Beyond HODLing: How to Earn Passive Income with Bitcoin in DeFi

Earning a passive yield through DeFi lending and borrowing protocols such as Compound, MakerDAO, and Sumer.money is one of the efficient ways investors can fully optimize their idle crypto portfolios.  However, while the DeFi market has opened up passive income opportunities, most of them are only compatible with Proof-of-Stake (PoS) blockchain networks. This explains why [...]

Beyond HODLing: How to Earn Passive Income with Bitcoin in DeFi

Earning a passive yield through DeFi lending and borrowing protocols such as Compound, MakerDAO, and Sumer.money is one of the efficient ways investors can fully optimize their idle crypto portfolios. 

However, while the DeFi market has opened up passive income opportunities, most of them are only compatible with Proof-of-Stake (PoS) blockchain networks. This explains why Ethereum currently accounts for more than half of the total value locked (TVL) across DeFi protocols: $52 billion, while the total across all blockchains stands at $90 billion. 

What about the investors who prefer to hold the digital gold, BTC? 

For context, Bitcoin’s price recently set a new all-time high of $73,000 following the excitement around spot ETF approvals by the U.S. SEC. And while the much-awaited halving did not have a significant boost on the price, longer term projections by experts and established banks show that BTC’s price could still surpass the $100,000 mark this year. 

That being the case, any investor who intends to hold BTC for a longer time frame ought to ask themselves this fundamental question; are there any opportunities to put the idle BTC to work through DeFi yield? 

BTC DeFi Yield Optimization 

In the earlier years of Bitcoin, the native token BTC operated solely on the Bitcoin blockchain, limiting investors to speculative gains that are purely dependent on price action. 

Luckily, siloed environments are no longer the norm for native crypto tokens; recent advancements in DeFi have made it possible to integrate one’s BTC with smart contract blockchain ecosystems, including Ethereum and Avalanche. 

Wrapped BTC 

Launched in 2019, Wrapped Bitcoin (WBTC) is an ERC-20 token that allows BTC users to leverage the Ethereum ecosystem. Technically, every WBTC is backed by an equivalent amount of BTC held by a central custodian (1:1). 

The process is quite simple. Let’s assume a user who owns 2 BTC wants to use their assets to tap into the yields available on Ethereum. This would mean sending the 2 BTC to a central entity or exchange such as BitGo, which will lock the BTC and, in turn, mint 2 WBTC that can be used on Ethereum’s DeFi ecosystem in various ways. This includes lending out the WBTC to earn interest and yield farming, among other DeFi operations. 

While a novel way to expose BTC to potential gains in the Ethereum network, the main shortcoming of this approach is that it involves centralized custodians. If history is a good teacher, even those that were the best at some point, including the infamous FTX exchange have reinforced the philosophy of ‘not your keys, not your crypto’. 

Currently, the total value locked (TVL) of WBTC is at $9.6 billion while the circulating supply stands at 155,304 BTC, according to Coingecko

Omni-Chain Synthetic Assets 

Multi-chain synthetic assets are another revolutionary way BTC holders can earn a passive income from DeFi protocols. The beauty about this approach is that one is not limited to a single DeFi ecosystem as is the case with WBTC. 

A good example in this case is the Sumer.money synthetic asset and money market protocol. Instead of locking up one’s BTC with a custodian, this omni-chain protocol is designed to facilitate seamless smart contract cross-chain communication. The protocol allows BTC users who want to explore the DeFi ecosystem to deposit their BTC on the native blockchain, after which it mints an equivalent amount of synthetic BTC (SuBTC). 

What particularly stands out is that, unlike most cross-chain solutions where an entirely new non-composable token is minted, Sumer.money SuBTC is fungible, meaning it can operate across all supported blockchain networks without losing any of its security characteristics or any significant price deviation. The concept is pretty similar to that of a credit card; it doesn’t matter which country one travels to, the funds in the credit card are liquid and spendable. 

Likewise, with synthetic BTC (SuBTC), it is possible to lend, trade, farm, or spend one’s Bitcoin across multiple DeFi chains in order to generate a passive income. 

BTC Bridging on Avalanche 

Bridging Bitcoin to the Avalanche blockchain is also an option for those looking to optimize the DeFi yields in this ecosystem. According to the latest data on Dune Analytics, the total supply of BTC.b as of writing is at around 3,310, which translates to a market capitalization of $209 million as per the prevailing BTC market prices. 

So, how does Avalanches BTC bridge work? Simply put, this smart contract network relies on a bridge address which handles the conversion process. A transaction is initiated on the Bitcoin Core, after which it is indexed by the bridge nodes. Once confirmed and verified, an application dubbed ‘SGX’ mints an equivalent amount of BTC.b. This token is what the user leverages to interact with Avalanche’s DeFi opportunities. 

Notably, BTC.b, unlike WBTC, uses a decentralized and non-custodial approach. However, it is also worth mentioning that bridged BTC.b is limited composability, which means tapping into DeFi opportunities outside the Avalanche ecosystem will require some more technical nuances. 

Conclusion  

Bitcoin is here to stay; with the big players in tradfi now onboard, it is only a question of when and not if more institutions will seek BTC exposure. For those who already own some BTC, the best way to optimize one’s portfolio is by putting it to work. 

What better way to do so than DeFi yields? Of course, the process might be a little technical, but the most important thing is to get a hang of it early in the game. This way, one doesn’t have to worry about their digital assets sitting as idle capital. 


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