BTCFi at a crossroads: Stalled revolution or temporary Setback?

Bitcoin-based decentralized finance (BTCFi) was pitched as the next growth engine for the original cryptocurrency. But recent market data suggest a more sobering reality: slow adoption, thin yields, and clunky user experience are weighing on progress.

A closer look shows structural hurdles across the board, from stagnant financial metrics to user apathy, raising questions about the near-term viability of the niche.

The user barrier: why bitcoin holders aren’t biting User growth is the lifeblood of any new technology. After a brisk start—TVL surged more than tenfold in H2 2024 to above $7 billion—momentum faded by early 2025, giving way to stagnation and pullbacks.

This is especially striking given bitcoin’s trillion‑dollar market cap, deep pools of “dormant” liquidity, and the still-untapped potential of L2s. Yet awareness and trust remain stubbornly low.

A recent GoMining survey of 700-plus respondents in North America and Europe found that 77% of bitcoin holders have never interacted with BTCFi protocols. The top reasons: lack of trust and complexity. Forty percent said they wouldn’t allocate more than 20% of their crypto to BTCFi; two-thirds couldn’t name a single project. Only 10% had any hands-on experience, and just 8% use farming or lending tools regularly. With three-quarters of the target audience sitting it out, ecosystem metrics inevitably stall.

Stalling TVL and underwhelming yields BTCFi still ranks in DeFiLlama’s top five, behind Ethereum, Solana, and BNB Chain. That positioning, despite a lack of growth, may also reflect broader DeFi stagnation during the market correction.

The segment is dominated by the restaking protocol Babylon, with TVL above $4.7 billion. A brief activity spike late last year—likely Babylon-driven—failed to reverse the broader slide.

One big reason demand is low: low return. Staking BTC alone yields roughly 0.05% APY, while pairing bitcoin with the BABY token offers about 1.51%. Given crypto’s risk profile—volatility, hacks, smart contract bugs—such rates are not competitive. For context, 10-year Treasuries yield around 4%, far above Babylon’s payouts. Meanwhile, wrapped bitcoin (like WBTC) deployed in mature DeFi ecosystems often looks like the more compelling alternative.

Under the surface: a usability problem BTCFi aims to shift bitcoin from a passive store of value to an active financial asset—integrating staking, lending, and yield strategies on-chain. Builders like Stacks co-founder Muneeb Ali argue for a “thriving on-chain economy” around BTC.

But usability remains the central obstacle. Analysts describe many BTCFi apps as effectively unusable for the average person. GoMining CEO Mark Zalan echoes the sentiment, noting that crypto broadly—and bitcoin specifically—still struggles on ease of use. Today, interacting with BTCFi can feel closer to a command line than an Apple-like experience.

Do Bitcoin L2s have a path forward? Galaxy Research warns that most Bitcoin L2s may prove non-viable long-term, despite the promise of cheap, fast, decentralized payments. The core challenge is the cost of posting data to Bitcoin’s base layer so that any node can reconstruct L2 state.

With block size capped at 4 MB, data commitments consume substantial space. A single posting can hit 400 KB—about 10% of a block. If many rollups publish data every 6–8 blocks, base-layer fees could spike, risking the exclusion of smaller transfers.

Survival, researchers argue, will depend on generating sufficient fees to secure block priority. At low fees (around 10 sat/vB), a rollup might spend roughly $460,000 per month on security; at higher fees (near 50 sat/vB), costs could climb to around $2.3 million.

Where BTCFi stands now

• The core issue is usability, which suppresses participation and capital inflows.
• Even founders acknowledge the sector is still forming and far from intuitive.
• Survey data show widespread unfamiliarity, stagnating TVL, and uncompetitive yields.

For now, BTCFi remains a niche experiment rather than a growth engine for the broader bitcoin ecosystem. Its trajectory will hinge on whether developers can strip away technical friction and deliver a simpler, safer, and more rewarding user experience. If they can, today’s stall could look like a temporary setback. If not, the “next chapter” for bitcoin finance may be written elsewhere.