Idle institutional capital activates Bitcoin-native DeFi

A new Bitwise report recently revealed that, as of Q3 2025, 172 public companies now hold over one million Bitcoin (BTC) worth $117 billion. That’s up 39% in company count (48 new) and 21% in holdings from the previous quarter. Bitcoin has not only lived up to the “digital gold” title it has long held, but firmly established itself as a pillar of institutions’ financial strategies in Q3 2025 despite its sharp price fluctuations.

In less than two years after spot Bitcoin ETFs were approved in the United States, Bitcoin has transitioned from a gamble to a hedge, lauded for its scarcity, sovereignty, and resilience after years of outright institutional criticism and skepticism. Now, institutional Bitcoin holdings have quietly entered a new phase, shifting gears from mere exposure to yield — Bitcoin-native yield.

The great convergence

The first chapter of DeFi was more of a cypherpunk revolution. It began on Ethereum (ETH) as a wild and unregulated experiment that thrived on speculation, permissionless access, and pseudonymous wallets. Bitcoin wasn’t part of the early DeFi revolution. It was supposed to be a new monetary system built on code and resistant to centralized control.

As they evolved over the years, Bitcoin and DeFi have increasingly converged. Bitcoin is now a yield-bearing asset prized by corporate treasuries, institutions, and nation-states. DeFi, meanwhile, has made a global, permissionless financial infrastructure without centralized gatekeepers a reality. 

Institutions stare at the idle capital

Despite its limited smart contract capabilities, Bitcoin is the most secure, trustworthy, and robust financial system there is. To the average pension fund, any cryptocurrency that’s not Bitcoin is just a speculative play at best. It’s Bitcoin, not the “not Bitcoin” chains, that will power the next phase of the DeFi revolution.

Institutions hold not just ETFs, but actual Bitcoin on their balance sheets, signaling they are not merely interested in exposure but the benefits of on-chain infrastructure. Today, custodians manage over $200 billion worth of Bitcoin for their institutional clients. Unfortunately, it’s been mostly sitting idle.

Unlocking the full potential of institutional Bitcoin is what would truly move the needle for DeFi, especially considering the total value locked in DeFi is relatively small at approximately $156 billion.

Not the retail way

Retail adoption will continue to grow, but right now, the growth is focused on corporations because that is the next uncharted territory. There’s a growing institutional demand to turn Bitcoin into a productive, yield-bearing asset. Their capital is inert, not through lack of will but because the existing DeFi stack is incompatible with their operational realities. In traditional banking, people are used to earning yield on savings and being able to get credit. Those basic primitives are just not there yet for institutional Bitcoin.

Corporate treasuries and custodians are not going to leverage public DeFi for their idle BTC. They can’t. The public, open DeFi has worked well for retail users. But the institutional financial needs are different, specifically regarding compliance and privacy regulations. 

In retail, people typically use a self-custody wallet that connects to dApps via a web browser. In contrast, all institutional digital assets, especially Bitcoin, are held by custodians who have to adhere to strict compliance protocols.

A permissioned place in the permissionless ecosystem

Bitcoin will always be permissionless. But now that the ecosystem has matured to some extent and institutions have become active participants, some of the financial applications built on top of Bitcoin may be permissioned to cater to their specific needs. As we move towards Bitcoin-native financial markets, some aspects of the BitcoinFi economy must adapt to meet the requirements of regulated entities like corporations and institutions.  

Their primary requirements are:

• Custodial integration: Institutions hold crypto via custodians that offer additional security features like recovery and multisig management. They won’t use DeFi applications that require them to exit the custodian and move assets to a regular wallet. 

• Bitcoin-native, in-kind yield: The stakes are high for institutions, and they can’t take on the unnecessary risks that come with bridging BTC to another chain or earning yield in secondary, speculative tokens. They prefer in-kind yield. That’s Bitcoin.

• Permissioned DeFi: Institutions need privacy-preserving auditability that verifies compliance without exposing strategies. Shielded contracts on a permissioned network ensure that level of privacy while still being fully auditable. Embedding KYC/AML workflows at the protocol level facilitates access to superior financial products for the custodians that they don’t currently have access to, including borrow, lend, trading, and yield. 

The institutional integration should not be seen as a betrayal of DeFi’s cypherpunk origins. In fact, it’s their validation because the institutional-focused features are being built on the very foundations laid by DeFi. They reflect the industry’s maturation and the next phase of adoption. The total value locked in the Bitcoin DeFi has skyrocketed from $705 million in September 2024 to $8.49 billion at the end of September 2025.

Closing thoughts

DeFi demonstrated what was possible with on-chain finance, and now it has evolved from a retail-first experiment into a robust financial system attracting the Smart Money. 

Combining compliance with on-chain innovation in a permissioned environment would truly open the institutional floodgates to not just yield products but the broader Bitcoin-powered financial system. 

2025 is the year regulatory clarity, Bitcoin-native DeFi infrastructure, and institutional frameworks have finally aligned to drive the next phase of adoption.