What is Bitcoin DeFi and How Does it Work with Bitcoin Wallets?

General Wallet Use

15 min

Decentralized finance, commonly known as DeFi, is a movement focused on creating an alternative to the traditional financial system through trustless and transparent protocols. It differs from centralized finance (or CeFi) in many ways, most notably by giving users more control and democratizing the financial space. In this piece, we’ll explore what potential DeFi applications can unlock in the Bitcoin network.

What is Decentralized Finance (DeFi) and How Does Bitcoin DeFi Work?


Decentralized finance is a method of performing peer-to-peer financial transactions on the blockchain that doesn’t require an intermediary. In a traditional, centralized financial system, you need a third-party to ensure the transaction is executed. DeFi replaces that middleman with smart contracts, meaning you need nothing more than a crypto wallet and an internet connection to conduct a transaction.


In other words, a DeFi system creates more opportunities for speed, accessibility and transparency. One of the biggest benefits is keeping custody of your money. In the centralized system, conducting a transaction requires you to relinquish control of your assets. But with DeFi, you never have to. You don’t need to rely on a bank’s opening hours or have to put your assets in another’s hands. Beyond internet capability, there are virtually no limitations on geography. This accessibility is particularly valuable for those in underbanked regions.


Cutting out the middle step makes DeFi transactions faster than their centralized counterparts. The lengthy processes that slow down traditional financial transactions do not apply, and smart contracts allow for seamless, 24/7 action. But their real appeal is transparency. Since DeFi applications are built on the blockchain, they can be audited by anyone, reducing the risk of fraudulent transactions.


Bitcoin DeFi, specifically, refers to DeFi platforms and DeFi-oriented decentralized applications (dApps) that are built on the Bitcoin blockchain. In this case, Bitcoin serves as the base layer upon which Bitcoin DeFi platforms and protocols settle, though many protocols also run on Bitcoin layers and sidechains like Stacks, Lightning and Rootstock (RSK). 

Why Build On Bitcoin?


Bitcoin’s emphasis on security and decentralization makes it an ideal home for DeFi builders, but that’s not all that’s driving growth. Put simply, Bitcoin has the largest market cap, name recognition and user base of any cryptocurrency. Its liquidity alone would make it an appealing option for applications, but it’s also the most durable. Since Bitcoin’s creation in 2009, it has continually proven itself to be resilient. These factors have helped make BTC the cryptocurrency standard-bearer when it comes to both retail and institutional users.


But because of Bitcoin’s deliberate choice to prioritize security over rapid growth, one of its biggest challenges has been a persistent narrative that it doesn’t have many uses beyond storing assets. Although Bitcoin popularized the concept of decentralized finance, the Bitcoin ecosystem was not initially built to enable DeFi protocols. Fortunately, over the last few years, new Bitcoin layers have come into play that are changing this narrative. Layers like the Lightning Network and Stacks have played a huge role in shifting public perception by helping to enable new use cases and open the doors for DeFi applications to be built on Bitcoin.

Connecting to Bitcoin DeFi Projects


You don’t need much to carry out a DeFi transaction, but you do need a Bitcoin wallet to connect with most of the applications. There are numerous types of Bitcoin wallets, which store your crypto assets and ensure that only those who have the private key are able to access the funds inside them. These can be either software applications or hardware devices, but users should put some thought into which wallet they use. While the decentralized nature of blockchain optimizes security, your bitcoin is only as secure as the wallet you’re using.


Leather, which is a self-custodied, open-source and audited Bitcoin wallet, is one of the most popular options on the market. It allows users to link their accounts to an array of Web3 applications, integrating with everything from NFT markets to DeFi protocols like ALEX and Velar. It also allows users to swap assets between the Bitcoin L1 and L2 seamlessly. With a Leather wallet, users can access emerging Bitcoin layers (like the Lightning Network and Stacks). DeFi wallets are designed to give users full control over their assets within the DeFi ecosystem, and they’re an integral part of the process.

Existing Use Cases for Bitcoin DeFi


You don’t need to look far for existing utilities; there are already plenty of them. Some of the most prominent include:


  • Asset Management - When you’re carrying out transactions through a DeFi system, you keep custody of your digital assets. This isn’t just about the currency – it also includes your account details. Instead of sharing your private information with a third-party, only you can access it. Assets can be easily moved with an internet connection and a crypto wallet.

  • DEXs - A DEX – or decentralized exchange – is a type of peer-to-peer marketplace. These exchanges operate through smart contracts, which allow them to operate autonomously. Bitcoin DEXs must be built on a layer, due to the nature of the complex smart contracts that conduct these transactions.

  • DAOs - Decentralized autonomous organizations, known as DAOs, are groups without any centralized authority. Instead, they are led by their community members who vote on management and protocol updates through various governance systems. DAOs and DeFi already intersect in various ways – most notably with the use of smart contracts – but there are likely to be further opportunities for interoperability, especially when it comes to governance.

  • Borrowing and Lending - These applications are dependent on smart contracts to run, so they need to be built on Bitcoin layers, such as Stacks. Through DeFi borrowing applications, users can acquire a cryptocurrency loan without any intermediaries. Generally, these loans are used for arbitrage or to conduct other trades. When it comes to lending, users can make passive income through yield on deposited assets. This allows users to earn interest on their BTC, though rates depend on the protocol, loan term and total amount.

  • Atomic Swaps - An atomic swap lets parties trade cryptocurrencies from different blockchains. They make use of hash timelock contract technology (HTCL) and liquidity pools to conduct secure cross-chain transactions. In short, a provider creates the necessary environment for a seamless swap by taking on the risk of providing necessary liquidity – often in exchange for rewards or interest.

  • Payments - Making peer-to-peer payments is hardly unique to Bitcoin or DeFi, but it’s a great application. These DeFi payments are the trifecta: faster, cheaper and with better security than their competition. They’re also highly accessible; all you need is a crypto wallet and the internet.

  • Trading - Trading is a comprehensive term for an array of activities on Bitcoin, ranging from margin trading to swaps. When you’re conducting a CeFi trade, users need to trust another business to execute their transactions. DeFi trading removes that additional step by implementing smart contracts to conduct the trades. This results in lower fees and faster transaction times than CeFi alternatives.

  • Stablecoins - Stablecoins exist to counter the volatility that many cryptocurrencies share. With a stablecoin, the value is tied to that of another currency – often the U.S. dollar. This stability makes them a viable form of payment for many goods or services and allows users to keep their digital assets on-chain without considering the volatility.

  • Derivatives - The use of derivatives allows a buyer and a seller to create an agreement between one another to sell an underlying asset. Some of the most popular derivative types include  futures, options and perpetual contracts.

 The Future of DeFi on Bitcoin


As demand grows, so too will opportunities. The more DeFi applications that are built on Bitcoin, the more utility it will have in the eyes of potential users. This will drive further development and help expand decentralization – and even, potentially, mass adoption. Just a few of the many potential areas for expansion include:


  • Decentralized Insurance - DeFi insurance can refer to two things. One is blockchain-based insurance in place of a “traditional” insurance plan. The other is insurance meant to protect against inherent risks of participating in DeFi. While these services exist, they are still complex for the average user and underutilized relative to their potential. With further innovation, they may become a much more prominent use case for Bitcoin DeFi.

  • Crowdfunding - Many businesses and individuals have used crowdfunding to achieve financial goals or raise funds for a project. But right now, these raises rely on using third-party providers to manage the donations and ensure they’re going to the right place. These companies typically take either a cut of the donation itself or attach service fees to conduct the transaction. This is a huge opportunity for DeFi, as use of smart contracts could replace these services while maintaining security.

This is just skimming the surface for opportunities. 



Bitcoin DeFi presents a host of opportunities for users who want autonomy and control of their finances. Although Ethereum was initially the hub for DeFi applications, Bitcoin has been gaining ground since the advent of several prominent Bitcoin layers. This has created development opportunities for builders and potential for users. As DeFi use cases on Bitcoin become more and more prevalent, many people will come to see the potential it holds for revolutionizing the financial world.

Connect to web3 applications built on Bitcoin with the Leather browser extension. Install Leather – the only wallet you need to tap into the multilayered Bitcoin economy – today.

This article was updated on 3/13/24

This article was updated on 3/13/24