Bitcoin and global liquidity move in the same direction 83% of the time in any given one-year period, a higher correlation than any other major asset class. The world’s first cryptocurrency is highly sensitive to liquidity, which becomes clear when data from May 2013 to July 2024 is analyzed. Its price demonstrated a correlation of 0.94 with global liquidity, almost the highest possible.
However, its average correlation with global liquidity drops to 0.51 when looking at the 12-month rolling correlation. This is still a positive correlation but significantly lower than that overall. Further, it drops to just 0.36 when evaluating the 6-month rolling correlation. Evidently, the flagship crypto’s price deviates more from the long-term trend as the time frames get shorter, showing that Bitcoin-specific factors are more likely to affect short-term price fluctuations than liquidity conditions.
Macroeconomic factors such as interest rates and monetary policy also affect Bitcoin. This is one prominent liquidity limitation. Bitcoin’s inconsistent correlation with global liquidity stems from its unique role as a decentralized digital asset with limited supply. Bridging Bitcoin to Solana could have an indirect impact on this dynamic by introducing mechanisms that enhance its utility within broader financial systems.
Addressing the lack of native support for smart contracts
Another prominent limitation is the lack of support for complex smart contracts. While tokenized versions of Bitcoin, such as Wrapped Bitcoin (WBTC), exist on other blockchains, they are fragmented across platforms. This lack of interoperability limits the seamless movement of liquidity between networks and reduces overall efficiency.
The Bitcoin network has limited transaction throughput: between 7 and 10 transactions per second and an average block time of 10 minutes. This creates bottlenecks during high demand, increasing transaction fees and reducing the efficiency of moving liquidity.
Additionally, Bitcoin’s primary use case as a store of value limits its adoption in active financial applications. Most Bitcoin holders focus on long-term investment rather than deploying their assets in liquidity pools or other financial instruments, restricting its availability for broader use.
Bridging Bitcoin to Solana is a leap in the right direction
Connecting Bitcoin to the Solana blockchain can address issues with limited liquidity. Zeus Network, a Layer 1.5 solution for Solana, seamlessly achieves this, enabling an integration of assets and liquidity. Zeus Layer is a pluggable and programmable node network on the Solana Virtual Machine, which Zeus Network is using to build cross-chain infrastructure. Its first decentralized application, Apollo, is a key element in the process of bringing Bitcoin liquidity to Solana.
Significantly, Zeus validated the first Bitcoin transaction on Solana, marking the beginning of permissionless Bitcoin liquidity flowing onto Solana. By leveraging ZeusNode Operator, ZeusNode Guardian, and the Zeus Program Library (ZPL), Zeus Network successfully pegged Bitcoin onto Solana’s infrastructure. This process not only showcases the reliability of Zeus Network’s cross-chain solutions but also sets the foundation for integrating additional UTXO-based assets such as Dogecoin, Litecoin, and Kaspa in the near future. Zeus has laid out an ambitious roadmap, including onboarding 1% of Bitcoin liquidity onto Solana by mid-2025.
BREAKING: @solana can now validate Bitcoin transaction!
— Zeus Network 🟧⛈️🟣 (EPOCH 1) (@ZeusNetworkHQ) December 12, 2024
Here’s what happened 🧵 👇🏻 pic.twitter.com/jykyZQmpyF
As Bitcoin holders move to Solana, the latter’s total value locked (TVL) is expected to grow significantly. DeFi activities like lending, borrowing, and yield farming become available to holders, driving up TVL. The increased liquidity will benefit Solana’s liquidity protocols (Jupiter, Raydium, etc.). Higher Bitcoin flows will attract more investors as slippage drops, validating Solana as a cross-asset DeFi hub.
Solana strengthens its position in the competitive DeFi landscape by tapping into Bitcoin’s immense capital base. More specifically, ZeusNode, the core product of Zeus Network, establishes inter-blockchain interaction, giving Solana a permissionless way to connect with other blockchains, including Bitcoin. The operator and the guardian enable this interaction in the system. The former collects, proposes, and relays transactions, and the latter signs the transaction proposals from ZeusNode. Solana is expected to attract retail and institutional users by making Bitcoin compatible with its advanced DeFi protocols, such as creating Bitcoin-native smart contracts and collateralized loans. This could not only bring significant liquidity and engagement to Solana but also unlock new financial products.
Unlocking Bitcoin liquidity for DeFi
Combining Bitcoin’s largely untapped liquidity potential and security with Solana’s high-speed, low-cost infrastructure can catalyze the next wave of dApps and protocol growth. Bitcoin’s market cap of $1.97 trillion represents a vast liquidity source, and Solana is an ideal platform for frequent and cost-effective financial operations using BTC, encouraging active participation in DeFi.
The ability to seamlessly use BTC on Solana’s fast network can attract institutional players looking for scalable solutions for Bitcoin-centric financial products. Retail investors will find Bitcoin liquidity equally accessible through intuitive, low-cost dApps on Solana, encouraging wider adoption of decentralized services.
Developing Bitcoin-native dApps
Protocols can develop multi-chain solutions where users leverage Bitcoin’s security and Solana’s efficiency, fostering a new generation of interconnected dApps. Bridging BTC to Solana allows Bitcoin to be used as collateral or payment in these dApps, setting the stage for innovative protocols like BTC-based derivatives and other financial products.
Finally, Bitcoin holders can avail themselves of new revenue streams by deploying BTC in yield-generating strategies but not selling it. This will also allow protocols to attract liquidity, enhance DeFi adoption, and generate revenue from fees. Protocols that facilitate yield generation on BTC can charge fees for services like staking or pooling, becoming a consistent source of income. Protocols can introduce structured BTC vaults, liquidity pools, or options strategies catering to Bitcoin holders, further differentiating their offerings in the competitive DeFi space.
