Could Bitcoin Emerge as the Top Collateral in DeFi? Lombard Finance Believes It Will

Is Bitcoin Poised to Become the Backbone of DeFi Collateral? Lombard Finance Makes Its Case

Lombard Finance is on a mission to redefine decentralized finance (DeFi) with a yield-bearing Bitcoin token, aiming to inject fresh liquidity into the ecosystem.

The Race for DeFi Collateral Supremacy

The competition for dominance in DeFi collateral is intensifying. DeFiLlama reports that nearly $126 billion is currently locked across DeFi protocols, approaching the 2021 peak of $175 billion. Ether (ETH) and its derivatives, such as staked ether (stETH) and wrapped ether (weETH), lead the pack, with wrapped bitcoin (wBTC) and stablecoins following closely behind.

Lombard Finance, however, seeks to disrupt this balance with LBTC, a new liquid Bitcoin token. Co-founder Jacob Philips believes Bitcoin is naturally suited to become the preferred collateral asset in DeFi.

“Bitcoin is already the premier collateral asset in centralized markets. It should hold the same status in DeFi,” Philips told CoinDesk. “Its strength as a store of value makes it an ideal choice for decentralized finance.”

Bitcoin’s Growing Influence

Bitcoin has seen a 124% increase in value since January, far outpacing Ether’s 48% growth. With increasing institutional interest and ongoing discussions about a potential U.S. strategic Bitcoin reserve, the asset’s role in DeFi is becoming more significant.

Philips believes Bitcoin’s liquidity could profoundly impact DeFi efficiency. “A fraction of Bitcoin’s $1.9 trillion market cap flowing into DeFi could drastically improve liquidity and rival centralized exchanges,” he said.

Yield-Bearing Bitcoin: A Game Changer

Unlike Ether, which supports staking to earn rewards, Bitcoin lacks native staking functionality. Lombard Finance aims to change this through Babylon, a protocol that allows Bitcoin staking to secure other blockchains.

Here’s how it works: Users deposit Bitcoin with Lombard, which stakes it via Babylon and issues LBTC tokens on a one-to-one basis. These tokens, adhering to the ERC-20 standard, can seamlessly interact with Ethereum-based protocols. The yield will be derived from blockchains secured through Babylon.

Nine projects, including Cosmos Hub, Manta, and Chakra, have already integrated with Babylon’s devnet. Despite not offering staking rewards yet, Babylon has amassed $5.4 billion in total value locked, partly driven by its points-based incentive program.

The Competitive Landscape

While wBTC holds a $12.9 billion market cap, only $5.7 billion is actively used as DeFi collateral. In comparison, ETH accounts for $14.5 billion and stETH for $11.1 billion.

Staked Ether tokens, especially stETH and weETH, continue to dominate. ARK Invest even reported that DeFi is increasingly centered around stETH’s benchmark yield.

Philips believes LBTC can overcome the limitations of wBTC. “Once staking yield is live, LBTC will rival ETH staking rewards, making it a highly attractive collateral asset,” he said.

Looking Ahead

Lombard Finance has already secured $16 million in funding from major investors, including Polychain Capital and Franklin Templeton. Philips noted that experienced crypto investors are especially receptive to the concept of Bitcoin staking.

“Our primary objective is to encourage Bitcoin holders to embrace on-chain finance,” Philips said. “Even with fluctuating yields, LBTC’s ability to generate consistent rewards will make it a compelling asset.”

As institutional interest grows and DeFi continues to evolve, Lombard Finance’s LBTC could play a key role in reshaping the future of DeFi collateral.