Written by: 0xresearcher
In recent years, the crypto market has shown a clear shift — from mere 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 maturing. Assets like stETH not only provide stable on-chain yields for ETH holders but also allow direct participation in DeFi lending, market-making, and derivatives trading, creating a multi-layered yield cycle.
In contrast, the on-chain capital efficiency of Bitcoin remains in the 'early stage'. While it is still the core of the crypto world — with about 60% market share, approximately $2.4 trillion market cap, and the most robust consensus network globally — on-chain, BTC is often viewed as 'digital gold': a secure store of value but lacking in composability, yield potential, and multi-chain liquidity. Most BTC holders either hold their assets long-term without movement or rely on centralized platforms for limited interest, missing out on the on-chain financial vitality.
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 BTC's main chain lacks an equivalent execution environment. Although there are cross-chain wraps (such as WBTC), sidechains, and bridging solutions, several core pain points still exist:
Lack of native yields — cross-chain BTC is largely wrapped assets that cannot naturally generate yields like ETH staking;
Liquidity dispersion — 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 particular institution or a 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 starting to drive liquidity innovation for BTC — not only hoping for secure yields for BTC holders but also wishing it to become the core asset for on-chain capital cycles in lending, stablecoins, and derivatives.
The Accelerating Role of the Asian Market
The demand for BTC DeFi in the Asian market is clearly growing. It gathers a large number of long-term BTC holders, while exchanges, infrastructure projects, and communities are highly concentrated, allowing new products to be rapidly accepted by the market once they fit the right scenario. An ideal BTC DeFi product needs to 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, reducing entry barriers for users.
WBTC – BTC Wrapping and Liquidity
WBTC is one of the earliest BTC wrapped assets, bringing Bitcoin into the Ethereum ecosystem in ERC-20 format, enabling BTC to participate in lending, liquidity provision, and derivatives trading. Its advantages lie in widespread acceptance and high liquidity, as nearly all mainstream DeFi protocols support 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 additional yields and only provides composability, which is a major limitation for users looking to fully leverage BTC's value.
Babylon – Underlying Staking Protocol and Node Operators
Babylon focuses on providing underlying staking infrastructure for Bitcoin, targeting technical node operators. Its strengths lie in high security and decentralization, ensuring BTC staking safety through stringent node management and multi-verification. It can support institutional-grade users, transforming BTC into on-chain operable assets. However, for ordinary users, directly using the Babylon protocol presents a barrier, requiring technical capability or reliance on derivative wrapping products. The core value of Babylon 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 provides ETH liquid staking services, combining staking yields with DeFi composability. Users can easily participate in ETH staking and conduct capital operations across multiple chains to achieve yield stacking. EtherFi caters to the ETH community, offering a low-threshold experience and supporting cross-chain operations. Compared to the BTC ecosystem, its model is 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 a lower risk appetite. Users can earn fixed yields on-chain while participating in strategy combinations to enhance capital efficiency. However, its composability is relatively limited, mainly focusing on stablecoin pools and synthetic assets, lacking flexibility for investors hoping to use BTC for broader DeFi applications. Ethena demonstrates the potential for yield diversification on-chain, 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, the LBTC launched by Lombard is a typical case. It is positioned as an institution-grade yield-bearing Bitcoin, 100% backed by BTC, acquiring passive income by staking the underlying BTC in the Babylon Bitcoin staking protocol. BTC holders retain core exposure while obtaining stable on-chain returns.
Market Performance:
Launched just 92 days, with TVL exceeding $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% of the Babylon staking protocol market share;
Deep collaboration with Finality Providers such as Galaxy, Figment, Kiln, and P2P;
Incorporated as institutional-grade collateral by Aave, Maple, Spark, Morpho, etc.
In terms of security, Lombard builds a multi-layer protection: institutional alliances, multi-signature approvals, time locks, audits, and on-chain PoR (Proof of Reserves). Since its launch, there have been no de-pegging incidents, approaching the “AAA” safety standards of traditional finance.
In terms of cross-chain layout, LBTC has been launched on chains such as Base, Sui, Katana, and BNB Chain, with SDK connections to Binance and Bybit, opening direct BTC DeFi access for Asian users.
The emergence of LBTC addresses the core issue of BTC on-chain yields. The LST model of ETH has been validated as feasible, but applying it directly 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 scale effects in a short period. If more DeFi protocols accept it as core collateral in the future, or enter complex on-chain markets like stablecoins and derivatives, the capital efficiency of BTC on-chain could see a qualitative leap. LBTC may become an accelerator for this wave of innovation.
Overall Market Trends and Future Outlook
Overall, the on-chain capitalization of BTC is still in its early stages but holds tremendous potential. As the market shifts from price speculation to asset efficiency and on-chain yields, more projects are experimenting with innovations in various directions.
Multi-chain expansion and interoperability: With more DeFi protocols laying out cross-chain, the use cases for BTC assets become richer;
Growth of low-risk yield products: Strong demand from investors for stable yields, yield-bearing BTC products are expected to become mainstream;
Increased participation from institutions and compliance: Institutional investors in Asia and globally are actively exploring on-chain BTC allocations, driving ecosystem maturity;
An experimental ground for innovative strategies: Derivatives, re-staking, arbitrage, and combination strategies are continuously emerging, enhancing BTC on-chain liquidity and capital efficiency.
Bitcoin is gradually shifting 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 unlock asset potential. LBTC is just one example, showcasing a potential direction for the financialization of BTC on-chain — diversification, low risk, composability, and cross-chain. With more technological innovations and product implementations, BTC will not only serve as a store of value but will also become an important node in on-chain capital operations.
