Bitcoin is undergoing a remarkable transformation. While some view it as a currency for daily transactions, others see it as digital gold for storing value. Increasingly, however, it is being recognized as a foundational digital monetary asset. Much like physical gold, Bitcoin serves as a holding asset, an inflation hedge, and a unit of account. Its transparent algorithm and fixed supply of 21 million units ensure a non-discretionary monetary policy, contrasting sharply with traditional fiat systems managed by central authorities.
This difference becomes especially evident in volatile, uncertain, complex, and ambiguous (VUCA) times. Bitcoin’s predictability stands in opposition to the often opaque and potentially unpredictable nature of fiat money systems—a point emphasized by Nobel laureate Friedrich August von Hayek in his critique of centralized monetary decision-making.
Should Bitcoin Be Leveraged?
For many Bitcoin purists, the 21 million supply cap is sacrosanct. Altering it would fundamentally change Bitcoin’s nature. This community often views leveraged Bitcoin products with skepticism, equating them with the practices of fiat systems that undermine Bitcoin’s core principles.
This skepticism is rooted in the distinction between commodity credit and circulation credit, as outlined by Ludwig von Mises. Commodity credit is based on real savings, while circulation credit resembles unsecured IOUs. Bitcoin proponents argue that leverage creates "paper Bitcoin," which is economically risky and unstable.
Even nuanced voices within the community, such as Caitlin Long, warn against the dangers of leveraged Bitcoin. The collapse of leveraged Bitcoin lending companies like Celsius and BlockFi in 2022 further validated these concerns.
Lessons from the Crypto Credit Crunch
The crypto market faced a Lehman-like collapse in 2022, leading to a widespread credit crunch that affected numerous players in the crypto lending space. Contrary to assumptions, most crypto lending was not peer-to-peer but involved significant counterparty risk. Clients lent directly to platforms, which then engaged in speculative strategies with poor risk management.
During the 2020 DeFi summer, many protocols offered attractive yields but lacked sustainable business models and tokenomics. Heavy reliance on inflationary token rewards created an unsustainable ecosystem detached from fundamental economic principles.
The 2022 crisis revealed critical flaws in centralized yield tools, including a lack of transparency, poor risk management, and failures in liquidity, market, and counterparty risk controls. Institutions like Voyager, Three Arrows Capital, Celsius, BlockFi, and FTX collapsed due to these vulnerabilities. Their failures mirrored traditional banking crises, highlighting that neither over-regulation nor the absence of oversight is a solution.
The Inevitability of Bitcoin Yield
So, where does that leave us? While concerns are valid, expecting Bitcoin yield products to disappear entirely is unrealistic. As the Bitcoin ecosystem grows, so does the development of financial infrastructure and applications directly on Bitcoin. Will this lead to the same problems seen in the broader crypto space?
Quite possibly—because that’s the nature of the game. Bitcoin is a permissionless protocol, meaning anyone can build on it, including those aiming to create a Bitcoin-driven financial system. And financial systems inevitably require credit and leverage.
Historically, credit and yield emerge naturally in any thriving society as catalysts for economic growth. Without credit, underdeveloped economies struggle to escape subsistence living. Only through access to credit can more complex and efficient economic structures form.
To realize a Bitcoin-based economy, proponents recognize the need to develop credit and yield mechanisms on top of the Bitcoin protocol. While Bitcoin’s monetary role is often praised, the reality is that to function effectively as money, it requires a supporting native economy.
This underscores the importance of Bitcoin-based yield products in fostering Bitcoin-centric economic growth. Such an ecosystem would utilize Bitcoin as its digital base money while using yield products to drive adoption and utility.
A Spectrum of Trust and Native Design
A Bitcoin-driven financial system will inevitably be layered. From a systemic perspective, this isn’t vastly different from today’s financial systems, where inherent hierarchies exist even among money-like assets. To properly evaluate Bitcoin yield products, we can use a triple trust spectrum focusing on:
- Consensus
- Asset type
- Yield form
Products that score higher on this spectrum are generally more trust-minimized, reducing reliance on intermediaries and increasing dependence on transparent, resilient code. This shift mitigates counterparty risk by moving trust from off-chain intermediaries to code. Transparency and algorithmic execution enhance resilience compared to trust-based intermediaries.
This direction is worth exploring: creating native yield options for Bitcoin should be the gold standard and ultimate goal for the Bitcoin community.
The Consensus Perspective
Based on alignment with Bitcoin blockchain consensus, Bitcoin yield products can be divided into four categories:
- No Consensus: This includes centralized off-chain platforms like Celsius or BlockFi. These platforms fully control user assets, exposing users to counterparty risk and intermediary dependence. Although they use Bitcoin, their yield strategies are executed off-chain via traditional financial mechanisms. These are often centralized and similar to traditional financial institutions but typically less regulated.
- Independent Consensus: This category includes decentralized infrastructure represented by public blockchains like Ethereum, BNB Chain, and Solana. These have their own consensus mechanisms, independent of Bitcoin.
- Inherited Consensus: Here, infrastructure is decentralized and represented by Bitcoin sidechains or Layer-2 solutions with distributed consensus. These sidechains aim to align more closely with the Bitcoin blockchain. Examples include federated sidechains like Rootstock, Liquid Network, or Stacks.
- Native Consensus: This relies on Bitcoin’s own consensus mechanism as the foundational security model. It uses off-chain state channels cryptographically linked to the Bitcoin blockchain rather than separate blockchains or sidechains. The Lightning Network is a key example, offering a high degree of trust minimization by fully depending on Bitcoin’s consensus.
The closer a Bitcoin yield product is to native consensus, the higher its alignment with Bitcoin and the more trust-minimized it is generally considered to be.
The Asset Perspective
When considering the assets used in Bitcoin yield products, alignment with Bitcoin can be categorized into three types:
- Non-BTC: These solutions use assets other than BTC, resulting in low Bitcoin alignment. An example is Stacks’ stacking option, which uses its native token STX to generate yield.
- Tokenized BTC: Here, the asset used is a tokenized version of BTC, improving alignment with Bitcoin compared to non-BTC assets. Tokenized BTC can be found on public blockchains like Ethereum (WBTC, renBTC, tBTC), BNB Chain (wBTC), and Solana (tBTC). It also includes tokenized BTC hosted on Bitcoin sidechains with inherited consensus mechanisms, such as sBTC, XBTC, aBTC, L-BTC, and RBTC.
- Native BTC: This category uses on-chain Bitcoin (BTC) without any tokenization, offering the highest level of Bitcoin alignment. Various CEX solutions and Babylon’s Bitcoin staking protocol use native BTC directly. Babylon aims to extend Bitcoin’s security by adapting it for proof-of-stake mechanisms. Projects like Stroom Network utilize the Lightning Network for liquid staking—users deposit BTC and mint wrapped tokens like stBTC or bstBTC on EVM-based blockchains for use in broader DeFi ecosystems.
The Yield Perspective
The yield aspect of Bitcoin products also aligns with the same three categories: non-BTC, tokenized BTC, and native BTC.
- Non-BTC Yield: Babylon offers yield in the form of native assets from proof-of-stake (PoS) blockchains secured through its Bitcoin staking mechanism.
- Tokenized BTC Yield: Stroom Network provides yield in lnBTC tokens. Sovryn, operating on Rootstock, facilitates Bitcoin lending using tokenized BTC (RBTC) as yield. On Liquid Network, Blockstream Mining Note (BMN) offers yield in BTC or L-BTC at maturity, giving qualified investors exposure to Bitcoin hashrate via an EU-compliant USDT security token.
- Native BTC Yield: Stacks provides various options, including some applications that pay yield in tokenized BTC via sBTC. However, for Stacks’ stacking option, yield accumulates in native BTC. Similarly, some centralized exchanges offer yield products that distribute native BTC to users.
The Gold Standard: Full Native Alignment
The ideal Bitcoin-based yield product would combine three features: native Bitcoin consensus, native Bitcoin assets, and native Bitcoin yield. Such a product would achieve near-perfect Bitcoin alignment.
Currently, such solutions are still in early development. One project actively working toward this vision is Brick Towers. Their approach focuses on using Bitcoin as a long-term savings solution, providing customers with a trust-minimized and native method to generate yield on Bitcoin.
Their planned solution centers on generating native yield within Bitcoin by leveraging Brick Towers’ automated services for other nodes in the Lightning Network. Through optimized algorithms, capital is strategically deployed to meet the liquidity needs of network participants, maximizing capital efficiency while minimizing counterparty risk.
This approach not only promotes the growth of the Lightning Network but also enhances Bitcoin’s utility as an asset. It offers customers a seamless and secure way to earn yield on their Bitcoin holdings. Importantly, Brick Towers avoids wrapped tokens, further reducing counterparty risk and strengthening their commitment to a native Bitcoin ecosystem.
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Frequently Asked Questions
What does “native Bitcoin yield” mean?
Native Bitcoin yield refers to earning returns paid directly in Bitcoin, without using tokenized or synthetic versions. It relies on Bitcoin’s own protocols, such as the Lightning Network, rather than external blockchains or intermediaries.
Why is counterparty risk important in yield products?
Counterparty risk arises when you depend on another party to fulfill financial obligations. High counterparty risk can lead to loss of funds if the intermediary fails. Native Bitcoin solutions minimize this risk by using decentralized, code-based execution.
How does the Lightning Network generate yield?
The Lightning Network enables users to earn fees by providing liquidity and routing payments. By channeling Bitcoin into the network, participants can earn yield in Bitcoin for supporting transaction throughput and liquidity.
Are Bitcoin yield products safe?
Safety varies by product. Solutions with native consensus, assets, and yield generally offer higher security and lower counterparty risk. However, all investments carry risk, and users should research thoroughly before participating.
Can Bitcoin maintain its fixed supply while offering yield?
Yes. Yield in Bitcoin does not require inflating the supply. Instead, it comes from fees, rewards, or interest generated through utility—such as lending, liquidity provision, or staking—without altering Bitcoin’s underlying monetary policy.
What is the role of decentralized finance (DeFi) in Bitcoin yield?
While most DeFi operates on other blockchains, Bitcoin-native DeFi is emerging via Layer-2 solutions like Lightning and sidechains. These enable yield opportunities while preserving Bitcoin’s security and non-custodial principles.