Bitcoins Transition to BTCFi: Navigating Privacy Challenges in a Growing Ecosystem

In the past year, the total value locked (TVL) in BTCFi protocols has surged over sixfold, growing from $975 million to more than $6.5 billion. According to DeFi Llama, Bitcoin now ranks among the top three DeFi ecosystems in terms of locked assets, trailing only Ethereum and Solana.

Protocols like Babylon offer Bitcoin holders new avenues for earning additional income. However, participating in BTCFi creates an environment that facilitates user tracking through on-chain analytics tools.

Together with the Bitcoin mixer Mixer.Money, we explore the current landscape of the BTCFi sector and evaluate tools for maintaining privacy.

BTCFi (Bitcoin Finance) encompasses a range of decentralized financial applications built on or utilizing Bitcoin as a primary asset. BTCFi protocols enable earnings from staking, lending, and various financial operations.

As of June 2025, a significant portion of BTCFi’s funds is concentrated in four protocols: Babylon Protocol, Lombard Finance, Threshold Network, and Solv Protocol.

Babylon Protocol has emerged as the key growth driver within BTCFi. As of June, it leads the ecosystem with a TVL of approximately $4.85 billion.

Technically, the project operates on a network based on Babylon SDK and consists of smart contracts linking Bitcoin to partner PoS networks. Users send their digital gold to a designated address in the Bitcoin mainnet, where the coins serve as collateral for validators securing the Bitcoin Supercharged Networks (BSN). In return, stakers receive rewards from PoS networks.

At the time of publication, the average yield in Babylon is around 0.5% annually, depending on the chosen partner network. The minimum amount for participation is 0.005 BTC, with an unlocking period of seven days (equating to 1008 blocks).

Lombard Finance addresses a critical issue of direct staking — the freezing of funds. While Bitcoin is locked in Babylon, Lombard enables users to obtain a liquid staking token — LBTC on the Ethereum network, pegged to Bitcoin at a 1:1 ratio.

Users deposit BTC into Lombard, which stakes it in Babylon, and in return, an equivalent amount of LBTC is minted. Rewards are accrued directly to the LBTC balance. When redeemed, the tokens are burned, and after seven days, users receive their Bitcoin back.

As of June 2025, Lombard stands as the second-largest protocol in BTCFi, boasting a TVL of about $1.8 billion. LBTC is integrated with multiple DeFi platforms such as Aave and Morpho.

Threshold Network addresses the challenge of issuing wrapped Bitcoin on Ethereum without intermediaries. The protocol minting tBTC is collateralized with BTC in a 1:1 ratio.

What sets tBTC apart from popular Wrapped Bitcoin (WBTC) is its decentralization. Instead of a centralized custodian, tBTC issuance is governed by a network of validators utilizing threshold signature technology. Currently, over 100 active validators safeguard the protocol.

In June 2025, Threshold launched tBTC support on the Starknet platform, paving the way for Bitcoin to venture into the realm of ZK-rollups.

The Solv Protocol team developed a Staking Abstraction Layer, a framework that simplifies Bitcoin integration with various protocols. Its main product is the SolvBTC token, issued under 1:1 BTC collateral.

Analytics companies are continuously enhancing their transaction tracking tools, and the emergence of BTCFi offers them new opportunities.

“The UTXO model in Bitcoin inherently provided a higher level of anonymity compared to the account model in Ethereum. However, the growth of BTCFi is introducing behavioral patterns from Ethereum into the Bitcoin network. Users are increasingly utilizing the same addresses to interact with protocols and are generally less concerned about privacy. This significantly simplifies the tasks for on-chain analysts and distances Bitcoin from its foundational ideals of confidentiality towards ‘ETF-ization’ and ‘Ethereum-ization,’” representatives from Mixer.Money note.

Besides the ideological factors, total transparency may pose issues in purely financial terms. A notable example is the story of trader James Wynn, who lost millions on the decentralized exchange Hyperliquid while opening large long positions in Bitcoin that were visible to all participants.

Other traders could track his actions and potentially exploit that information for manipulation. In response to Wynn’s announcement of closing another losing position, Adam Back, co-founder and CEO of Blockstream, remarked:

“Just trade with leverage on a platform that doesn’t broadcast your liquidation level to the world. This makes it easier for people to hunt for your stops. They can push the price to liquidate you and make a profit. Stop doing that,” he advised.

In such scenarios, Bitcoin mixers and other transaction anonymization tools become essential for maintaining user confidentiality.

“Certainly, blockchain transparency has its advantages, but within the context of BTCFi, it often transforms into a vulnerability. Major players can track competitors’ fund flows and use that information against them,” comment representatives from Mixer.Money.

They present several scenarios for employing Bitcoin mixers within BTCFi:

“Not everyone using Bitcoin wants their actions to be visible to the entire world. We believe that privacy should be an option accessible to everyone,” conclude Mixer.Money representatives.

Modern Bitcoin mixers utilize multi-layered mixing with thousands of intermediate addresses, time randomization, and integration with exchanges to create additional breaks in the chain.

For example, Mixer.Money mixes coins in three modes: “Mixer,” “Exact Payment,” and “Full Anonymity.” The “Mixer” mode provides basic anonymity — protecting against manual transaction analysis but not against advanced on-chain analytics.

“In the ‘Full Anonymity’ and ‘Exact Payment’ modes, Mixer.Money sends users Bitcoin sourced directly from major exchanges and carrying the corresponding status,” emphasize the team at Mixer.Money.

On-chain analysis services can only track Bitcoin withdrawals from the exchange to a wallet. The participation of large trading platforms reduces the risk of obtaining coins from dubious sources.

Mixer.Money randomly selects the timing of transactions and the ratios of transaction amounts to complicate the determination of links between operations based on timestamps.

“We see tremendous potential in BTCFi, but we also emphasize the importance of maintaining a balance between innovation and privacy. Confidentiality has always been one of Bitcoin’s fundamental principles. Today, various technologies exist for anonymizing transactions — such as CoinJoin or stealth payments. Nonetheless, Bitcoin mixers remain the most versatile and time-tested tool,” stated representatives from Mixer.Money.

The BTCFi sector has become a prominent part of the crypto industry. Billions of dollars in Bitcoin are locked in Babylon, providing investors with new income generation opportunities.

However, the transparency of the blockchain in the context of BTCFi often becomes a concern, enabling competitors and on-chain analysts to track user transactions. Tools like Mixer.Money become essential for those looking to preserve the privacy of their financial activities.