Bitcoin has grown into a reserve asset with a market value of about $1.3 trillion and a place as the world’s 13th-largest asset, yet its financial utility still looks thin compared with assets of similar scale, according to a Castle Labs research note compiled by TechFlow.
The report says that out of 20.05 million BTC in active supply, only 311,000 BTC, roughly 1.5%, is earning any yield at all. The other 98.5% remains idle. In the authors’ framing, most Bitcoin is still held mainly for price appreciation rather than used in structures that generate a native return.
Bitcoin’s yield gap versus Ethereum
The paper contrasts Bitcoin with Ethereum, where a layered financial stack has already formed. It says 32.5% of circulating ETH is staked, producing about 2% native yield. On top of that base layer sits liquid staking. Lido alone accounts for 21% of all staked ETH and issues stETH, a rebasing asset widely used across DeFi.
Bitcoin has not built an equivalent structure. The report ties that gap to two factors. One is protocol design: Bitcoin runs on proof of work and has no native staking mechanism. The other is holder behavior: large BTC holders have stayed deliberately conservative and have shown little willingness to chase yield by taking on additional risk. The failures of Celsius, BlockFi, and Voyager in 2022 reinforced that stance.
From there, the study asks two things: why BTC remains underused as a financial asset, and whether systems such as Stacks can make dormant BTC productive without materially weakening Bitcoin’s security model.
Where BTC yield exists today
The report breaks the current BTC yield market into three routes: centralized BTC lending, DeFi in EVM ecosystems and on Solana, and Bitcoin L2 and staking protocols. Its broader point is simple. Nearly all durable BTC yield infrastructure sits outside Bitcoin L1 rather than on it.
Centralized BTC lending and the 2022 failures
Before on-chain alternatives matured, platforms such as Celsius, BlockFi, and Voyager offered BTC yield by taking custody of user assets. The report argues that their collapse followed almost the same pattern. They acquired legal ownership of deposited crypto through contract terms, then re-lent those assets to opaque counterparties.
In Celsius’ case, the paper notes that its terms explicitly transferred 「all right and title」 in depositor assets to the platform, allowing rehypothecation. It says Celsius failed after the liquidity squeeze that followed the Terra/Luna collapse, with 75% of withdrawals taking place after that event, eventually forcing the firm to halt redemptions.
Voyager failed after 3AC defaulted on a loan of $350 million in USDC and 15,250 BTC. BlockFi was first hit by the same 3AC exposure and then by a second blow tied to an approximately $680 million loan default by Alameda Research.
The common structure, in the report’s telling, was that retail deposits funded undercollateralized institutional lending while depositor ownership and control over the underlying assets had effectively been signed away.
DeFi offers yield, but adds layers of risk
Compared with CeFi, DeFi on EVM chains and Solana has a longer operating history and, in many cases, stronger user confidence. But BTC holders cannot use those systems directly. They first need to turn native BTC into representations other chains can understand. The paper lists custodial mints such as WBTC and Coinbase’s cbBTC, decentralized bridge assets such as tBTC, and liquid staking tokens such as LBTC.
That conversion step introduces new trust layers.
- Bridge risk: To mint a representation, users send native BTC to an address or custodian that holds the coins and receive a 1:1 receipt token on another chain. For custodial mints such as WBTC and cbBTC, the process depends on centralized operators and remains exposed to private-key compromise or social engineering risk. Threshold’s tBTC removes the single-custodian model, but still carries signer-set and smart contract risk.
- Custodian risk: The report says BitGo changed WBTC custody in August 2024 from one entity holding all three keys in a 2-of-3 multisig arrangement to a split structure across BitGo Inc. in the U.S., BitGo Singapore Ltd., and BiT Global in Hong Kong. Even after that change, the third key remained with BiT Global, which the paper describes as a joint venture linked to Justin Sun’s Tron ecosystem, with BitGo only a minority shareholder. The paper treats that as a continuing source of key-man and structure risk. By comparison, cbBTC is backed 1:1 but held entirely by Coinbase, making it a single-custodian model that can freeze or seize assets under its user agreement.
- Smart contract risk: Using any DeFi protocol exposes depositors to contract risk. The report cites the Balancer hack in November 2025, saying liquidity providers suffered major losses after around $128 million was drained from Balancer V2 pools despite multiple audits.
The paper also points to the kelpDAO rsETH incident. It says more than 86,000 BTC left the protocol in the first six hours as users rushed to avoid contagion, and that those withdrawals represented about 12% of the protocol’s BTC-based assets.
In its account, the attacker posted rsETH as collateral and borrowed large amounts of wETH. Once all wETH liquidity had been drained, lenders began using their deposits as collateral to borrow in other stablecoin markets. Users who wanted no part in that chain reaction chose to pull funds immediately.
The report goes on to say that Aave, the largest lending protocol, later saw its market size fall by more than 50% because of the external-asset shock, its pool-based design, and gaps in governance oversight when the asset was included in E-mode, pushing LTV to 93%.
Bitcoin L2s and staking protocols now hold about $4 billion in TVL
The second major route for BTC yield comes from Bitcoin L2 and staking protocols such as Babylon, Lombard, Stacks, Rootstock, and BOB. The paper estimates combined TVL across that segment at roughly $4 billion.
Babylon accounts for the largest share of locked value. The report describes it primarily as a staking protocol in which BTC holders lock assets on L1 and use Bitcoin’s base-layer security to secure proof-of-stake networks. In exchange, they earn yield in the native tokens of the chains they help secure.
Users who want a liquid representation can deposit native BTC or WBTC into Lombard and receive LBTC, a liquid, yield-bearing asset, making Lombard a liquid staking protocol in the report’s classification.
That said, the paper stresses that these structures still expose BTC holders to slashing risk. The rest of the TVL comes from BTC L2s trying to bootstrap their own on-chain economies, a historically harder task because they need chain activity, builders, stablecoin rails, usable UX, and incentives strong enough to retain capital.
The trust assumptions behind each route
The study argues that the gap in BTC finance is not only about missing infrastructure. It is also about fragmentation. The parts exist, but not in one place, and each route asks users to accept a different trust model.
EVM ecosystems offer deep liquidity and live applications, but at the cost of custody and bridge risk. Bitcoin L2s are philosophically closer to what BTC holders tend to want, yet they still lack broad yield diversity and polished retail UX. Centralized lending, in the report’s view, suffered a structural break after the failures of 2022.
It lays out several examples.
- Wrapped BTC: users trust custodians and or bridge signer sets, plus the wrapper itself and downstream smart contracts.
- Babylon native staking: users trust a covenant committee and an M-of-N multisig. The current setup is 6-of-9, including three signers from Babylon Labs and one each from CoinSummer Labs, RockX, AltLayer, Zellic, Informal Systems, and Cubist. Together they sign unbonding and slashing transactions.
- Stacks sBTC bridge: users trust a set of 15 institutional signers, including Figment, Chorus One, and Stacking DAO. The bridge needs 70%, or 11-of-15, honest participation to operate normally. Even if 33% of signer voting power remains honest, or 5-of-15, the system can still preserve safety and block withdrawals.
The unmet need, the authors argue, is a way to preserve Bitcoin’s trust model as much as possible while still offering applications and liquidity that make BTC productive.
What the report means by Bitcoin-native finance
The paper defines Bitcoin-native finance as financial products that use BTC as the core asset while keeping settlement, security, and asset movement as close to Bitcoin’s base layer as possible, minimizing additional trust assumptions.
It also says that a fully Bitcoin-native financial system cannot exist on Bitcoin L1 itself because of Bitcoin’s design limits.
- Bitcoin Script can enforce simple spending conditions, but it is not Turing-complete and cannot express the state machines DeFi protocols require, such as AMM curves, health-factor checks, or liquidation logic.
- The UTXO model does not maintain shared mutable state. Lending markets and AMMs need shared state outside an individual transaction.
- Block space is scarce and block times are slow, around 10 minutes, making high-frequency DeFi operations impractical on L1.
- Bitcoin has no native yield mechanism because it uses proof of work.
- Bitcoin cannot verify the state of external chains, so moving BTC into any programmable environment requires custodians or signer sets.
For that reason, the report says every product on the market today depends on trust assumptions outside Bitcoin consensus. What protocols can do is move as close to Bitcoin as possible.
Babylon avoids bridges entirely because staked BTC stays in time-locked Bitcoin UTXOs, but users still take covenant committee risk and the risk attached to finality providers protecting outside proof-of-stake chains, including slashing. BOB aims to pair Bitcoin finality with a full EVM environment through a BitVM-style bridge, though the paper says it currently settles on Ethereum and treats full Bitcoin security as a phased roadmap item. Stacks anchors execution finality directly to Bitcoin consensus, while still relying on the signer set that moves sBTC, which needs 70% participation to move funds.
Some of these systems have already reached meaningful scale. The report lists TVL at $2.6 billion for Babylon, $800 million for Lombard, and $480 million for Solv.
The paper says these protocols have attracted attention partly because they can compose with the rest of DeFi, allowing users to layer additional returns on top of the base yield generated by the asset itself. Those yield sources differ. Lombard’s LBTC earns through staking on Babylon, while Solv’s solvBTC draws yield from delta-neutral strategies, lending, liquidity provision, staking, and real-world assets.
To judge whether a design is truly Bitcoin-native, the report suggests a short checklist: does it allow self-custody, how decentralized is the bridge signer set, where does the yield actually come from, and can holders exit or redeem freely or only after a lockup.
Stacks as a case study in Bitcoin-native finance
The report then turns to Stacks. It describes Stacks as a Bitcoin L2 whose execution is anchored to the Bitcoin base layer. Current on-chain TVL is about $90 million, with another $190 million in sBTC.
In the authors’ view, Stacks is one of the most complete attempts to assemble a Bitcoin-native stack in one place. They list five main pieces: a Bitcoin-anchored execution layer, a minimized-trust BTC bridge, native BTC-denominated staking, a liquid staking representation, and live DeFi applications such as Zest, Bitflow, StackingDAO, and Hermetica.
Bitcoin-anchored settlement after the Nakamoto upgrade
The paper says that since the Nakamoto upgrade in October 2024, each block-commit transaction from a Stacks miner anchors the full chain state of the previous tenure into a Bitcoin transaction. Reversing a finalized Stacks tenure would therefore require reversing the corresponding Bitcoin block.
That gives Stacks blocks full Bitcoin finality after a tenure ends and roughly one more Bitcoin block has passed, according to the report.
sBTC as the bridge for moving BTC between L1 and Stacks
sBTC is presented as the mechanism that moves BTC between Bitcoin L1 and Stacks without relying on a traditional custodian. It is the bridged representation of Bitcoin on Stacks and currently has about $190 million in TVL.
All bridged BTC sits in a single peg wallet, a Bitcoin Taproot address controlled by 15 community-elected signers. Moving funds requires a 70% threshold, or 11-of-15.
PoX-5 and BTC-denominated yield under self-custody
Stacks has proposed a PoX-5 upgrade that would let BTC holders earn BTC-denominated yield while their BTC stays locked on Bitcoin L1. The report says the launch is expected in late August.
It uses the standard OP_CHECKLOCKTIMEVERIFY timelock so BTC can remain committed and yield-bearing in the holder’s own custody. The lock is enforced by Bitcoin consensus itself, without asking users to trust a custodian, a bridge, or a signer set.
Yield in PoX-5 comes from the Stacks consensus mechanism. Miners bid BTC for the right to mine Stacks blocks. The paper says that mechanism has distributed more than 4,200 BTC to STX stakers since January 2021, and BTC stakers will be able to earn through the same flow once PoX-5 is live.
To join the BTC staking model, a participant needs to lock BTC on L1 as protocol collateral and pair it with an STX position worth at least 5% of the BTC value for a six-month term. The paired BTC-STX collateral receives priority claims on the miner BTC pool in each cycle, with a target APY of 3%. Any remaining yield goes to participants who stake only STX and to a reserve fund that accumulates excess miner income for future periods when miner revenue might fall short.
The report says there is no forced exit. Holders can withdraw their BTC within a few Bitcoin blocks, though they give up the remaining yield for the term, while the paired STX stays locked for the full period. The paper emphasizes that the model has no slashing risk, meaning stakers do not face principal loss through penalties.
Using BTC collateral that stays on L1
The paper says native BTC yield is only the first step in the Stacks roadmap. The team is also researching self-custodied Bitcoin lending that would let users post BTC as collateral in lending protocols such as Zest on Stacks while the BTC itself never leaves L1.
In the report’s description, Stacks continuously reads Bitcoin state to verify BTC collateral on L1. Borrowers could then access assets such as Circle’s USDCx and Hermetica’s Bitcoin-backed stablecoin USDh, increasing capital efficiency while still earning PoX-5 staking yield.
stBTC and the application layer
BTC paired with STX on L1 is productive because it earns base yield and can be redeemed, but it is not composable elsewhere while staked. For users who want DeFi use cases, the report points to liquid staking as the next layer.
StackingDAO is preparing to launch stBTC, described here as a Bitcoin analogue to stETH.
The main advantage is that BTC holders do not need to source the 5% STX pair themselves. StackingDAO supplies that from the STX already supporting its stSTX and stSTXbtc products, allowing holders to earn BTC-denominated yield on BTC without taking direct STX exposure while keeping the highest-priority claim on rewards.
Under the model described in the report, users deposit native L1 BTC or sBTC and receive stBTC. The value of stBTC auto-compounds as sBTC rewards from PoX-5 accrue and are paid at the end of each cycle. Part of those rewards goes to supporters who lend the STX pair through stSTX and stSTXbtc. The remaining sBTC is reinvested into the pool backing stBTC, increasing the stBTC-to-sBTC ratio.
For withdrawals, the report says stBTC exits can be facilitated through a reserve buffer for a small fee, or, if the buffer is exhausted, through a one-cycle cooldown using a withdrawal NFT.
How the application layer uses that BTC liquidity
The report argues that the real value of the system depends on the applications built around these assets.
Zest is described as the largest DeFi application and lending market on the chain. It allows users to deposit BTC-denominated collateral such as sBTC, STX, and stSTX, then borrow stablecoins in isolated-risk markets. Zest has also announced Stacks Vaults, which are expected to launch alongside BTC staking on Stacks. The first vault is a fully automated stBTC looping strategy with a target APY of 6% to 8%, which the paper calls the first example of productive liquid-staked BTC inside the Stacks financial stack.
Granite, another lending protocol, also lets users borrow stablecoins against BTC or sBTC collateral in isolated-risk markets. Hermetica issues USDh, a synthetic dollar backed by Bitcoin and structured around basis trading. Bitflow is the Stacks-based DEX, running a Curve-style Stableswap AMM built for BTC-anchored assets including sBTC, xBTC, aBTC, and WBTC, as well as native stablecoins on Stacks.
The funnel model described by the report
The report summarizes the Stacks approach as a top-of-funnel model. BTC staking attracts capital that wants yield without giving up custody. Once that capital is committed, the surrounding application layer can identify and use it.
In the paper’s outline, Zest handles lending, Bitflow handles swaps, Hermetica supplies structured basis-trade yield, and StackingDAO adds liquidity once stBTC goes live. As those applications are used, chain activity should rise and produce transaction fees, which then become part of a broader, self-sustaining source of consensus yield alongside miner bids into the PoX pool.
Idle BTC is a structural issue, and every solution comes with trade-offs
The report closes with a direct conclusion: Bitcoin’s idle-capital problem is real and structural. Because BTC has no native yield mechanism, every route built to make it productive, whether wrapped BTC, BTC L2 systems, or CeFi lending, introduces some form of trust assumption.
It says BTC currently represents about 7% of DeFi TVL, or around $5.2 billion. Given Bitcoin’s size, that is still a small share. Most BTC today remains an asset held for appreciation rather than one actively deployed in financial use.
Stacks, in the authors’ view, has spent years trying to reduce those added assumptions. With PoX-5 approaching, BTC holders would be able to earn yield directly in BTC from Stacks miners bidding BTC to mine Stacks blocks.
Whether that model becomes the most widely adopted route will depend on how tightly the broader ecosystem grows alongside native BTC staking. The reason is mechanical: if the system is to maintain a 3% target APY, miners need to keep bidding. The report says that dynamic has already been tested by more than five years of activity since Stacks mainnet launched.
Its final point is that Bitcoin remains a reserve asset and is already widely adopted by institutions. If BTC can become more productive without moving too far away from Bitcoin’s trust model, that could expand its role on more balance sheets and open up new uses for holders beyond simply waiting for the price to rise.