Bitcoin (BTC)'s role in decentralized finance (DEFI) is growing as the world's biggest cryptocurrency evolves from more than just value, Binance Research said in a report on Thursday.
The Bitcoin Network is “evolving into a broader, distributed financial ecosystem with the advent of Bitcoin receivables,” writes analyst Moulik Nagesh.
This is the sector that unlocks Bitcoin's capital efficiency through the use of financial applications focused on loans, staking, stubcoin and decentralized exchanges (DEX).
Defi is the umbrella term used for lending, trading and other financial activities made on the blockchain without the need for traditional intermediaries.
Binance noted that only about 0.8% of the Bitcoin supply currently used in Defi, this presents a major “undeveloped opportunity.” In fact, last year, Julian Love, a trading analyst for digital assets at Franklin Templeton, said the opportunity could be $1 trillion.
Unlike smart contract-based Layer 1, the Binance Research Report states that Bitcoin needs Layer 2 because the network does not have “native programmaticity.” Layer 1 networks are the basic layer or underlying infrastructure of a blockchain. Layer 2 refers to a series of off-chain systems or individual blockchains built on top of Layer 1.
While there have been some advances in the development of the Bitcoin Layer-2 network, these platforms need greater adoption and liquidity incentives to be able to scale up effectively, Binance Research said.
Network security models face “long-term sustainability challenges” as block rewards continue to be halved, the report says, which reduces miners' incentives.
The long-term viability of Bitcoin Defi depends on execution, further development of Layer 2, and “the ability to align with Bitcoin's unique value proposition,” the report added.
Read more: Ethereum L2 Starknet seeks “Bitcoin defi takeoff moment” in BTC wallet vsverse
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