From Stored Value to Capital Operation: The Next Cycle of On-Chain Finance for BTC

In the past few years, the cryptocurrency market has undergone a significant shift—from pure price speculation to an era focused on "asset efficiency" and "on-chain yield." Ethereum has been the first to benefit, with its staking economy and LST (Liquid Staking Token) ecosystem maturing rapidly. 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, creating a multi-layered yield cycle.

In contrast, Bitcoin's on-chain capital efficiency remains in a "primary stage." While it continues to be the core of the crypto world—holding about 60% market share, a market cap of approximately $2.4 trillion, and the most robust consensus network globally—on-chain, BTC is more often viewed as "digital gold": a secure store of value, but lacking in composability, yield generation, and multi-chain liquidity. Most BTC holders either hold their assets long-term without action or rely on centralized platforms for limited interest, missing out on the vibrant on-chain financial ecosystem.

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 Bitcoin main chain lacks an equivalent execution environment. Although there are cross-chain wrappers (like WBTC), sidechains, and bridging solutions, several core pain points remain:

Lack of native yield—cross-chain BTC is mostly wrapped assets that cannot naturally generate yield like ETH staking;
Fragmented liquidity—cross-chain assets are distributed across different chains and protocols, with insufficient scale to support large capital operations;
High trust costs—whether through centralized custody or multi-signature mechanisms, users need to place additional trust in a specific institution or multi-party alliance.

These issues have left BTC in a long-term "high value, low utilization" awkward state. However, market expectations are changing. An increasing number of institutions and DeFi teams, especially in Asia, are beginning to drive BTC liquidity innovation—not only hoping for BTC holders to earn secure yields but also aiming for it to become a core asset in on-chain capital cycles involving lending, stablecoins, and derivatives.

The Accelerating Role of the Asian Market

The demand for BTC DeFi in the Asian market has grown significantly. It is home to a large number of long-term BTC holders, 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 yield—avoiding high volatility and high-leverage strategies;
Strong composability—able to integrate directly into mainstream DeFi protocols rather than existing in isolation;
Cross-chain convenience—supporting multi-chain deployment to lower the entry barrier for users.

WBTC – BTC Wrapping and Liquidity

WBTC is the earliest BTC wrapped asset, bringing Bitcoin into the Ethereum ecosystem in ERC-20 form, allowing BTC to participate in lending, liquidity provision, and derivatives trading. Its advantages lie in widespread acceptance and high liquidity, with almost all mainstream DeFi protocols supporting WBTC. However, WBTC essentially relies on centralized custody, requiring users to trust the custodian, which poses security and transparency risks. Additionally, it does not generate extra yield and only provides composability, which is a significant limitation for users looking to fully leverage BTC's value.

Babylon – Underlying Staking Protocol and Node Operators

Babylon focuses on providing the underlying staking infrastructure for Bitcoin, targeting technical node operators. Its advantages include high security and decentralization, ensuring BTC staking safety through strict node management and multiple verifications. It can support institutional users by converting 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 wrapping products. Babylon's core value lies in providing underlying staking capabilities for the BTC ecosystem, but liquidity and ease of use still need further expansion.

EtherFi – ETH Liquid Staking and Cross-Chain Composability

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

Ethena – Synthetic Dollar Yields and Strategy Features

Ethena provides stable dollar yields (USDe) through perpetual contracts and arbitrage strategies, suitable for DeFi users with lower risk appetites. Users can earn fixed yields on-chain while participating in strategy combinations to improve capital efficiency. However, its composability is relatively limited, mainly focused on stablecoin pools and synthetic assets, lacking flexibility for investors looking to use BTC in broader DeFi applications. Ethena demonstrates the potential for diversified on-chain yields but still needs dedicated solutions for BTC to meet core market demands.

Lombard – LBTC: A Representative Case of BTC On-Chain Yields

Against this backdrop, Lombard's LBTC is a typical case. It is positioned as an institutional-grade yield-bearing Bitcoin, 100% backed by BTC, generating passive income by staking the underlying BTC in the Babylon Bitcoin staking protocol. BTC holders retain core exposure while earning stable on-chain returns.

Market performance:

Launched just 92 days ago, TVL surpassed $1 billion;
Over 80% of LBTC is active in DeFi, used for lending, providing liquidity, and re-staking strategies;
Attracted over $2 billion in new liquidity, accounting for 40% of the Babylon staking protocol's market share;
Deep collaborations with Finality Providers like Galaxy, Figment, Kiln, and P2P;
Included as institutional-grade collateral by Aave, Maple, Spark, and Morpho.

In terms of security, Lombard has built multi-layered protections: institutional alliances, multi-level approvals, time locks, audits, and on-chain PoR (Proof of Reserves), with no de-pegging incidents since launch, approaching traditional finance's "AAA" security standards.

In cross-chain deployment, LBTC has launched on chains like Base, Sui, Katana, and BNB Chain, with SDK integration into Binance and Bybit, opening direct BTC DeFi channels for Asian users.

The emergence of LBTC addresses the core issue of BTC on-chain yields. The LST model of ETH has proven feasible, but directly applying it to BTC requires consideration of security, liquidity, and cross-chain deployment. LBTC first provides staking yields through Babylon, then combines multi-chain deployment and SDK integration to unlock liquidity, creating a scale effect in the short term. If it is accepted as core collateral by more DeFi protocols or enters complex on-chain markets like stablecoins and derivatives, BTC's on-chain capital efficiency may experience a qualitative leap. LBTC could become an accelerator for this wave of innovation.

Overall Market Trends and Future Outlook

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

Multi-chain expansion and interoperability: As more DeFi protocols deploy cross-chain, the use cases for BTC assets become richer;
Growth of low-risk yield products: Investors have a strong demand for stable yields, and yield-bearing BTC products are likely to become mainstream;
Increased institutional and regulatory participation: Institutional investors in Asia and globally are actively exploring on-chain BTC allocations, driving ecosystem maturity;
Innovation strategy testing ground: Derivatives, re-staking, arbitrage, and combination strategies are continuously emerging, enhancing BTC's on-chain liquidity and capital efficiency.

Bitcoin is gradually transforming from "digital gold" to a usable on-chain asset. Various innovative projects are collectively driving the development of the BTC ecosystem, allowing long-term holders and DeFi users to more efficiently unlock asset potential. LBTC is just one example, showcasing a path and approach that hints at the possible future direction of BTC's on-chain financialization—diversified, low-risk, composable, and cross-chain. With more technological innovations and product implementations, BTC will not only serve as a store of value but also become an important node in on-chain capital operations.

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