Kaiko: BTCfi Gains Momentum as Stablecoin Supply Tops $300 Billion

Bitcoin-backed financial innovation is accelerating as a new wave of infrastructure—often grouped under the banner of 'BTCfi'—moves from experimentation toward practical deployment, according to a recent report from Kaiko Research. The shift matters because it signals an effort to bring decentralized finance (DeFi) functionality to Bitcoin (BTC) without relying on the wrapped assets and cross-chain bridges that have historically introduced added layers of risk.

Kaiko’s analysis arrives as stablecoins continue to cement their role as the settlement layer of onchain markets. The report noted that the total stablecoin market capitalization surpassed $300 billion in 2025, underscoring growing demand for dollar-pegged liquidity that can move quickly across crypto venues and DeFi protocols. That expansion, Kaiko argued, is not a side story; it is a key enabling condition for Bitcoin-based finance to scale.

Until now, much of Bitcoin’s participation in DeFi has been indirect. BTC liquidity often reached lending markets, automated trading venues, and structured products through integration with the Ethereum Virtual Machine (EVM) ecosystem—typically via wrapped representations of BTC on other chains. While this approach helped bootstrap liquidity and composability, it also highlighted a structural trade-off: the more BTC leaves its native environment through wrapping or bridging, the more it depends on external trust assumptions, governance processes, and complex security models.

'BTCfi' aims to change that dynamic by implementing financial functions in ways that remain anchored to Bitcoin’s base-layer security. Rather than treating Bitcoin purely as collateral to be exported elsewhere, the goal is to build mechanisms—often via layer-2 networks—that allow BTC holders to access liquidity or generate yield while preserving a direct tie to Bitcoin’s settlement guarantees.

Kaiko pointed to layer-2 designs as foundational to this thesis. These systems typically move activity 'offchain' to improve speed and reduce costs, while keeping Bitcoin as the final settlement anchor. In practice, that means transactions, state updates, and application logic can occur outside the main chain, with periodic settlement and security assurances rooted in Bitcoin itself.

The report also framed bridging as a persistent weak point for broader crypto market structure. Many bridge architectures, Kaiko said, rely on intricate security assumptions that can amplify economic and operational risks in stress scenarios. For BTCfi to mature into a durable market segment, alternatives must provide credible security, resilient liquidity access, and a user experience that is not meaningfully worse than current cross-chain approaches.

Kaiko outlined two conditions that would determine whether BTCfi becomes a lasting pillar of crypto markets or remains a niche concept. First, there must be clear use cases that let BTC holders deploy capital without selling—such as borrowing against BTC, accessing liquidity for trading or payments, or earning returns through onchain market activities. Second, the supporting infrastructure must minimize operational risk, including risks that emerge from custody models, smart contract vulnerabilities, and failure modes tied to layered security designs.

Stablecoins, in Kaiko’s view, are the critical counterpart that can make BTCfi function at scale. As 'onchain finance’s engine,' stablecoins provide a stable unit of account and efficient settlement asset, allowing borrowers, lenders, market makers, and traders to interact without taking on the price volatility inherent in most crypto assets. This liquidity layer, the report argued, is essential for smoother market functioning and deeper capital efficiency across DeFi.

Looking ahead, Kaiko suggested that the trajectory of BTCfi will depend on whether the sector can build a secure financial architecture centered on Bitcoin while expanding the range of value-creation opportunities available to BTC holders. If stablecoin liquidity continues to deepen and layer-2 infrastructure proves resilient under real market conditions, Bitcoin-based finance could evolve from an aspirational narrative into a meaningful component of the broader digital asset economy.