Bitcoin has firmly established itself as digital gold, the apex store of value in the cryptocurrency ecosystem. Adoption has reached Wall Street, banks are expanding their crypto services and offering direct BTC exposure via ETFs. With this level of institutional integration, the next pressing question becomes: how to generate yield on BTC holdings? Making things more interesting, institutions will focus on solutions that optimize for Security, Yield and Liquidity.
This poses a fundamental challenge for any Bitcoin L2 solution (and staking): since Bitcoin lacks native yield (unless you run a miner), and serves primarily as a store of value, any yield generated in another asset faces selling pressure if the ultimate goal is to accumulate more BTC.
When Bitcoiners participate in any ecosystem – whether it's an L2, DeFi protocol, or alternative chain – their end goal remains simple: stack more sats. This creates inherent selling pressure for any token used to pay staking rewards or security budgets. While teams are developing interesting utility for alternative tokens, the reality is that without a thriving ecosystem, sustainable yield remains a pipedream.. Teams are mainly forced to bootstrap network effects via points or other incentives.
This brings us to a critical point: Bitcoin L2s' main competition isn't other Bitcoin L2s or BTCfi, but established ecosystems like Solana and Ethereum. The sustainability of yield within a Bitcoin L2 cannot be achieved until a sufficiently robust ecosystem exists within that L2 – and this remains the central challenge. Interesting new ZK rollup providers like Alpen Labs and Starknet claim they can import network effects by offering EVM compatibility on Bitcoin while enhancing security. With Bitcoin’s building tenure as a store of value, increasingly like Gold, monetisation schemes for the asset will become more common.
However, we need to face reality – with 86% of VC funding for these L2s allocated post-2024, we're still years away from maturity. Is it too late for Bitcoin L2s to catch up?
Security alone is no longer a sufficient differentiator. Solana and Ethereum have proven resilient enough to earn institutional trust, while Bitcoin L2s must justify their additional complexity, particularly around smart contract risk when interacting with UTXOs.
Being EVM-compatible does not automatically create network effects. It might help bring developers / dapps over, but creating a winning ecosystem flywheel will only become tougher with time. In fact, the winners of this cycle have differentiated with a product first approach (Hyperliquid, Pumpdotfun, Ethena…), not VM or tech. As such, providing extra BTC economic security or alignment won’t be enough without a killer product in the long run.
Incremental security improvements alone aren't the most compelling selling point – we've seen re-staking initiatives like Eigenlayer struggle with this exact issue. AVS aren't generally willing to pay extra for security (especially since they’ve had it for free); selling security is hard. We’ve seen the same promise of cryptoeconomic security fail before with Cosmos ICS and Polkadot Parachains.
That said, Bitcoin L2s do have a compelling security advantage. They inherit Bitcoin's massive $1.2T+ security budget (hashrate), far exceeding what Solana or Ethereum can offer. For institutions prioritizing safety over yield size, this edge might matter – even if yields are somewhat lower. Bitcoin Timestamping could create a completely new market. Can L2s tap into this extra economic security and liquidity while 10x’ing product experience? Again, if your security is higher but the product is not great, it won’t matter.
BTC whales aren't primarily interested in bridging assets; they want to accumulate more Bitcoin. This raises an important question: from their perspective, is there a meaningful difference between locking BTC in an L2 versus in Solana?
Perceived risk is the key factor here. An institution might actually prefer Coinbase custody over a decentralized signer set where they might not know the operators, weighing legal risk against technical risk. This perception is heavily influenced by user experience – if a product isn't intuitive, the risk is perceived as higher. A degen whale on the other hand, might be comfortable with bridging into Solayer to farm the airdrop or with ‘staking’ into Bitlayer for yield.
At Chorus One we’ve classified every staking offering to better inform our institutional clients who are interested in putting their BTC to work, following the guidance of our friends at Bitcoin Layers.
Want to dive deeper into the staking offerings available through Bitcoin Layers? Shoot our analyst Luis Nuñez (and author of this paper) a DM on X!
Since risk is perceived and depending on your yield, security and liquidity preferences, your ideal option might look like this:
And still be super convenient. We’re in an interesting period where Bitcoin TVL or BTCfi is increasing dramatically (led by Babylon), while the % of BTC that has remained idle for at least 1 year keeps rising, now at 60%. This tells us that Bitcoin dominance is growing thanks to institutional adoption, but that there’s no compelling yield solutions yet to activate the BTC.
Institutions have historically preferred lending BTC over exploring L2/DeFi solutions, primarily due to familiarity (Coinbase, Cantor). According to Binance, only 0.79% of BTC is locked in DeFi, meaning that DeFi lending (e.g. Aave) is not as popular. Even so, wrapped BTC in DeFi is still around 5 times larger than the amount of BTC in staking protocols.
Staking in Bitcoin Layers requires significant education. L2s like Stacks and CoreDAO use the proximity to miners to secure the system and tap into the liquidity by providing incentives for contribution or merge mining. More TradFi akin operations might be an interesting differentiator for a BTC L2. We've seen significant institutional engagement in basis trades in the past, earning up to 5% yield with Deribit and other brokers.
However, lending's reputation has suffered severely post-2022. The collapses of BlockFi, Celsius, and Voyager exposed substantial custodial and counterparty risks, damaging institutional trust. As mentioned, Bitcoin L2s like Stacks offer an alternative by avoiding traditional custody while including other parties like Miners to have a role in providing yield via staking. For those with a more passive appetite, staking can be the ideal solution to yield. Today however, staking solutions are early and offer just points with the promise of a future airdrop, with the exception of CoreDAO.
Staking in Bitcoin L2s is very different. Typically, we see a multi-sig of operators that order L2 transactions and timestamp a hashed representation of the block into Bitcoin. This allows for state recreation of the L2 at any point in time if the L2 is compromised. Essentially, these use Bitcoin for DA (Data Availability). This means that consensus is still dependent on the multi-sig operators, so these could still collude. Innovations with ZK (Alpen Labs, Citrea), UTXO-to-Smart Contract (Arch, Stacks) and BitVM (BoB) are all trying to improve these security guarantees.
In Ethereum, leading L2s typically have a single sequencer (vs. a multi-sig) to settle transactions to the L1. Critically however, Ethereum L1 has the capability to do fraud proofs allowing for block reorgs if there's a malicious transaction. In Bitcoin, the L1 doesn’t have verification capabilities, so this is not possible… until BitVM?
BitVM aims to allow fraud proofs on the Bitcoin L1. BitVM potentially offers a 10x improvement in security for Bitcoin L2s, but it comes with significant operational challenges.
BitVM is a magnificent project where leaders from every ecosystem are collaborating to make it a reality. We’ve seen potentially drastic improvements between BitVM1 and BitVM2:
BitVM allows fraud proofs to happen through a sequence of standard Bitcoin transactions with carefully crafted scripts. At its core, verification in BitVM works because:
1. Program Decomposition
Before any transactions occur, the program to be verified (like a SNARK verifier) is split into sub-programs that fit in a btc block:
2. Operator Claim
The operator executes the entire program off-chain and claims:
They commit to all these values using cryptographic commitments in their on-chain transactions.
3. Challenge Initiation
When a challenger believes the operator is lying:
4. The Critical On-Chain Execution
Here's where Bitcoin nodes perform the actual verification:
The challenger creates a "Disprove" transaction that:
5. Bitcoin Consensus in Action
When nodes process this transaction:
The Bitcoin network reaches consensus on this result just like it does with any transaction's validity. The technology enables Bitcoin-native verification of arbitrary computations without changing Bitcoin's consensus rules. This opens the door for more sophisticated smart contracts secured directly by Bitcoin, but implementation hurdles are substantial since operators need to front the liquidity and face several risks:
As such, incentives to operate the bridge will be quite attractive to mitigate the risks. If we’re able to mitigate these, security will be significantly enhanced and might even provide interoperability between different layers, which could unlock interesting use-cases while retaining the Bitcoin proximity. Will this proximity allow for the creation of killer products and real yields?
For a Bitcoin L2 to succeed, it must offer products unavailable elsewhere or provide substantially better user experiences. The previously mentioned Bitcoin proximity has to be exploited for differentiation.
The jury is still out on whether ZK rollup initiatives can bootstrap meaningful network effects. These rollups will ultimately need a killer app to thrive or to port them from EVM with the promise of Bitcoin liquidity. Otherwise, why would dapps choose to settle on Bitcoin?
The winning strategy for Bitcoin L2s involves:
Below, we’ll dive into some of my top institutional picks, a few of which we’ve invested in.
Babylon’s main value-add is to provide Bitcoin economic security. As we’ve mentioned several times, this offering alone will not be enough, and the team is well aware. Personally, I'm bullish on the app-chain approach, following models like Avalanche or Cosmos, but simply using BTC for the initial bootstrap of security and liquidity.
While the app-chain thesis represents the endgame, reaching network effects requires 10x the effort since everything is naturally fragmented. Success demands an extremely robust supporting framework – something only Cosmos has arguably achieved with sufficient decentralization (and suffered its consequences). Avalanche provides the centralized support needed to unify a fragmented ecosystem.
The ideal endgame resembles apps in the App Store – distinct from each other but with clear commonalities. In this analogy, Bitcoin serves as the iPhone – the trusted foundation for distribution.
Mezo (investor)
Mezo's approach with mUSD is particularly interesting as it reduces token selling pressure if mUSD gains significant utility. Their focus on "real world" applications could drive mainstream adoption, with Bitcoin-backed loans as the centerpiece. Offering fixed rates as low as 1% unlocks interesting DeFi use cases around looping with reduced risk, while undercutting costs compared to Coinbase + Morpho BTC lending offerings (at around 5%).
Plasma (investor)
Purpose built for stablecoin usage. Zero-fee USDT transfers, parallel execution and strong distribution strategies position Plasma well in the ecosystem. Other features include confidential transactions and high customization around gas and fees.
Arch is following the MegaEth approach to curate a mafia ecosystem, a parallel execution environment, and close ties to Solana. In Arch, Users send assets directly to smart contracts using native Bitcoin transactions.
Stacks has a very interesting setup since there's no selling pressure for stakers (they earn BTC rather than STX). As the oldest and most recognized Bitcoin L2 brand, they have significant advantages. While Clarity presents challenges, this may be changing with innovations like smart contract to Bitcoin transaction capabilities in development and other programming languages. StackingDAO (investor), is the leading LST in the ecosystem and provides interesting yield opportunities in both liquid STX and liquid sBTC.
Looking to stake your STX? Click here!
BOB (Building on Bitcoin)
BoB is at the forefront of BitVM development (target mainnet in 2025) and is looking to use Babylon for security bootstrapping. The team is doing a fantastic job at exploiting the BTC proximity with BitVM while developing institutional grade products.
CoreDAO features strong LST adoption tailored for institutions and is the only staking yield mechanism that's live and returns actual $. CoreDAO Ventures is doing a great job at backing teams early in their development.
Botanix is the leading multi-sig set up with their Spiderchain, where each BTC that is being bridged by the chain is operated by a new and randomized multi-sig, increasing its robustness by providing ‘forward security’. Interestingly, Botanix will not have their own token (at least initially) and will only use BTC and pBTC, meaning rewards and fees will be in BTC.
For retail users, four standout solutions I like:
Bitcoin L2s face significant challenges in their quest for adoption and sustainability. The inherent tension between Bitcoin's store-of-value proposition and the yield-generating mechanisms of L2s creates fundamental hurdles. However, projects that can offer unique capabilities, seamless user experiences, and compelling institutional cases have the potential to overcome these obstacles and carve out valuable niches in the expanding Bitcoin ecosystem.
The key to success lies not in merely replicating what Ethereum or Solana already offer, but in leveraging Bitcoin's unique strengths to create complementary solutions that expand the utility of the world's leading cryptocurrency without compromising its fundamental value proposition. Adoption is one killer product away.
Want to learn more about yield opportunities on Bitcoin? Reach out to us at research@chorus.one and let’s chat!
