From Value Storage to Capital Operation: Analyzing BTC on-chain Finance

Author: 0xresearcher

In recent years, the crypto market has shown a significant shift—from pure price speculation to an era of “asset efficiency” and “on-chain yield.” Ethereum has been the first to benefit, with its staking economy and LST (Liquid Staking Token) ecosystem maturing increasingly. Assets like stETH not only allow ETH holders to earn stable on-chain yields but also enable direct participation in DeFi lending, market making, and derivatives trading, forming a multi-layered yield cycle.

In contrast, the on-chain capital efficiency of Bitcoin is still at a “primary stage.” Although it remains the core of the crypto world—about 60% market share, approximately $2.4 trillion market capitalization, and the most robust consensus network globally—on-chain, BTC is more regarded as “digital gold”: a safe store of value, but lacking in composability, yield potential, and multi-chain liquidity. Most BTC holders either hold their assets long-term without movement or rely on centralized platforms for limited interest, missing out on the vitality of on-chain finance.

The composability dilemma of ### BTC

The key to the success of ETH’s staking model lies in its deep integration with smart contracts and the DeFi ecosystem, while the BTC main chain lacks an equivalent execution environment. Although there are cross-chain wrappers (such as WBTC), sidechains, and bridging solutions, several core pain points still exist:

• Lack of native yield - Cross-chain BTC is mostly wrapped assets and cannot generate yield naturally like ETH staking;
• Liquidity fragmentation - Cross-chain assets are distributed across different chains and protocols, and the scale is insufficient to support large-scale capital operations;
• High trust cost - Whether it’s centralized custody or a multi-signature mechanism, users need to place additional trust in a certain institution or multiple parties.

These issues have left BTC in an awkward state of “high value, low utilization” for a long time. However, market expectations are changing. More and more institutions and DeFi teams, especially in Asia, are beginning to drive liquidity innovation for BTC—not only hoping that BTC holders can achieve secure returns, but also hoping it can become the core asset for on-chain capital circulation such as lending, stablecoins, and derivatives.

The Accelerating Role of the Asian Market

The demand for BTC DeFi in the Asian market has grown significantly. There is a large number of long-term BTC holders here, and the concentration of exchanges, infrastructure projects, and communities means that new products can be quickly accepted by the market once they fit the right scenario. Ideal BTC DeFi products need to meet three conditions:

• Low-risk returns - avoiding high volatility and high leverage strategies;
• Strong composability - can be directly integrated into mainstream DeFi protocols, rather than existing in isolation;
• Cross-chain convenience - supports multi-chain deployment, lowering the entry barrier for users.

WBTC – BTC wrapping and liquidity

WBTC is the earliest BTC wrapped asset that introduces Bitcoin into the Ethereum ecosystem in ERC-20 format, allowing BTC to participate in lending, liquidity provision, and derivatives trading. Its advantages lie in its wide acceptance and high liquidity, as almost all mainstream DeFi protocols support WBTC. However, WBTC essentially relies on centralized custody, requiring users to trust the custodians, which poses security and transparency risks. At the same time, it does not generate additional yield and only provides composability, which is a significant limitation for users looking to fully leverage the value of BTC.

Babylon – Layered Staking Protocol and Node Operators

Babylon focuses on providing a foundational staking infrastructure for Bitcoin, targeting technically-oriented node operators. Its advantages lie in high security and decentralization, ensuring the safety of BTC staking through strict node management and multi-validation. It supports institutional-level users to convert BTC into on-chain operable assets. However, for ordinary users, directly using the Babylon protocol presents a barrier, requiring technical skills or reliance on derivative packaging products. The core value of Babylon lies in providing foundational staking capabilities for the BTC ecosystem, but liquidity and usability still need further expansion.

EtherFi – ETH liquid staking and cross-chain composability

EtherFi offers ETH liquid staking services, combining staking rewards with DeFi composability. Users can easily participate in ETH staking and conduct capital operations across multiple chains to achieve yield stacking. EtherFi targets the ETH community, providing a low-threshold experience and supporting cross-chain operations. Compared to the BTC ecosystem, its model is already mature, but it primarily serves ETH users and has not addressed the yield and low volatility needs of BTC.

Ethena – Characteristics of Synthetic Dollar Yield and Strategy

Ethena offers stable USD earnings (USDe) through perpetual contracts and arbitrage strategies, suitable for DeFi users with a lower risk appetite. Users can earn fixed income on-chain while participating in strategy combinations to enhance capital efficiency. However, its composability is relatively limited, primarily focused on stablecoin pools and synthetic assets, providing insufficient flexibility for investors looking to utilize BTC for broader DeFi applications. Ethena demonstrates the potential for diversification of on-chain returns, but still requires dedicated solutions for BTC to meet core market demands.

Lombard – LBTC: A representative case of on-chain earnings in BTC

In this context, the LBTC launched by Lombard is a typical case. It is positioned as an institutional-grade yield-bearing Bitcoin, fully backed by BTC, obtaining passive income by staking the underlying BTC in the Babylon Bitcoin staking protocol. BTC holders retain core exposure while also earning stable on-chain returns.

Market Performance:

• Launched for only 92 days, TVL exceeded 1 billion USD;
• Over 80% of LBTC is active in DeFi, used for lending, providing liquidity, and re-staking strategies;
• Attract over $2 billion in new liquidity, accounting for 40% market share of the Babylon staking protocol;
• Deep collaboration with Finality Providers such as Galaxy, Figment, Kiln, P 2 P, etc.
• Included as institutional-grade collateral assets by Aave, Maple, Spark, Morpho, etc.

In terms of security, Lombard has built a multi-layered protection system: institutional alliances, multi-level approvals, time locks, audits, and on-chain PoR (Proof of Reserves). Since its launch, there have been no depegging incidents, closely approaching the traditional financial “AAA” security standards.

In terms of cross-chain deployment, LBTC has been launched on chains such as Base, Sui, Katana, and BNB Chain, with SDK integration for Binance and Bybit, opening a direct channel for BTC DeFi for Asian users.

The emergence of LBTC addresses the core issue of on-chain yields for BTC. The LST model of ETH has been validated as feasible, but directly applying it to BTC requires consideration of security, liquidity, and cross-chain deployment. LBTC first establishes a base yield through staking provided by Babylon, and then combines multi-chain deployment and SDK integration to unlock liquidity, enabling it to form a scale effect in the short term. In the future, if it is accepted by more DeFi protocols as a core collateral, or enters complex on-chain markets such as stablecoins and derivatives, the on-chain capital efficiency of BTC may undergo a qualitative leap. LBTC may become an accelerator for this wave of innovation.

Overall Market Trends and Future Outlook

Overall, the capitalization on the BTC chain is still in its early stages, but the potential is huge. As the market shifts from price speculation to asset efficiency and on-chain yields, more and more projects are trying innovation in different directions:

• Multi-chain expansion and interoperability: As more DeFi protocols deploy across chains, the use cases for BTC assets become richer;
• Growth of low-risk yield products: Investors have a strong demand for stable returns, and yield-based BTC products are expected to become mainstream;
• Increased participation from institutions and compliance: Institutional investors in Asia and globally are actively exploring on-chain BTC allocations, driving ecosystem maturity;
• Innovation Strategy Sandbox: Derivatives, re-staking, arbitrage, and combination strategies are continuously emerging, improving on-chain liquidity and capital efficiency for BTC.

Bitcoin is gradually transforming from “digital gold” into a usable on-chain asset. Various innovative projects are jointly promoting the development of the BTC ecosystem, enabling long-term holders and DeFi users to more efficiently unlock asset potential. LBTC is just one example, and the path and ideas it showcases hint at possible future directions for the financialization of BTC on-chain—diversification, low risk, composability, and cross-chain. With more technological innovations and product implementations, BTC will not only serve as a store of value but will also become an important node for on-chain capital operations.