Bitcoin Yield Opportunities Expand With Layer-2 Solutions, Coinbase Fund

Bitcoin, the world's most prominent cryptocurrency, does not natively support staking due to its proof-of-work (PoW) consensus mechanism. However, Bitcoin holders can still generate passive income through various yield-generating methods, including centralized lending platforms, Wrapped Bitcoin (WBTC) on Ethereum, and layer-2 solutions like Babylon and Stacks. These methods allow Bitcoin holders to earn yield without altering the core protocol of Bitcoin.

Centralized lending platforms such as Binance Earn, Nexo, and Ledn enable users to deposit their BTC and earn interest. These platforms lend the deposited BTC to institutional borrowers, providing users with a return on their investment. However, this method comes with custodial risks, as users must trust the platform to remain solvent and secure. The collapse of firms like Celsius and BlockFi has highlighted the vulnerabilities associated with centralized lending platforms.

Wrapped Bitcoin (WBTC) is an ERC-20 token backed 1:1 by BTC, held by a centralized custodian. WBTC allows BTC holders to participate in Ethereum-based DeFi protocols, such as lending on Aave, providing liquidity on Curve, or yield farming. This unlocks the potential of DeFi but introduces risks from the custodian, bridge vulnerabilities, and smart contract bugs. Users must convert their BTC to WBTC using a centralized exchange or decentralized bridge and then transfer it to a Web3 wallet to interact with DeFi protocols.

Layer-2 solutions like Babylon and Stacks offer Bitcoin-native yield opportunities. Babylon locks BTC in time-locked scripts to secure its PoS network, while Stacks uses a proof-of-transfer (PoX) model where STX tokenholders lock tokens to earn BTC rewards. These platforms expand Bitcoin’s utility without leaving its ecosystem entirely. Babylon’s Genesis mainnet launched on April 10, 2025, with over 57,000 BTC staked, valued at approximately $4.6 billion. Users can earn yield by locking BTC via the Babylon Stake app and delegating to finality providers.

Coinbase Asset Management has launched the Coinbase Bitcoin Yield Fund (CBYF) on May 1, aiming to deliver sustainable Bitcoin-denominated returns for institutional investors outside the US. The fund uses a conservative cash-and-carry arbitrage strategy, capitalizing on price gaps between spot and futures markets, while steering clear of high-risk tactics like leveraged loans or call selling. Targeting annual net returns of 4–8% in BTC, CBYF offers a safer alternative for earning yield on Bitcoin.

Generating yield on BTC involves several risks, including custodial risk, smart contract risk, liquidity risk, network maturity, market risk, and regulatory risk. Centralized platforms and WBTC’s custodian hold BTC, risking losses if they face insolvency, hacks, or regulatory shutdowns. Smart contract vulnerabilities and liquidity issues can also pose challenges. Newer protocols like Babylon may face technical or adoption challenges, and price volatility can offset yield during bear markets. Additionally, centralized platforms and custodians face Know Your Customer (KYC) and Anti-Money Laundering (AML) scrutiny, and yield may be taxed as income or capital gains, depending on the jurisdiction.

The Bitcoin yield landscape is evolving through layer-2 and DeFi innovations. Babylon and Stacks pioneer trustless solutions, locking BTC or STX without centralized custodians. Future advancements may include more non-custodial, Bitcoin-native systems using cryptographic tools to unlock value while preserving Bitcoin’s censorship resistance. However, purists argue that yield generation risks diluting Bitcoin’s role as hard money, sparking debates over balancing utility and security.