Pantera Capital: The total value of DeFi applications on Bitcoin may reach $225 billion

Original Title: THE MOST NEGLECTED ASSET: REVISITING BITCOIN PROGRAMMABILITY
Original Author: Franklin Bi, Pantera Capital
Original Compiler: Kate, Mars Finance

Bitcoin is the most neglected asset in the world

What if I told you that an asset has:

• A market cap of $900 billion (60% higher than Visa)

• A daily trading volume of $26 billion (250% higher than Apple)

• An annualized volatility of 50% (20% lower than Tesla)

• Over 220 million global holders (countries with populations over 220 million: 6)

Ignored and sidelined by the world's "leading" financial institutions for 10 years? Would an ETF satisfy you?

No. Relative to the size and scale of Bitcoin, it remains one of the most underserved and least financialized assets in the world.

Bitcoin is one of the most distinctive assets in the crypto ecosystem. Its market cap and trading volume are 2.5 times that of Ethereum. The Bitcoin network is like a digital Fort Knox. Its computational power is 500 times that of the fastest supercomputers in the world. There are over 200 million Bitcoin holders and 14 million Ethereum holders globally. Bitcoin still stands out in the regulatory gray ocean—recognized, classified, and viewed as a digital commodity.

If Wall Street's financial system is not built for Bitcoin, then Bitcoin will have to build a financial system for itself.

If blockchain technology can help unbanked individuals access banking services, the most obvious way is through Bitcoin's global distribution in Latin America, Africa, and Asia. This has already covered millions of people. If we expect trillions of value to eventually flow on-chain, there is no network more secure or resilient than the Bitcoin network. As Bitcoin users reach 1 billion or more, they will want to do more than just store and transfer their assets. Capital and technology rarely stagnate. This time is no exception.

Bitcoin is Technology

Just as Bitcoin as an asset has been overlooked, its role as a technology may be even more neglected. Bitcoin lags in scalability, programmability, and developer interest. My first attempt to build on Bitcoin was in 2015, during the early days of JPMorgan's cryptocurrency research. There was almost nothing to explore beyond colored coins and sidechains. These were the early ancestors of today's NFT revival and Layer-2 rollups.

At that time, the judgment was: building on Bitcoin is too difficult. Ask David Marcus, former president of PayPal and co-founder of Meta's Diem stablecoin. He is now building a Bitcoin payment company, Lightspark. David recently wrote on Twitter: "Building on Bitcoin is at least 5 times harder than building on other protocols."

As both a currency and a technology, Bitcoin's blessing is also its curse:

- Resistance to Change: This is the foundation of Bitcoin's robustness, but also its lagging nature. Upgrades are hard to approve and may take 3-5 years to implement.

- Simple Design: This makes Bitcoin less susceptible to exploitation but also less flexible. The UTXO model of the Bitcoin blockchain is well-suited for providing a simple transaction ledger for payments. However, it is largely incompatible with the complex logic or loops required for more advanced financial applications.

- 10-Minute Block Time: This has helped the Bitcoin network maintain 100% uptime since 2013 (a rare achievement), but it has hindered its ability to provide a rich consumer experience.

Today, the signs I see suggest that Bitcoin's developmental stagnation is a temporary, non-structural condition. A decentralized financial system based on Bitcoin may eventually emerge. Its potential is similar to or greater than today's DeFi on Ethereum, although it follows a different evolutionary path.

Why Now?

In the past few years, Bitcoin has embarked on a new trajectory of development:

- Taproot Upgrade (November 2021): This upgrade expanded the amount of data and logic that Bitcoin transactions can store.

- Ordinals Inscription (January 2023): A Taproot-supported protocol for inscribing rich data onto a single sat (totaling 21 trillion). This enabled a metadata layer for non-fungible tokens.

- BRC-20 Tokens (March 2023): An Ordinals inscription capable of enabling deployment, minting, and transfer functions.

The release of qualitative and non-fungible assets in 2016-2017 sparked the first wave of DeFi and NFT activity on Ethereum. Similarly, early signs of growth are now emerging. Driven by Ordinals inscriptions, the average fee per Bitcoin transaction rose 20-fold in 2023.

Bitcoin will inevitably carve its own path, but it is clear that a new design space has opened up for Bitcoin builders.

Larger macro trends have triggered a psychological shift within the Bitcoin community, reigniting Bitcoin investors' interest in Bitcoin's decentralized finance:

- Adoption of Layer-2: Layer-2 solutions like Arbitrum dominated new DeFi activity in 2023. This indicates that it is possible to expand the capacity and programmability of blockchains without changing the base layer.

- Acceptance by Traditional Institutions: The approval of Bitcoin ETFs has broken a major regulatory barrier, bringing capital flows and entrepreneurial spirit back to its ecosystem. BlackRock and Fidelity are activating Wall Street's slow but powerful engine. Trading firms are seeking every marginal source of Bitcoin liquidity. This may soon draw them into DeFi, especially new institutional DeFi gateways like Fordefi.

- Failures of Crypto-Native Institutions: The collapse of counterparties like FTX, BlockFi, Celsius, and Genesis marked a global financial crisis native to cryptocurrency. A whole generation of investors is reluctant to hand over their Bitcoin to centralized financial services.

In hindsight, it is clear: technological unlocks and macro trends are converging toward a breakthrough moment for DeFi on Bitcoin. Now is the time to seize this moment.

A $500 Billion Opportunity

The rewards of enabling DeFi on Bitcoin are enticing. Beyond the social and economic significance, every early builder and investor should ask: What if it succeeds? What is DeFi's value to Bitcoin?

Ethereum, valued at approximately $300 billion, currently hosts most of the DeFi activity. Historically, DeFi applications built on Ethereum have accounted for 8% to 50% of Ethereum's market cap, currently around 25%. Uniswap is the largest DeFi application on Ethereum, valued at $6.7 billion, accounting for 9% of all DeFi applications on Ethereum.

If DeFi on Bitcoin reaches the same proportion as Ethereum, we can expect the total value of DeFi applications on Bitcoin to reach $225 billion (25% of Bitcoin). Over time, this figure could range between $72 billion and $450 billion (8% to 50%). This assumes that Bitcoin's current market cap remains unchanged.

Leading Bitcoin DeFi applications could ultimately be valued at $20 billion (2.2% of Bitcoin), ranging from $6.5 billion to $40 billion. This would make it one of the ten most valuable assets in the crypto ecosystem. Bitcoin is on the verge of becoming a trillion-dollar asset again. However, it still has an untapped opportunity of $500 billion.

Looking Ahead

In the past three years, a wave of advancements in Bitcoin programmability has emerged on the horizon. Examples include: Stacks, Lightning, Optimistic rollup, zk-rollup, Sovereign rollup, Discreet Log Contracts. Recent proposals include Drivechains, Spiderchain, and BitVM.

But successful solutions will not break through solely based on their technical advantages. Successful methods for enabling DeFi on Bitcoin will require the following:

- Economic Consistency with Bitcoin: Any programmable Bitcoin layer should be directly linked to Bitcoin's economic value and security. Otherwise, users may perceive it as hostile or parasitic to Bitcoin. Alliances could take the form of bridging BTC as L2 collateral and gas payments. It could also involve using the Bitcoin network for settlement and data availability.

- Feasibility without Changing the Base Layer: Some proposed solutions require hard forks or soft forks of Bitcoin. This means system-wide upgrades. Given how rare they are, they are unlikely to become early contenders. However, some are worth pursuing in the long term.

- Modular Architecture: Winning solutions need sufficient scalability to incorporate new technological advancements. We have already seen changes in on-chain hosting, consensus design, virtual machine execution, and zero-knowledge applications. A semi-closed system with a proprietary stack will not keep pace.

- Trustless Bridging: Connecting assets from one chain to another is very challenging. If done well, it is as challenging as interstellar transport, considering potential disasters, from mismatched delays to weakened vulnerabilities. Few decentralized bridges have been attempted and validated. One example is tBTC, which continues to evolve its design and decentralization.

- A Relentless Ground Game: Two audiences are crucial for growth: 1) current Bitcoin holders and 2) future Bitcoin builders. Both are dispersed in obscure ways. Exchanges hold about 10-20% of the total Bitcoin supply. Approximately $10 billion worth of Bitcoin exists in various tokenized forms on Ethereum. Developers' thoughts are distributed across multi-chain, multi-layer stacks. Both groups need a "take the profit" mentality.

The era of Bitcoin being overlooked may finally be coming to an end. In the post-ETF era, Wall Street is finally recognizing the benefits of Bitcoin as an asset. The next era will be one of Bitcoin as a technology, reigniting passion for Bitcoin.