Why Bitcoin L2s Like Stacks are Critical for Bitcoin DeFi

Why Bitcoin L2s Like Stacks are Critical for Bitcoin DeFi

Why Bitcoin L2s Like Stacks are Critical for Bitcoin DeFi

Bitcoin DeFi

5 min

Jul 11, 2024

Bitcoin DeFi is a budding space that is fueled by its layer-2 solutions such as the Lightning Network, Stacks, and more. 

Ethereum TVL constitutes around 15% of ETH's market cap (considering the Ethereum TVL of $64.5 billion and its market cap around $ 442.5 billion). If we assume that Bitcoin TVL reaches the level of Ethereum TVL, then the potential market size for Bitcoin smart contracts can be estimated to be over $200 billion. 

Layer-2 solutions will be critical to this growth.

Why Bitcoin L2s?

A Bitcoin L2 typically offers the combined benefits offered by the Bitcoin blockchain and L2 protocol. 

  • Increased Scalability: The 10-minute block time limits the Bitcoin network to handle only an average of 7 transactions per second (TPS). With the help of L2 solutions, the load on Bitcoin's main network is reduced, lowering block confirmation time and increasing transaction throughput. 

  • Cheaper Transactions: Bitcoin transaction fee peaks during high network activity (For example, on 20 April 2024, the average Bitcoin transaction fee was almost $128). As the L2 transactions take place off-chain, the transaction fees charged are reduced significantly. 

  • Enhanced Smart Contract Functionality: Bitcoin's main network offers limited possibility for programmability. The introduction of L2s facilitated smart contract functionalities to expand the use cases of the Bitcoin network, paving the way for the development of dApps, NFTs, and DeFi-based platforms. 

  • Inherited Security: L2 can offer added functionalities while maintaining the security of the Bitcoin network. These layers inherit the Bitcoin network's security by finally settling the transactions on the mainchain. 

Enter the Stacks Bitcoin L2

Stacks is an open-source Bitcoin L2 enabling smart contracts, and, consequently, Bitcoin dApps. It uses a novel Proof of Transfer (PoX) consensus algorithm (a hybrid of Proof of Stake (PoS) and Proof of Burn (PoB) consensus algorithms) with STX tokens as its native cryptocurrency.

Based on the PoS algorithm, stackers need to stake their STX tokens to gain rights for block validations. The winning miner gets the chance to validate the block and earn their reward in STX tokens.  

Impact of Bitcoin L2s for Bitcoin DeFi

The number of DeFi users surged to over 50 million users in January 2024 from merely ~1 million just four years prior — signaling abundant adoption and acceptance of such products and services. 

Since 2009, Bitcoin mostly remained as a decentralized and secure digital store of value. On the other end of the utility spectrum, major blockchains like Ethereum, Solana, and BNB Chain, emerged that offered practical use cases for everyday transactions. 

Bitcoin L2s help to facilitate the building of a DeFi ecosystem that offers services like swapping, lending, borrowing, and more. Further, the increased transaction speed, throughput, and reduced fees make Bitcoin DeFi more user-friendly and accessible.  

The growth of Bitcoin DeFi was initiated with the help of L2 solutions like Stacks and  Lightning, which offered access to numerous DeFi services such as trading, asset management, atomic swaps, etc. Moreover, Bitcoin L2 addresses the blockchain trilemma by integrating decentralization, scalability, and security. 

Nakamoto Upgrade: Making Bitcoin DeFi More Practical

There have been many attempts to bring Bitcoin into mainstream finance. But, to be completely candid, there hadn't been much success until fairly recently.

The Lightning Network made the world realize that micro-transactions on Bitcoin can be a reality — yet it lacks several building blocks for a global financial layer.

Stacks’ Nakamoto upgrade marks a transformation point in Bitcoin DeFi history. A starting point, even.

The surge in total value locked (TVL) in Stacks-based DeFi applications is a testament to the growing confidence in this nascent ecosystem. Bitcoin TVL has surged from $200 million in October 2023 to over $1 billion within six months in April 2024. The enhanced scalability, and improved smart contract capabilities that will be provided by the Nakamoto Upgrade will lay the groundwork for a new wave of innovation.

The introduction of the sBTC peg is critical to Bitcoin’s integration into DeFi. This trust-minimized two-way peg system allows Bitcoin to be used within Stacks’ smart contracts and dApps without slacking off on security​. By enabling ‘BTC’ to be transferred onto the Stacks network and utilized in a programmable manner, the Nakamoto upgrade will unlock the potential of billions of dollars worth of Bitcoin.


Bitcoin's dominance in the crypto space is getting stronger with time. However, there are still hurdles that need to be overcome for Bitcoin’s mass adoption.

By overcoming Bitcoin's scalability limitations and enhancing its smart contract functionality, these layer 2 solutions, like Stacks, unlock a new era of financial possibilities, merging the security of Bitcoin with the versatility of DeFi.