From Passive Holding to Active Earning: New Ways to Put Bitcoin to Work

For many of Bitcoin’s early adopters, the promise was of buying and holding for the long term; however, as the crypto landscape has become increasingly more sophisticated, owners are no longer content to simply "HODL" tokens and hope for price gains.

The evidence is in the numbers as by late 2024, the total value locked (TVL) across various Bitcoin-based L2s and DeFi networks topped roughly $1.4 billion – a roughly tenfold increase from the prior year, with much of this capital flowing into emerging tools and protocols aimed at generating bitcoin-denominated returns.

For those wondering where that capital went, one eye-catching development was the rise of Babylon, a Bitcoin staking protocol that lets holders lock BTC to secure new chains. In October 2024, Babylon opened a staking round that took deposits from roughly 1,000 BTC up to about 24,000 BTC (valued at around $1.5 billion at that time).

That haul vaulted Babylon to the top of the Bitcoin DeFi leaderboard, far outstripping the Lightning Network, which still held about $321 million of BTC collateral at the time. Lightning itself – the veteran L2 payment network – had roughly $300 million locked in channels, and node operators were earning around 5.6% APR in Bitcoin fees.

In layman's terms, this has meant that returns on Bitcoin have started competing with, and in some cases beating, yields on many major altcoins — and it’s not just the crypto hobbyists that have taken note, as institutional-grade staking services have begun pouring in too.

To this point, firms like Kiln and Figment have incorporated support for staking of Stacks’ native token (STX), which in turn pays out BTC to stakers. Several specialized investment products have launched to, with Swedish issuer Valour debuting a Bitcoin Staking ETP (that locks BTC into Core Chain) last year and asset manager 21.co rolling out a regulated "21BTC" wrapped-Bitcoin token.

Looking beyond base layer activities

Until recently, earning income on Bitcoin was nearly a contradiction of sorts as the currency’s original framework was built without native staking or smart-contract features in mind, so it behaved more like digital gold (i.e., something to be held, not spent or invested). The only on-chain "yield" historically was mining block rewards – something ordinary holders had no share in unless they became miners. Otherwise, people had to trust a centralized lender for a promised interest rate, or settle for almost no return.

In this context, developers have responded with creative workarounds as a new generation of sidechains and L2s have grafted programmability onto Bitcoin’s solid foundation. Stacks, for example, runs on Bitcoin as its base layer and lets developers write smart contracts in the Clarity language.

Similarly, Rootstock (RSK) lets developers deploy Ethereum-like apps secured by Bitcoin’s proof-of-work (PoW) mechanism, with these platforms facilitating DeFi operations using Bitcoin as collateral, thereby opening up lending, trading, and more while Bitcoin’s network still provides security.

More recently, architects have pushed the idea further by literally making Bitcoin collateral for new blockchains. Protocols like Babylon, Spiderchain, and Merlin have invited holders to lock up BTC and use it as "proof of security" for entire networks. In Babylon’s model, for instance, the deposited BTC helps secure the new chain’s consensus; i.e., if the chain behaves honestly, those stakers earn rewards (usually paid in a native token).

Of course, these workarounds have trade-offs, as relying on L2s or sidechains means embracing additional code and trust assumptions. Many emerging yield figures are in tokens other than Bitcoin (for example, Stacks DAO emits BTC, but Core Chain’s LSD paid ~8.8% in CORE tokens).

Amidst this chaos, SatLayer has pitched itself as the new "economic layer on Bitcoin," leveraging BTC as the security foundation for a broad range of DeFi, tokenized assets, and institutional applications. SatLayer offers a shared-security platform where holders can deposit BTC (or liquid-staked BTC derivatives) into its smart contracts, with this locked capital then serving to secure other applications on companion blockchains.

In effect, one’s Bitcoin becomes collateral backing new DeFi or RWA protocols, and if those protocols behave correctly, stakers earn rewards (often in the form of project tokens). If not, they can be penalized by slashing a portion of the collateral.

SatLayer’s technical architecture runs on top of networks like Babylon (and now Sui), giving those chains Bitcoin-level finality and full smart-contract programmability. The company’s messaging emphasizes Bitcoin’s role in "securing any type of decentralized application" with "full Turing-complete programmability".

This vision is already being backed by action, as in late 2024, SatLayer integrated with the Sui blockchain, effectively plugging Bitcoin’s security into Sui’s fledgling DeFi ecosystem. Moreover, by early 2025, over $2 billion of BTC was expected to be locked into SatLayer-secured networks. Meanwhile, SatLayer’s staking interface has gone live on multiple chains (Ethereum, BNB Chain, Berachain, Sui, etc.), allowing users to deposit BTC and earn rewards in wrapped BTC across those ecosystems.

What lies ahead?

All of the above mentioned developments point to a broader transformation of Bitcoin’s role, especially as billions of dollars of the asset have moved from deep cold storage into active service as collateral for decentralized loans, tokenized bonds, insurance pools, and more. Experts believe this shift could upend how Bitcoin is viewed by regulators and institutions, i.e., instead of a volatile store of value, it may increasingly resemble a form of high-grade collateral or "base money" in digital finance.

For holders today, the change stands to be practical as their assets can finally earn a return simply by participating in these protocols. Similarly, for the Bitcoin narrative, the implications are profoun,d with the era of passive HODLing seems to be giving way to a world where Bitcoin can underwrite the next wave of financial innovation.

For many of Bitcoin’s early adopters, the promise was of buying and holding for the long term; however, as the crypto landscape has become increasingly more sophisticated, owners are no longer content to simply "HODL" tokens and hope for price gains.

The evidence is in the numbers as by late 2024, the total value locked (TVL) across various Bitcoin-based L2s and DeFi networks topped roughly $1.4 billion – a roughly tenfold increase from the prior year, with much of this capital flowing into emerging tools and protocols aimed at generating bitcoin-denominated returns.

For those wondering where that capital went, one eye-catching development was the rise of Babylon, a Bitcoin staking protocol that lets holders lock BTC to secure new chains. In October 2024, Babylon opened a staking round that took deposits from roughly 1,000 BTC up to about 24,000 BTC (valued at around $1.5 billion at that time).

That haul vaulted Babylon to the top of the Bitcoin DeFi leaderboard, far outstripping the Lightning Network, which still held about $321 million of BTC collateral at the time. Lightning itself – the veteran L2 payment network – had roughly $300 million locked in channels, and node operators were earning around 5.6% APR in Bitcoin fees.

In layman's terms, this has meant that returns on Bitcoin have started competing with, and in some cases beating, yields on many major altcoins — and it’s not just the crypto hobbyists that have taken note, as institutional-grade staking services have begun pouring in too.

To this point, firms like Kiln and Figment have incorporated support for staking of Stacks’ native token (STX), which in turn pays out BTC to stakers. Several specialized investment products have launched to, with Swedish issuer Valour debuting a Bitcoin Staking ETP (that locks BTC into Core Chain) last year and asset manager 21.co rolling out a regulated "21BTC" wrapped-Bitcoin token.

Looking beyond base layer activities

Until recently, earning income on Bitcoin was nearly a contradiction of sorts as the currency’s original framework was built without native staking or smart-contract features in mind, so it behaved more like digital gold (i.e., something to be held, not spent or invested). The only on-chain "yield" historically was mining block rewards – something ordinary holders had no share in unless they became miners. Otherwise, people had to trust a centralized lender for a promised interest rate, or settle for almost no return.

In this context, developers have responded with creative workarounds as a new generation of sidechains and L2s have grafted programmability onto Bitcoin’s solid foundation. Stacks, for example, runs on Bitcoin as its base layer and lets developers write smart contracts in the Clarity language.

Similarly, Rootstock (RSK) lets developers deploy Ethereum-like apps secured by Bitcoin’s proof-of-work (PoW) mechanism, with these platforms facilitating DeFi operations using Bitcoin as collateral, thereby opening up lending, trading, and more while Bitcoin’s network still provides security.

More recently, architects have pushed the idea further by literally making Bitcoin collateral for new blockchains. Protocols like Babylon, Spiderchain, and Merlin have invited holders to lock up BTC and use it as "proof of security" for entire networks. In Babylon’s model, for instance, the deposited BTC helps secure the new chain’s consensus; i.e., if the chain behaves honestly, those stakers earn rewards (usually paid in a native token).

Of course, these workarounds have trade-offs, as relying on L2s or sidechains means embracing additional code and trust assumptions. Many emerging yield figures are in tokens other than Bitcoin (for example, Stacks DAO emits BTC, but Core Chain’s LSD paid ~8.8% in CORE tokens).

Amidst this chaos, SatLayer has pitched itself as the new "economic layer on Bitcoin," leveraging BTC as the security foundation for a broad range of DeFi, tokenized assets, and institutional applications. SatLayer offers a shared-security platform where holders can deposit BTC (or liquid-staked BTC derivatives) into its smart contracts, with this locked capital then serving to secure other applications on companion blockchains.

In effect, one’s Bitcoin becomes collateral backing new DeFi or RWA protocols, and if those protocols behave correctly, stakers earn rewards (often in the form of project tokens). If not, they can be penalized by slashing a portion of the collateral.

SatLayer’s technical architecture runs on top of networks like Babylon (and now Sui), giving those chains Bitcoin-level finality and full smart-contract programmability. The company’s messaging emphasizes Bitcoin’s role in "securing any type of decentralized application" with "full Turing-complete programmability".

This vision is already being backed by action, as in late 2024, SatLayer integrated with the Sui blockchain, effectively plugging Bitcoin’s security into Sui’s fledgling DeFi ecosystem. Moreover, by early 2025, over $2 billion of BTC was expected to be locked into SatLayer-secured networks. Meanwhile, SatLayer’s staking interface has gone live on multiple chains (Ethereum, BNB Chain, Berachain, Sui, etc.), allowing users to deposit BTC and earn rewards in wrapped BTC across those ecosystems.

What lies ahead?

All of the above mentioned developments point to a broader transformation of Bitcoin’s role, especially as billions of dollars of the asset have moved from deep cold storage into active service as collateral for decentralized loans, tokenized bonds, insurance pools, and more. Experts believe this shift could upend how Bitcoin is viewed by regulators and institutions, i.e., instead of a volatile store of value, it may increasingly resemble a form of high-grade collateral or "base money" in digital finance.

For holders today, the change stands to be practical as their assets can finally earn a return simply by participating in these protocols. Similarly, for the Bitcoin narrative, the implications are profoun,d with the era of passive HODLing seems to be giving way to a world where Bitcoin can underwrite the next wave of financial innovation.