As more altcoin ETFs are set to launch in the US, potentially offering yields through staking, institutions will gain exposure to the returns that crypto has to offer. This change might impact how Wall Street sees Bitcoin.
As Bitcoin does not have native smart contract capabilities, the idea of a synthetic token, commonly referred to as a wrapper, is to allow the usage of BTC in DeFi protocols built on other blockchains.
Babylon leads native staking with 58,271.77 BTC, generating a 0.29% APR through a self-custodial protocol that secures proof-of-stake chains.
Using Babylon’s infrastructure, chains and applications can tap a security layer maintained by BTC staking.
Threshold operates tBTC v2 across Ethereum, Starknet, Sui, and MezoChain with 6,335.31 tBTC bridged and $717.7 million in TVL.
Meanwhile, b14g offers an average of 5% APR through dual-staking mechanisms that combine BTC with native protocol tokens, across a $300 million TVL.
Zeus Network bridges Bitcoin to Solana via the zBTC wrapper, with $58.7 million in TVL using Multi-Party Computation for trustless cross-chain interoperability. It offers 4.52% APY on staking via Fragmetric.
Thorchain facilitates native Bitcoin swaps for assets across different chains with $74 million locked. Bitcoin bridges processed $1.87 million in September 2025.
Regarding chains with the largest amounts of wrappers, Ethereum holds 178,458.67 BTC as of Sept. 30, followed by BNB Smart Chain at 24,082.67 BTC and Base at 21,647.85 BTC.
Besides the wrapper domination in established blockchains, Lightning Network presents itself as a significant rail for BTC usage.
Additionally, Tether deployed USDT over Lightning via Taproot Assets in January 2025, enabling dollar-denominated payments without locking BTC in channels.
Despite the plurality of networks and wrappers that institutions could use to add composability to Bitcoin if they wish to, the key point of access remains through ETFs.
Using BlackRock’s IBIT S-1 filing as an example, the document specifies that Coinbase Custody Trust Company holds Bitcoin in segregated cold storage wallets with multi-signature authentication, separate from all other Coinbase assets.
In January 2025, BlackRock filed an amendment to IBIT’s structure to allow in-kind creation and redemption, requiring Coinbase Custody to process withdrawals to public blockchain addresses within 12 hours.
Currently, there is limited room to incorporate yield pathways into Bitcoin ETFs, which would involve exploring the DeFi ecosystem using BTC.
Additionally, the Financial Action Task Force’s Travel Rule mandates financial institutions and Virtual Asset Service Providers to transmit originator and beneficiary identifying information with virtual currency transactions.
This standard requires end-to-end transparency to aid law enforcement and mitigate financial crime risks. ETF issuers must maintain segregated custody with regulated entities that are capable of producing audit trails that satisfy the travel rule requirements.
Wrapped Bitcoin protocols introduce trust assumptions that conflict with institutional custody standards.
Threshold’s tBTC relies on decentralized node operators to maintain the bridge between Bitcoin and Ethereum, creating a multi-signature custodial model where no single entity controls funds.
Although this is positive from a decentralization perspective, it introduces a security dependency on the integrity of the validator set. Lombard utilizes Babylon’s Bitcoin Staking Protocol, combined with a consortium model for custody, which distributes risk across multiple parties.
Again, there is an effort to decentralize single points of failure; however, this adds coordination requirements that complicate audit procedures.
A Bitcoin ETF holding LBTC on Base would face scrutiny on Optimism’s fraud-proof system, Base’s sequencer centralization, and the bridge’s oracle dependencies.
Each wrapped BTC variant trades off security assumptions. BitGo’s wBTC utilizes centralized custody with legal agreements, whereas Threshold’s tBTC distributes custody across validators, who must maintain uptime and adhere to honest behavior.
These layered risks multiply audit surfaces beyond what segregated cold storage presents.
Babylon’s 0.29% APR on staked Bitcoin compares unfavourably to Ethereum’s 3.2% staking yield or Solana’s 7.1% APY available through liquid staking derivatives.
Lombard’s 0.82% return requires institutions to accept exposure to 13 different blockchain networks, each with distinct security models and potential failure modes.
These examples reveal the challenge that a 1% yield advantage on a 5% Bitcoin allocation contributes just five basis points to total portfolio returns.
Institutions might find insufficient compensation for introducing bridge risk, oracle dependencies, and cross-chain settlement complexity.
Franklin Templeton’s Gokhman observed that institutions increasingly view Bitcoin as a cyclical, high-beta risk asset that correlates with traditional financial markets as institutional adoption grows.
This framing suggests that portfolio managers prefer to separate their Bitcoin holdings from yield generation, maintaining BTC as a pure exposure play while sourcing returns from assets with more established DeFi infrastructure.
An institution could hold Bitcoin through IBIT’s segregated cold storage while deploying capital into Ethereum ETFs that will potentially offer staking yields through proven liquid staking tokens approved by the SEC’s August 2025 guidance.
Dividing exposure requires allocating capital across multiple positions but preserves custody clarity and simplifies compliance reporting.
The alternative of bridging Bitcoin to access DeFi yields forces institutions to evaluate whether Threshold’s node operators or Lombard’s decentralized consortium provides equivalent security to Coinbase Custody’s federally regulated cold storage.
Each bridge introduces a new counterparty, and each destination chain adds another risk surface that chain risk committees must review. The fragmented liquidity across 365,958 BTC, spread across different protocols and chains, compounds this complexity, as no single venue offers the depth that institutions require for entry and exit without market impact.
In conclusion, Bitcoin layer-2 and alternative layer protocols offer technical solutions for yield generation. However, it is up to regulators to find a way to accommodate these paths into regulated products, and it is up to institutions to decide whether direct exposure is worth the risk.
