Bitcoin DeFi: A Guide to Decentralized Finance Powered by BTC

Bitcoin DeFi (often dubbed BTCFi) is rapidly reshaping the crypto landscape, bringing decentralized finance directly to the Bitcoin network. While Ethereum has long been the hub for DeFi activity, recent innovations like Taproot, Ordinals, and Runes are unlocking powerful new use cases on Bitcoin’s base layer.

This guide explores what Bitcoin DeFi is, why it matters, the tools available today, and how platforms like Liquidium are pioneering this emerging frontier.

TL;DR: 

• Bitcoin DeFi (BTCFi) enables lending, borrowing, and trading directly on Bitcoin's network.

• Innovations like Taproot, PSBTs, and DLCs have expanded Bitcoin's capabilities for DeFi applications.

• Liquidium is a leading platform offering non-custodial Bitcoin lending using Ordinals, Runes, and BRC-20 tokens as collateral.

• BTCFi provides a secure, decentralized alternative to Ethereum-based DeFi, leveraging Bitcoin's robust security and decentralization.

What Is Bitcoin DeFi?

Bitcoin DeFi refers to a growing class of financial tools built natively on the Bitcoin blockchain. Historically, Bitcoin was seen as "digital gold" with limited programmability compared to chains like Ethereum. But that narrative has changed.

Thanks to the Taproot upgrade and new protocols like Ordinals and Runes, Bitcoin is now host to an emerging decentralized finance ecosystem. BTCFi lets users borrow, lend, and trade—without wrapping assets or using centralized intermediaries.

At its core, Bitcoin DeFi leverages the same principles that made Bitcoin revolutionary: decentralization, censorship resistance, and trustless transactions. But it adds new functionality using tools that respect Bitcoin's base-layer constraints while pushing its capabilities forward.

How Bitcoin DeFi Works

Bitcoin DeFi doesn’t rely on complex virtual machines or centralized smart contracts. Instead, it builds on the fundamentals of Bitcoin's architecture, enhanced by recent innovations:

Taproot: Unlocking Smart Contract Potential

Taproot, activated in 2021, was a major upgrade that made Bitcoin transactions more private and efficient. More importantly, it expanded what's possible with Bitcoin scripts, enabling basic smart contract functionality that powers many BTCFi protocols. 

PSBTs: Trustless Collaboration for Finance

Partially Signed Bitcoin Transactions (PSBTs) allow multiple parties to collaboratively construct and sign a transaction without giving up control of their private keys. This is crucial for non-custodial lending, where borrowers and lenders can agree to terms trustlessly.

DLCs: Smarter Contracts with Real-World Conditions

Discreet Log Contracts (DLCs) enable contracts that only execute based on real-world data, like BTC price. Think of them like conditional bets or hedging tools that settle on-chain without revealing sensitive info.

Assets on Bitcoin: Ordinals, Runes, and BRC-20s

Bitcoin-native assets are now possible thanks to:

• Ordinals, which inscribe data (like images or text) on individual satoshis

• Runes, a streamlined fungible token protocol designed to replace BRC-20s

• BRC-20, a proof-of-concept fungible token system built on top of Ordinals

These digital assets can be traded, valued, and—most importantly—used as collateral in DeFi protocols like Liquidium.

The combination of Taproot, PSBTs, DLCs, and asset protocols means Bitcoin DeFi can now support complex use cases while staying true to Bitcoin's ethos.

How to Use Bitcoin DeFi on Liquidium

If you’re ready to put your Bitcoin-native assets to work and earn yield, here’s how to start lending on Liquidium. You can choose between manual loans—where you set your own terms—or instant loans for quicker matches. Let’s start with the manual lending route, which supports Ordinals, Runes, and BRC-20 tokens.

Head to Liquidium’s website

Open Liquidium’s website in your browser and launch the app. 

Connect your wallet

Liquidium supports a wide range of wallets—Xverse, Phantom, Magic Eden, OKX, and more—so you can easily connect your preferred wallet and start lending or borrowing securely.

Choose a suitable collection

In the app, navigate to the Lend page, browse the various listed collections (Ordinals, Runes, or BRC-20), and choose which you want to lend your assets against by pressing the ‘Lend’ button next to it.

Set and confirm the offer

You’ll be able to view key loan details like interest rates, loan-to-value (LTV) ratios, APY, and duration—take a moment to review these so you know exactly what you’re committing to. Then, choose how much BTC you want to lend and adjust the terms to match your preferences.

Wait for a borrower to accept

Once a borrower accepts your offer and agrees to your terms, Liquidium will notify you directly in the app—and, if enabled, via email or Telegram for real-time updates.

Approve the loan

You’ll need to sign the loan. You can do this on your Portfolio page, under the ‘Lending’ tab, where the loan is listed under ‘Pending.’ The loan will begin once the transaction is confirmed in the mempool.

And there you have it! You can now sit back and relax, racking up those interest payments. Use Liquidium’s handy dashboard to keep an eye on your yield in real-time.

Instant Runes-backed loans

If you’re open to accepting Runes as collateral for your BTC, you can streamline the process using Liquidium’s Instant Loans feature. Here’s how to get started

Switch to Instant Loans

Once your wallet is connected, select ‘Runes’ as your preferred collateral type. Then, toggle to ‘Instant Loans’ by clicking the button in the upper-right corner of the app. Prefer a more hands-on approach? You can always switch back to the manual loan process anytime.

Create a vault

Next, once you’ve found a collateral offer you’re happy with, click ‘Lend’ and follow the prompts to create your lending vault. Want more flexibility? You can also learn how to access and manage your vault independently, outside of Liquidium’s interface.

Deposit your bitcoin

Head to your Liquidium profile in the upper-right corner, click on ‘Manage,’ then select ‘Deposit.’ From there, choose the amount of BTC you want to allocate to your vault for lending. Once you sign the transaction, your BTC will be securely deposited and ready to put to work.

Start lending

Now you’re ready to create loan offers. Set your preferred terms—including loan duration, the amount of Runes you’re lending against, and the desired LTV ratio. You can track all your active and pending offers on your Portfolio page.

Once a borrower accepts your offer, the loan kicks off automatically—no extra steps needed on your end. Keep in mind that offers can also be partially filled, depending on the borrower’s requested amount.

And that’s it! Now you can sit back and earn—borrowers will begin repaying their loans along with interest. If a borrower defaults, the collateral is yours. Plus, any unused BTC in your vault can be withdrawn at any time, giving you full flexibility and control over your funds.

Explore Bitcoin DeFi with Liquidium

Bitcoin-native DeFi is finally here, and it’s unlocking new financial opportunities for Bitcoin holders and degens alike. By using platforms like Liquidium, you can put your Bitcoin-native assets to work or earn yield in a secure, peer-to-peer marketplace.

Borrowers can unlock liquidity without selling their prized Ordinals or Runes, while lenders can earn high yields by funding overcollateralized loans. It’s all non-custodial, transparent, and powered by the Bitcoin base layer.

Connect your wallet to Liquidium today to lend or borrow Bitcoin using Ordinals, Runes, and BRC-20 tokens.

FAQ: Bitcoin DeFi

Q: Is Bitcoin DeFi secure?
A: Yes. It uses Bitcoin’s base layer and secure transaction formats like PSBTs, minimizing smart contract risk.

Q: Do I need a special wallet for BTCFi?
A: You'll need a wallet that supports Ordinals, Runes, or BRC-20s. Popular options include Xverse, Unisat, and Hiro Wallet.

Q: Can I use any Ordinal or only certain collections?
A: Liquidium currently supports select top-tier collections. Check the supported assets list before borrowing.

Q: What happens if a borrower doesn’t repay?
A: The lender unlocks the collateral, which is held in a smart contract until loan repayment or default.

Q: Why use Liquidium over other BTCFi platforms?
A: Liquidium offers a trustless, peer-to-peer marketplace with support for multiple asset types, competitive yields, and full on-chain transparency.

“Bitcoin DeFi is not just a trend; it's the evolution of financial sovereignty on the most secure blockchain.” — Liquidium Founder