Can Bitcoin Become the Standard Collateral for DeFi? Lombard Finance Thinks So

Lombard Finance is stepping into the spotlight with its bold vision: to make Bitcoin the preferred collateral asset in decentralized finance (DeFi) through a yield-bearing token, LBTC. This move aims to unlock a significant flow of liquidity across the DeFi landscape.

The Battle for DeFi Collateral Dominance

The race to dominate the DeFi collateral market is heating up. According to DeFiLlama, the total value locked (TVL) in DeFi protocols has surged to nearly $126 billion, closing in on its 2021 all-time high of $175 billion. Ether (ETH) and its derivatives, including staked ether (stETH) and wrapped ether (weETH), currently lead the market, followed by wrapped bitcoin (wBTC) and stablecoins.

Lombard Finance, however, aims to disrupt this status quo with LBTC, a liquid Bitcoin token designed to bring Bitcoin’s value securely into DeFi protocols. Co-founder Jacob Philips argues that Bitcoin’s status as a store of value makes it the ideal asset for DeFi collateral.

“Bitcoin is the gold standard for collateral in centralized finance. There’s no reason it shouldn’t hold the same position in DeFi,” Philips said in an interview with CoinDesk.

Bitcoin’s Expanding Role in DeFi

Bitcoin’s price has soared by 124% since the start of the year, significantly outperforming Ether’s 48% increase. Institutional interest in Bitcoin continues to rise, and discussions around a potential U.S. Bitcoin reserve further highlight its growing importance.

Philips believes that Bitcoin liquidity could revolutionize DeFi markets. “Even a small fraction of Bitcoin’s $1.9 trillion market cap entering DeFi would drastically increase liquidity and efficiency,” he noted.

A Yield-Bearing Bitcoin Token

Unlike Ether, which can be staked for rewards, Bitcoin does not natively support staking. Lombard Finance plans to bridge this gap via Babylon, a protocol that allows Bitcoin holders to stake their assets to secure other blockchains.

Here’s the process: Users deposit Bitcoin with Lombard, which stakes it through Babylon and mints LBTC tokens at a one-to-one ratio. These tokens follow the ERC-20 standard, enabling them to interact seamlessly with Ethereum-based protocols. The yield on LBTC will come from blockchains secured via Babylon.

Projects such as Cosmos Hub, Manta, and Chakra are already integrating with Babylon’s devnet. Despite the absence of immediate staking rewards, Babylon has accumulated $5.4 billion in total value locked, driven largely by a points-based incentive program.

Competing in a Crowded Market

While wBTC has a market cap of $12.9 billion, only $5.7 billion is currently being used as collateral in DeFi protocols. In contrast, ETH accounts for $14.5 billion and stETH for $11.1 billion.

Staked Ether derivatives, including stETH and weETH, continue to gain ground, reshaping the DeFi ecosystem. According to ARK Invest, stETH’s benchmark yield is becoming a key reference point for the entire market.

Philips remains confident that LBTC can carve out a space in this competitive arena. “Once staking yield becomes available, LBTC will rival ETH’s staking rewards, making it an incredibly attractive collateral asset,” he explained.

The Road Ahead for Lombard Finance

This summer, Lombard Finance successfully raised $16 million from prominent investors, including Polychain Capital and Franklin Templeton. Philips noted that experienced DeFi participants have been particularly enthusiastic about the idea of Bitcoin staking.

“Our goal is to guide Bitcoin holders into on-chain finance,” Philips said. “Even if yields fluctuate, LBTC’s ability to offer consistent rewards makes it a valuable asset.”

With institutional interest growing and DeFi infrastructure evolving rapidly, LBTC has the potential to play a transformative role in reshaping the future of DeFi collateral.