The Shift From Centralized Lending to Decentralized Bitcoin-Backed Finance

With Bitcoin’s multiple recent all-time high closes, the rise of Bitcoin-backed finance surprises no one. It includes, but is not limited to, using Bitcoin as collateral to secure a loan, which enables owners to access fiat currency or stablecoins for different needs without having to sell their cryptocurrency. You deposit Bitcoin with a lending platform, obtain the loan, and get the Bitcoin back after repaying the loan with interest.

Centralized lending refers to borrowing or lending through any entity that acts as an intermediary between the lender and the borrower. On the other hand, decentralized lending takes place via DeFi protocols that operate based on smart contracts. You can lend Bitcoin directly through a dApp operating on the Bitcoin network or through protocols on Ethereum, Sui, or another blockchain using wrapped BTC (wBTC).

As Bitcoin-backed finance gains momentum, offerings are becoming more complex, but also more valuable. Volo wBTC Vault, which optimizes DeFi yield, is an example. Volo, a leading liquid staking protocol on the scalable L1 blockchain Sui, recently announced its launch. The Vault leverages wBTC and integrates with NAVI Protocol to deliver potentially high-yield DeFi strategies with intuitive access on Sui. NAVI, also on Sui, allows users to borrow and lend cryptocurrency without intermediaries.

Sui already has over 1,000 BTC in liquidity, and Volo’s launch strengthens its position as a Bitcoin DeFi layer. The integration with NAVI’s stable lending pools provides high-yield opportunities with low to no friction as well as leveraged positions and automated yield optimization through a one-click interface

The innovative vaults enable users to maximize wBTC utility, enhancing Sui’s position as a DeFi hub and offering new ways to engage with Bitcoin in a secure environment. Volo’s vault offerings will soon include altcoins, stablecoins, and other BTC variants with the purpose of improving capital efficiency and the DeFi experience overall.

Decentralized products offer sovereign control and full transparency

Lending or borrowing via a centralized platform is simple enough. The user deposits Bitcoin into the platform’s crypto wallet, sets the loan amount, expected interest rate, and loan duration, and confirms their lending offer. The platform finds borrowers and transfers the interest to the lender after taking its cut. Borrowing is similarly straightforward

Centralized lending platforms control the users’ assets, which means users can lose their Bitcoin if the platform goes bankrupt, is hacked, or suffers a rug pull. These risks have diminished since the series of insolvencies of centralized platforms in 2022, but remain to some extent. Centralized lending is also insufficiently transparent. The user must trust the platform to manage the loan terms and assets. As the transactions are internal, there may be no record of the loan on the blockchain

Decentralized Bitcoin-backed finance is a viable alternative as it automates the lending process via smart contracts, doing away with the need for a third party. When the preset terms are fulfilled, the smart contracts automatically execute the transaction. DeFi protocols determine interest rates algorithmically, so there is no centralized control over the rate amount

The borrower must lock up their collateral in a smart contract. Once they repay the loan with interest, the collateral is unlocked and sent to their wallet automatically. If they wish to lend Bitcoin, they must connect a wallet, set the loan amount and duration, and approve the transaction

DeFi protocols allow the two parties involved to negotiate rates directly and lend fiat or cryptocurrency via the corresponding decentralized network. The blockchain reflects all loan terms and transactions, providing clear, verifiable, tamper-proof records. Users retain control of their assets. DeFi lending is trustless because users can rely on open-source codes, which anyone can verify and audit.

How stablecoins power efficient, low-cost Bitcoin-backed finance

The total stablecoin transfer volume reached $27.6 trillion in 2024, exceeding the combined volume of Mastercard and Visa transactions. Merchant settlements, B2B and cross-border payments, and retail remittances have increased the demand for more responsive, more secure, and less expensive solutions.

Stablecoins don’t experience the price volatility typical of other cryptocurrencies as they are pegged to reserve assets. They address many of the limitations of legacy payment systems by offering high transaction speeds, minimal or nonexistent fees, 24/7 operation, and nearly instant settlement. Their circulation is growing in light of the maturing infrastructure. The total value of stablecoins issued has doubled to $250 billion over the past two years. It is predicted to surpass $400 billion by the end of 2025 and reach $2 trillion by 2028.

Yield-bearing stablecoins generate returns through tokenized US treasuries or delta-neutral trading. The number of yield-bearing, cash-equivalent tokens issued has increased in parallel with stablecoin value growth. Typically, these tokens represent investments in short-term government securities, an example being BlackRock’s USD Institutional Digital Liquidity Fund. They are denominated in USD and could be used at the point of sale and to accumulate returns in real-time.

Stablecoins address the gap between traditional savings rates and market opportunities, like money market funds once did. A second parallel between the two is that the rate caps Regulation Q imposed on bank deposits drove MMF adoption, just like increased regulatory clarity in 2025 supports stablecoin growth. The jurisdiction is a key factor in determining the potential yield

Essentially, stablecoins’ role in the shift from centralized lending to decentralized, Bitcoin-backed finance is nothing short of critical. By providing a price-stable medium of exchange that operates on-chain, stablecoins allow users to borrow against Bitcoin without relying on intermediaries. They unlock capital efficiency by letting holders retain BTC exposure while accessing liquidity in a non-custodial, permissionless manner.

Stablecoins support seamless collateralization, settlement, and repayment within decentralized protocols. As a result, they reduce costs, improve transparency, and make Bitcoin-backed lending more accessible and efficient.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.