- There are many ways for investors to grow their Bitcoin holdings.
- Options include centralized lending and placing wrapped Bitcoin in DeFi protocols.
- For “native” yield, a growing array of sidechain and Layer 2 solutions brings DeFi to the Bitcoin ecosystem.
As Bitcoin investors buckle down for what could be the next crypto winter, many are looking for somewhere to park their coins where they can grow.
However, without a staking mechanism like Ethereum’s, generating yield from BTC requires more creativity.
Today, investors seeking Bitcoin yield can choose from dozens of different platforms and strategies, each with their own risks and benefits.
Margin Lending
The most basic way to generate BTC yield is to lend it to borrowers who are willing to pay interest on the loan.
Several centralized exchanges operate lending desks that connect investors with traders who want to borrow margin collateral.
While straightforward, it’s important to understand the counterparty risk involved with centralized crypto lending.
FTX, Celsius, and BlockFi failed exactly here, and many investors remain wary of the practice.
DeFi+Wrapped Bitcoin
With the rise of decentralized finance (DeFi), crypto investors gained new ways to generate yield without lending to traders directly.
In the DeFi model, lenders place their coins in a shared liquidity pool.
Protocols like Aave can algorithmically set rates based on supply and demand, distributing interest proportionally to depositors.
A similar algorithmic logic applies to automated market makers (AMMs) like Uniswap and Curve, only instead of interest payments, yield is generated from trading fees.
Initially, BTC investors seeking DeFi yields were required to wrap their coins, and Wrapped Bitcoin (WBTC) has been an important source of value and liquidity for the ecosystem.
Investors “tried various things to earn yield on their Bitcoin. They even tried to lend it out via centralized entities, and it didn’t end well,” Curve founder Michael Egerov observed to CCN.
In his opinion, “wrapping Bitcoin and using it in DeFi [is] much safer.”
The Rise of BTCFi
As decentralized finance matures, Egerov anticipates more Wrapped Bitcoin arriving in the ecosystem.
Conservative BTC holders have stayed away so far. But as protocols prove their resilience, more will start to come around, he predicted.
However, the most diehard Bitcoiners are likely to always reject WBTC yield strategies on ideological grounds.
For those who don’t want to trust custodians like BitGo who secure the assets underpinning wrapped tokens, a new generation of “native” Bitcoin yield products offers an alternative.
So-called “BTCFi” platforms deploy Ethereum-style DeFi mechanics on Bitcoin sidechains of Layer 2 networks.
Platforms like Rootstock and Liquid Network let users wrap their own BTC.
Today, these subsidiary networks play host to dozens of alternative yield protocols spanning a wide variety of DeFi models.
Bitcoin Staking
BTCFi is still in its infancy, but there are already billions of dollars locked in the most popular protocols.
For instance, as of Nov. 7, BTC worth over $5.8 billion was staked via Babylon.
Bitcoin staking is a novel strain of BTCFi that yields cryptocurrencies other than Bitcoin.
Babylon anchors the security of other blockchains in Bitcoin’s proof-of-work consensus mechanism.
When users “stake” their BTC, they are locking it up to secure proof-of-stake (PoS) networks in return for their native token rewards.
Currently, the protocol underpins Neutron. But a pipeline of other blockchains that may integrate Babylon in the future.
Other Bitcoin staking platforms include Stroom.
Rather than generating yield from PoS rewards, Stroom users lock their BTC in Lightning Network channels in exchange for transaction fees.
Rewards denominated in lnBTC can then be converted permissionlessly to mainnet Bitcoin.
