Executive Summary
The Story So Far
Why This Matters
Who Thinks What?
Bitcoin’s network security is facing a significant challenge as daily transaction fees have plummeted by over 80% since April 2024, raising concerns about the long-term sustainability of miner incentives. This drastic reduction in revenue for miners, who secure the network, has prompted a search for solutions, with Bitcoin-native Decentralized Finance (BTCfi) emerging as a potential avenue to revitalize on-chain activity and fee generation.
According to a recent report from Galaxy Digital, the collapse in daily transaction fees has led to nearly 15% of all Bitcoin blocks being mined with minimal or no fees by August 2025. This situation, where blocks are processed for as little as one satoshi per virtual byte, significantly reduces the compensation for miners.
The issue is exacerbated by the April 2024 halving event, which cut block rewards to 3.125 BTC per block, forcing miners to rely more heavily on transaction fees. Pierre Samaties, chief business officer at the Dfinity Foundation, highlighted this concern, stating that “as block rewards shrink, more weight falls on transaction fees,” emphasizing that sustained network usage is essential for security.
Factors Contributing to Fee Decline
The slowdown in on-chain activity is largely attributed to the decline of non-monetary trends that previously drove demand. Galaxy’s report indicates that OP_RETURN transactions, which were prevalent during the 2024 Ordinals boom, now account for only 20% of daily volume, a sharp drop from their peak of over 60%.
Furthermore, alternative Layer 1 blockchains like Solana have gained traction for high-frequency use cases such as memecoins and NFTs, diverting activity away from Bitcoin. The rise of spot Bitcoin ETFs, now holding over 1.3 million BTC, has also contributed by moving a substantial amount of Bitcoin volume off-chain, thereby limiting transactions that would otherwise generate fees.
Bitcoin’s fee market is designed to be elastic, meaning fees increase with demand and decrease when activity slows. However, the current trend of shrinking demand has resulted in nearly 50% of recent blocks not being full and sluggish mempool activity, signaling insufficient incentive for miners to maintain robust network security.
BTCfi Emerges as a Potential Solution
Amidst these challenges, BTCfi, or Bitcoin-native DeFi, is being explored as a promising path forward. Unlike DeFi applications on other blockchains, BTCfi utilizes Bitcoin as its base asset, building financial applications like lending, trading, and yield generation on layers that interact directly with the core Bitcoin network.
The fundamental premise of BTCfi’s potential to boost fees lies in its operational requirements. Samaties explained that “every BTCfi action requires moving Bitcoin,” which in turn “drives computation, computation consumes block space, and space carries cost.” This direct link suggests that growth in BTCfi adoption would inherently increase on-chain activity and, consequently, transaction fee revenue.
Samaties also noted a shift in perception, envisioning Bitcoin evolving from merely “digital gold” to a “financial primitive.” In this role, Bitcoin becomes a programmable component within broader financial systems, allowing developers to design complex financial flows and tools, thereby enhancing its utility beyond a store of value.
Julian Mezger, chief marketing officer of Liquidium, echoed this sentiment, emphasizing that infrastructure improvements over the past five years have transformed Bitcoin’s capabilities. He stated that these developments are now laying the groundwork for “true Bitcoin-native DeFi,” suggesting a new era of utility for the network.
The significant drop in Bitcoin transaction fees poses a critical threat to the network’s long-term security model by reducing miner incentives. However, the emerging BTCfi ecosystem offers a viable pathway to increase on-chain activity and fee generation, potentially transforming Bitcoin’s role from a static store of value into a dynamic financial primitive.
