonds
• Security tokens: Stock and bond trading on Bitcoin
• Institutional offerings: Regulatory-compliant tokenized assets

Other Innovations

• Insurance protocols: Decentralized insurance for DeFi risks
• Prediction markets: Decentralized betting on future events
• DAOs: Bitcoin community governance tools

Bitcoin DeFi is rapidly expanding from basic to advanced financial applications, with more use cases expected in the coming years.

How to Participate in Bitcoin DeFi: Key Steps and Investment Guidelines

To participate in Bitcoin DeFi, you'll need to prepare and follow several steps. Here are step-by-step instructions and key investment points for residents in Japan.

Getting Started With Bitcoin DeFi

To use Bitcoin DeFi, set up a wallet, bridge assets, and connect to protocols through the following steps.

Step 1: Prepare a Compatible Wallet

Choose a wallet compatible with your chosen platform. Each L2 or sidechain has its own recommended wallet.

Lightning Network

• Strike: User-friendly mobile wallet
• BlueWallet: Multi-feature wallet
• Phoenix: Automatic channel management

Stacks

• Hiro Wallet: Official browser extension
• Xverse Wallet: Mobile and desktop support

Rootstock (RSK)

• Metamask: Add RSK network
• Nifty Wallet: RSK-focused wallet

Liquid

• Blockstream Green Wallet: Official Liquid wallet

Follow official site instructions for installation. Always use official sources for security.

Wallet Setup Tips

• Safeguard seed phrase: Store securely in multiple locations
• Enable two-factor authentication: Always activate if available
• Test with small amounts: Start small to learn safely

Step 2: Bridge BTC

Transfer Bitcoin to your chosen L2 or sidechain using platform-specific bridging methods.

Lightning Network

• Send BTC to a Lightning channel
• Initial channel opening requires standard BTC transaction fee
• After opening, transactions are instant and low-cost

Stacks

• Buy STX directly at exchanges for simplicity
• BTC-to-sBTC conversion planned for the future

Rootstock (RSK)

• Peg-in: Convert BTC to RBTC via dedicated bridge site
• Requires about 100 blocks (about 16 hours) for confirmation

Liquid

• Send BTC to a federation address
• Receive L-BTC
• Processing time: about 10–20 minutes

Bridging Tips

• Check processing times: Rootstock peg-out may take about 16 hours
• Check fees: Bridging requires BTC transaction fees
• Test with small amounts: Start small before using larger amounts

Step 3: Connect to Protocols and Start Trading

After bridging, connect to DApps via browser extensions or dedicated apps.

Example: Sovryn

1. Add Rootstock network to Metamask
2. Acquire RBTC (peg-in or exchange)
3. Visit Sovryn's website
4. Click "Connect Wallet" and link Metamask
5. Access lending, trading, staking, and more

Tips

• English-only UI: Use translation tools if needed
• Reserve gas fees: Hold some native tokens (STX, RBTC, etc.) for gas
• Approve smart contracts: Grant permission on first use

Step 4: Understand Network Fees

L2 transactions incur platform-specific fees (gas).

Returning BTC to L1 also requires standard transaction fees, which vary with network congestion.

Step 5: Withdraw Assets

After management, return BTC from L2 to L1.

Withdrawal Steps

1. Select "Withdraw" or "Peg-out" in your wallet
2. Enter your BTC address
3. Specify amount and execute
4. Wait for confirmation (minutes to hours, depending on platform)

Tips

• Minimum withdrawal amount: Some platforms set minimums
• Fees: Withdrawal incurs fees
• Processing time: Peg-out from Rootstock may take time

Key Considerations for Residents in Japan

Japanese residents using overseas DeFi services must consider legal and tax implications.

Legal Protection Limits

• Unapproved tokens: Trading is not illegal, but local legal protection may not apply in case of trouble
• Self-responsibility: Domestic consumer protection does not cover protocol bugs or hacks
• Fraud risk: Some overseas projects may be fraudulent; conduct due diligence

Tax Complexity

In Japan, crypto transactions are treated as follows:

• Taxable income: DeFi interest and profits are "miscellaneous income"
• Yen conversion required: Record all transactions in yen at the time
• Loss offset limitations: Miscellaneous income cannot offset other income
• Tax return required: Annual profits over ¥200,000 require filing

Tax Handling Example

1. Supply BTC for lending → receive BTC interest
2. Record yen value of interest received as "miscellaneous income"
3. If BTC is sold later, the sale price difference is also taxable

Tax Management Tips

• Keep detailed records
• Use crypto tax tools (e.g., Cryptact, Gtax)
• Consult a tax accountant for complex cases

Other Precautions

• Start small: Begin with small amounts to learn
• Diversify risk: Avoid concentrating assets in one protocol
• Stay informed: Monitor community and social media for updates
• Security measures: Use hardware wallets and enable two-factor authentication

Japanese residents should understand these legal and tax considerations before participating in Bitcoin DeFi.

Bitcoin DeFi Investment Advantages and Outlook

Bitcoin DeFi offers compelling investment opportunities. Here are its main advantages and outlook.

Enormous Market Growth Potential

Bitcoin DeFi's greatest appeal is its vast room for expansion.

Current Market Size

Currently, less than 0.8% of the total Bitcoin supply is used in DeFi—far below Ethereum's participation rate (~27%).

Growth Potential

Expert forecasts:

• Bitcoin DeFi TVL could multiply hundreds-fold in coming years
• Market could expand to hundreds of billions of dollars
• From about $1.5 billion now to tens or hundreds of billions soon

Growth Drivers

1. Technology advances: Mature L2 technology brings safer, easier services
2. Institutional adoption: Entry of major financial institutions
3. Regulatory clarity: Clearer rules improve reliability
4. User education: Greater understanding drives usage

These factors are expected to fuel explosive growth in Bitcoin DeFi.

BTC Stability and Credibility

Bitcoin is the most established crypto asset, with key features:

Long-Term Value Growth

• Consistent long-term price appreciation
• Recognition as "digital gold"
• Fixed 21 million BTC supply ensures scarcity

Compounding Effect Potential

Bitcoin DeFi offers:

1. DeFi yield: Annual interest of 3–5%
2. BTC price appreciation: Long-term price growth
3. Compounding: Reinvesting earned BTC for further growth

Sample Calculation

• Initial investment: 1 BTC (assumed $100,000)
• DeFi yield: 5% per year
• BTC appreciation: 10% per year (average)

After 5 years:

• DeFi yield only: 1.28 BTC
• BTC price: About $161,000
• Total asset value: About $206,000 (roughly double)

Institutional Trust

Institutions favor Bitcoin for:

• Longest track record (since 2009)
• Largest market capitalization
• Some regulatory recognition (e.g., US ETF approval)
• High liquidity and trading volume

These attributes make Bitcoin DeFi a stable investment compared to other crypto assets.

Early Investment Opportunities in New Projects

Bitcoin DeFi is still developing, offering early investors the potential for high returns.

Main Project Tokens

High-growth Bitcoin DeFi tokens include:

Stacks (STX)

• Price has multiplied several times in recent years
• Upcoming Nakamoto upgrade and technical advances
• Market cap: about $3.9 billion

RSK (RIF)