Written by: 0xresearcher
In recent years, the crypto market has shown a clear shift—from pure price speculation to an era of 'asset efficiency' and 'on-chain yields.' Ethereum has been the first to benefit, with its staking economy and LST (liquid staking token) ecosystem increasingly maturing. Assets like stETH not only allow ETH holders to obtain stable on-chain yields but also enable direct participation in DeFi lending, market-making, and derivatives trading, forming a multi-layered yield cycle.
In contrast, Bitcoin's on-chain capital efficiency is still in the 'early stage.' While it remains the core of the crypto world—about 60% market share, approximately $2.4 trillion in market capitalization, and the most robust consensus network globally—on-chain, BTC is more often viewed as 'digital gold': a safe store of value but lacking composability, yield capability, 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 finance space.
BTC's composability dilemma
The success of ETH's staking model lies in its deep integration with smart contracts and the DeFi ecosystem, while BTC's main chain lacks an equivalent execution environment. Although there are cross-chain wrappers (like WBTC), sidechains, and bridging solutions, several core pain points still exist:
Lack of native yield—cross-chain BTC is mostly wrapped assets and cannot naturally generate yield like ETH staking;
Liquidity fragmentation—cross-chain assets are distributed across different chains and protocols, with insufficient scale to support large-scale capital operations;
High trust costs—whether centralized custody or multi-signature mechanisms, users need to trust a specific institution or multi-party alliance additionally.
These issues have kept BTC in an awkward state of 'high value, low utilization' for a long time. However, market expectations are changing. More and more institutions and DeFi teams, especially in Asia, are beginning to drive BTC liquidity innovation—not only hoping for BTC holders to achieve secure yields but also wishing for it to become a core asset in on-chain capital cycles such as lending, stablecoins, and derivatives.
Accelerating effect of the Asian market
The demand for BTC DeFi in the Asian market has significantly increased. It gathers a large number of long-term BTC holders, and the concentration of exchanges, infrastructure projects, and communities means that once new products enter suitable scenarios, they can be quickly accepted by the market. An ideal BTC DeFi product must meet three conditions:
Low-risk yields—avoiding high volatility and high-leverage strategies;
Strong composability—able to directly integrate into mainstream DeFi protocols rather than existing in isolation;
Cross-chain convenience—supporting multi-chain deployment and lowering user entry barriers.
WBTC – BTC wrapping and liquidity
WBTC is the earliest BTC wrapped asset, introducing Bitcoin into the Ethereum ecosystem in ERC-20 form, allowing BTC to participate in lending, liquidity provision, and derivatives trading. Its advantages include wide 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, presenting security and transparency risks. At the same time, it does not generate additional yields and only provides composability, which is a significant limitation for users wishing to fully leverage BTC's value.
Babylon – Underlying staking protocol and node operators
Babylon focuses on providing Bitcoin underlying staking infrastructure, targeting tech-oriented node operators. Its advantages lie in high security and decentralization, ensuring BTC staking safety through strict node management and multi-fold verification. It supports institutional users to convert BTC into on-chain operable assets. However, for ordinary users, directly using the Babylon protocol poses barriers that require technical capabilities or reliance on derivative wrapper products. Babylon's core value lies in providing underlying staking capability for the BTC ecosystem, but liquidity and usability still need further expansion.
EtherFi – ETH liquid staking and cross-chain composability
EtherFi provides ETH liquid staking services, combining staking yields with DeFi composability. Users can easily participate in ETH staking and perform capital operations across multiple chains, achieving yield stacking. EtherFi targets the ETH community, offering low-threshold experiences and supporting cross-chain operations. Compared to the BTC ecosystem, its model has matured, but it primarily serves ETH users and does not address BTC's yield and low volatility demands.
Ethena – Synthetic dollar yield and strategy characteristics
Ethena provides stable dollar yields (USDe) through perpetual contracts and arbitrage strategies, suitable for DeFi users with lower risk preferences. Users can obtain fixed income on-chain while participating in strategy combinations to improve capital efficiency. However, its composability is relatively limited, primarily focused on stablecoin pools and synthetic assets, lacking flexibility for investors wishing to use BTC for broader DeFi applications. Ethena demonstrates the potential for on-chain yield diversification but still needs dedicated solutions for BTC to meet core market demands.
Lombard – LBTC: A representative case of on-chain BTC yields
In this context, LBTC launched by Lombard is a typical case. It is positioned as an institutional-grade income-generating Bitcoin, fully backed by BTC, obtaining passive income by staking the underlying BTC in the Babylon Bitcoin staking protocol. BTC holders not only retain core exposure but also gain stable on-chain returns.
Market performance:
Launched only 92 days, TVL exceeded $1 billion;
Over 80% of LBTC is active in DeFi, used for lending, providing liquidity, and re-staking strategies;
Attracting over $2 billion in new liquidity, accounting for 40% market share of the Babylon staking protocol;
In-depth collaboration with Finality Providers like Galaxy, Figment, Kiln, P2P, etc.;
Included as institutional-grade collateral by Aave, Maple, Spark, Morpho, etc.
In terms of security, Lombard builds a multi-layered defense: institutional alliance, multi-signature approval, time locks, audits, and on-chain PoR (Proof of Reserves). Since its launch, there have been no de-pegging events, nearing the traditional finance 'AAA' security standard.
In terms of cross-chain layout, LBTC has launched on chains like Base, Sui, Katana, and BNB Chain, with SDK integration with Binance and Bybit, opening direct access to BTC DeFi for Asian users.
The emergence of LBTC addresses the core issue of on-chain BTC yields. The LST model of ETH has been validated, 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, allowing it to form a scale effect in a short time. In the future, if accepted as core collateral by more DeFi protocols or entering complex on-chain markets like stablecoins and derivatives, BTC's on-chain capital efficiency could experience a qualitative leap. LBTC may become an accelerator for this wave of innovation.
Overall market trends and future outlook
Overall, BTC's 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 yields, more and more projects are innovating in various directions:
Multi-chain extension and interoperability: With more DeFi protocols adopting cross-chain strategies, the usage scenarios for BTC assets are becoming richer;
Low-risk income product growth: Investors have a strong demand for stable returns, and income-generating BTC products are expected to become mainstream;
Increased institutional and compliant participation: Asian and global institutional investors are actively exploring on-chain BTC allocation, promoting ecosystem maturity;
Innovative strategy testing ground: Derivatives, re-staking, arbitrage, and combination strategies are continuously emerging, enhancing BTC on-chain liquidity and capital efficiency.
Bitcoin is gradually transitioning from 'digital gold' to usable on-chain assets. Various innovative projects are jointly promoting the development of the BTC ecosystem, allowing long-term holders and DeFi users to more efficiently release asset potential. LBTC is just one example, its demonstrated path and ideas hint at the possible directions for future BTC financialization on-chain—diversified, low-risk, composable, and cross-chain. With more technological innovations and product implementations, BTC will not only serve as a value store but also become an important node in on-chain capital operations.
