Where BTC Yield Comes From

It is difficult to get yield from BTC, because there is a lot of BTC, and a limited demand to borrow it. Most yield comes from sources other than borrowing. After hunting down some of those sources, we can now share the following map.

“BTCfi” is the practice of using BTC denominated assets in DeFi. There are two big reasons to do this:

• You like BTC, but you need dollars. You want to use BTC as collateral to borrow USD. DeFi provides a number of ways to do that.
• You want to get yield on your BTC.

There is a pent-up demand for these services. Bitcoin holders have bridged about $27B into EVM blockchains as various types of wrapped BTC. They do this because they intend to use the assets in BTCfi. However, only about $5B of those assets have been placed.

We are developing a BTC yield curator that will aggregate the supply of yield in order to satisfy this demand. Where does the supply come from?

Staking

Staking provides bitcoin denominated returns from blockchains and staking networks that use BTC as collateral for validation. In many cases, this opportunity is pitched as having high security with locking directly on bitcoin chain. This is a new idea, and the underlying activity in networks that use staking is not very big, and the returns from secure versions of staking are less than 1%/year. However, protocols often provide token rewards that will boost yield in exchange for longer duration placements, or holding of their non-bitcoin protocol token. This is a way of compensating BTC holders for their help in building the ecosystem.

There is a thriving market in “liquid restaking tokens” that wrapped BTC or liquid staking tokens from the previous category, and add yield with rewards for what (in theory) will become other uses. Some of these tokens may be unbacked, and users of these tokens should verify that the tokens are actually redeemable for underlying assets.

These tokens end up in DeFi lending and trading strategies that may add additional yield.

Lending

The core yield for USD is provided by borrowers who want USD. BTCfi has markets that lend out BTC in the same way. However, unlike USD, BTC can spike up in price and make it difficult to repay loans. Historically, demand for borrowing BTC is low, and there is a lot of BTC available in lending pools. This drives the native lending rate down to about 0.5%. This is an indicator of the risk premium that wrapped BTC holders demand over bitcoin chain holdings.

There is some demand to borrow BTC for shorting, or for marketmaking (essentially short-term shorting). There is also a demand to arbitrage between different types of wrapped and LST BTC. And, there are pools that are boosted up to 8% by protocol rewards.

Trading

Bitcoin supports one of the world’s most active and liquid trading markets. Participants in these markets can earn LP and arbitrage fees by trading BTC. They can provide LP positions in pools that trade between different types of BTC, or hedge in pools that trade BTC with other assets, or do cross-chain marketmaking. They can use BTC as collateral for perpetual and option trading strategies. A yield-focused derivative strategy will typically sell options in order to satisfy demand for leverage.

A proven BTC trading strategy is short-term arbitrage between the many CEX exchanges that offer BTC. Some DeFi vaults offer topenized positions in hedge funds that run this strategy. Trading in BTCfi is a growing category as more volume moves into DeFi and DeFi becomes more efficient.

USD Strategies

You can use BTC as collateral to borrow USD at low-risk rates. You can then invest in higher-yielding USD strategies.

These strategies typically borrow at 60% LTV. So, a borrower that is paying 5%, and getting returns of 10% makes a 5% spread on 60% of their BTC value, or 3% in BTC.

The terms for borrowing USD are important variables in any USD strategy. Lending USD against BTC is one of the most important functions of BTCfi. BTCfi markets provide variable rates based on utilization, fixed rates, or CDP rates that are fixed until liquidation. A borrower will look for markets that are competitive on cost and scale, and then optimize for LTV and interest rate stability.

Currently the most popular investment strategies are DeFi high yield, and basis.

A DeFi high yield strategy works well when the invested amount is small. This fits into reward boosted strategies with Pendle, Morpho, and various lending venues. Yields can be 15%+, providing a 5%+ yield to BTC.

A basis strategy is scalable. It places delta neutral positions that are long crypto / short perpetual futures on perp exchanges. This earns the “funding rate” that provides leverage to long perp buyers. It makes money from the fact that most perp traders want to be long crypto and will pay a positive funding rate. The funding rate is volatile, and often is negative, but has averaged over 10% recently. You can place a basis trade by buying staked Ethena, which passes through basis earnings. Or, you can place with a specialty provider like Hermetica, or run your own positions with exchanges or Hyperliquid.