Bitcoin Yield Farming Competition: Exploring Key L2s and Protocols

Dive into the fierce competition of yield farming, where Layer-2 protocols and innovative solutions are pushing the boundaries of Bitcoin and other assets’ capabilities in the DeFi space.

Yield farming in decentralized finance (DeFi) happens when crypto holders lock up their assets in a DeFi protocol to earn rewards. These rewards are usually in the form of the protocol's governance tokens, which can be further staked or reinvested to compound gains.

Yield farmers can earn passive income and high yields, often surpassing those available in traditional finance—while DeFi platforms benefit from increased liquidity, which is essential for their operations. The distribution of governance tokens through yield farming can also enhance decentralization, allowing users to participate in the platforms' decision-making processes​.

Bitcoin, traditionally seen as a store of value, is also becoming a key player in the DeFi space through Layer-2 (L2) models. These innovations enhance Bitcoin’s functionality beyond a mere store of value and also open up new opportunities for BTC holders to generate returns through staking, liquidity provision, and yield farming.

Several innovative L2 alternatives have been developed to leverage Bitcoin's potential in the DeFi space. These solutions, explored below, enable Bitcoin holders to engage in yield farming and other DeFi activities, significantly enhancing its utility.

Bitcoin L2s that have already issued native tokens

The L2s listed below have issued native tokens, providing unique functionalities and enhanced security features.

• BEVM (BEVM), an EVM-compatible L2 based on Taproot, utilizes BTC as gas for transactions and is currently on the mainnet. 

• BiopDAO (BIOP), another mainnet protocol, offers an Optimistic rollup aiming to enhance Bitcoin with smart contracts.

• Dovi (DOVI), also on the mainnet, provides EVM-compatible smart contracts for enhanced security.

• Elastos (ELA), designed to build a decentralized internet where individuals own their data, is on the mainnet but not EVM-compatible.

• Interlay (INTR), a mainnet protocol, offers DeFi services like earning and staking but lacks EVM compatibility.

• Map Protocol (MAP) facilitates peer-to-peer interoperability and is both mainnet- and EVM-compatible.

• Omni Layer (OMNI), a software layer built on Bitcoin, is in its testnet phase and not EVM compatible. 

• Rootstock (RBTC) offers EVM-compatible smart contracts and is on the mainnet.

• SatoshiVM (SAVM), employing versatile zero-knowledge (ZK) rollups with EVM, is in its testnet phase.

• Stacks (sBTC/STX) which enable smart contracts and apps on Bitcoin, are on the mainnet but not EVM compatible. 

• Syscoin (SYS) provides a hash-based digital authentication protocol and EVM execution layer. It is on mainnet and EVM compatible.

• U Protocol (YOU), powered by Arbitrum AnyTrust and Celestia, is EVM compatible and on the mainnet.

• Stacks (STX) (formerly Blockstack) has its own token, STX, which is used for executing smart contracts, processing transactions, and rewarding miners through its unique Proof of Transfer (PoX) mechanism.

• Rootstock (RBTC), uses RBTC, a token pegged 1:1 with Bitcoin, for transactions and smart contracts on its platform.

• Liquid Network (L-BTC), utilizes L-BTC, which is a tokenized version of Bitcoin, within its sidechain for confidential transactions and asset issuance​.

• Portal Network (PORTAL), has its own token, PORTAL, which is used within its ecosystem to facilitate transactions, staking, and governance. This enhances the capabilities of Bitcoin through atomic swaps and other L2 techniques​.

Bitcoin L2s that have not yet issued tokens

The L2s listed below, while not issuing native tokens, still provide unique functionalities and enhanced security features.

• B2 Network, is an EVM-compatible ZK-proof rollup currently in the testnet phase. It supports both Bitcoin and Ethereum address accounts. The B2 Network has its native token, $B2, which will be launched during the Token Generation Event (TGE) scheduled for Q4, 2024. This token will be used within their ecosystem for staking, governance, and other utility functions​.

• Bison Labs, a Bitcoin and ordinals ZK rollup, is also in the testnet phase and aims to enhance Bitcoin's capabilities.

• Build on Bitcoin (BOB), offers a Bitcoin L2 with EVM compatibility and native Bitcoin support. It’s currently in the testnet phase.

• Botanix Labs, provides an EVM-compatible Bitcoin L2 in the testnet phase. It supports staking with decentralized multi-sigs as safeguards.

• Chainway, a Bitcoin L2 ZK rollup, is in the pre-testnet phase.

• Lightning Network, which enhances transaction speeds and enables cross-chain transitions, is already on the mainnet.

• Liquid Network, is a mainnet Bitcoin L2 solution for confidential settlement and issuance.

• LumiBit, offering EVM equivalence and BTC-native account abstraction, is in the testnet phase.

• Merlin Chain EVM-compatible and built on native Bitcoin protocols, is on the mainnet.

• RGB Network, provides scalable and confidential smart contracts for Bitcoin and Lightning Network, and is currently in the testnet phase.

• Rollkit offers a platform for developers to create new rollups in the testnet phase.

• ROLLUX, an EVM-equivalent OPStack rollup anchored in Bitcoin's PoW, is on the mainnet.

• ROOS, an EVM-compatible Bitcoin L2 ZK Rollup, is in the testnet phase.

• Rosetta Network, extending Bitcoin's capabilities through an inscription chain, is in the testnet phase.

• Citrea, an EVM-compatible ZK Rollup supporting light nodes and Bitcoin script as validation methods, is in the pre-testnet phase.

• Bitlayer, offering an EVM/MoveVM/SOLVM-compatible Bitcoin L2, is in the pre-testnet phase.

• Babylon Labs enables Bitcoin holders to earn yields from their idle bitcoins through staking without the need for third-party trust, bridging, or wrapping.

All of these L2 solutions are expanding Bitcoin's utility, making it a more versatile asset within the DeFi ecosystem.

Will BTC Maximalists Use Bitcoin L2s?

Bitcoin L2 protocols significantly enhance Bitcoin's utility by enabling support for smart contracts and DeFi activities. These solutions often leverage Bitcoin's robust security features, such as Rootstock's merge mining, which aligns with the security and decentralization priorities of many BTC maximalists. The potential for higher yields and increased functionality could drive interest in these innovative solutions.

But despite the potential benefits, some significant drawbacks might deter BTC maximalists from adopting L2 solutions. Many maximalists hold purist views, believing strongly in Bitcoin's original vision as a decentralized, peer-to-peer digital cash system. Some see L2 solutions as a deviation from this vision, introducing unnecessary complexities and dependencies on other networks.

The integration of classic institutional services such as custody solutions, delta-neutral hedge fund strategies, and other financial products could increase the appeal of Bitcoin L2s. Institutional-grade custody services offer secure storage for Bitcoin and L2 tokens, which may alleviate security concerns and boost confidence among investors.

Delta-neutral hedge fund strategies that aim to maximize returns while minimizing market exposure can also be applied to Bitcoin L2s. By using these strategies, investors can potentially achieve stable returns without being exposed to all the volatility of the crypto market.

The deeper penetration of institutional services into the Bitcoin ecosystem could soften the attitudes of BTC maximalists and encourage exploration into passive income opportunities for BTC. The appeal of generating returns through well-structured, risk-managed products could encourage even the most conservative Bitcoin holders to participate in L2 solutions.

The Marginly Alternative

Innovative platforms like Marginly are providing some compelling options for maximizing returns on Bitcoin (and other assets) as a liquidity provider. Marginly stands out as a comprehensive platform for both new and experienced DeFi participants.

Marginly is the leveraged trading protocol that supports innovative use cases involving LSTs/LRTs and tokenized yield, democratizing complex DeFi strategies and optimizing yields. Key features include a creative approach to yield farming, reliability (double audited by Quantstamp), a robust risk management system, and a reward system geared toward a future airdrop.

While Bitcoin Layer-2 solutions offer increased utility and potentially higher returns, they can sometimes be unattractive to those who prioritize Bitcoin’s original simplicity. Protocols like Marginly challenge these conservative biases by providing broader benefits to users through integrated risk management tools and competitive yield farming opportunities.

All of these features position Marginly as an alternative for optimizing returns on Bitcoin and other assets, catering to both new and experienced DeFi participants.