Bitcoin returns without the gamble.

This is a guest contribution and viewpoint from Hong Sun, Head of Institutional at Core DAO.

Conventional financial institutions are starting to reap rewards from the increasing value of Bitcoin, but their strategies often fall short of optimal effectiveness. Many are merely holding onto Bitcoin as if it were cash, satisfied with market exposure while ignoring its potential for productive use. This passive approach will eventually change, as Wall Street will inevitably seek more innovative ways to leverage their Bitcoin assets.

However, exercising caution in the crypto landscape is essential. The recent history shows that chasing yield without a clear understanding of inherent risks can lead to significant losses. Fortunately, there are now secure and sustainable yield generation products for Bitcoin that effectively minimize the risk of principal loss.

2022’s Lessons: Understanding Yield Variations

Bitcoin-holding entities must contemplate the lessons of recent cryptocurrency events. The downturn of 2022 highlighted the vulnerabilities of yield-seeking tactics based on unstable foundations. Several notable companies — such as Voyager, BlockFi, Celsius, Three Arrows Capital, and FTX — have faced dire consequences due to inadequate risk management and unsustainable commitments.

The takeaway? Yield is not uniform. Numerous products marketed as yield generators introduced additional risk factors — such as exposure to counterparty risks, custody weaknesses, and the potential for smart contract vulnerabilities — which ultimately endangered firms that miscalculated the risks involved.

The primary challenge is that Bitcoin, unlike Ethereum, does not provide native staking rewards because of its Proof of Work system. To obtain yield, holders have traditionally engaged in lending, rehypothecation, or liquidity provisioning, each presenting certain trust-related risks.

Bitcoin holders are caught in a dilemma: they can choose self-custody with maximum security or pursue yield opportunities. However, there should be a solution that bridges this gap without necessitating blind trust.

Timelocking: Bitcoin’s Built-In HODL Capability

While Bitcoin does not facilitate smart contracts in the same manner as Ethereum, it offers a significant native feature: timelocking. This mechanism allows users to securely “HODL” by locking their BTC, preventing any movements until a predetermined block in the future. Unfortunately, this functionality has historically been underutilized.

Now, this very HODL mechanism can pave the way for generating yield without compromising custody.

A new staking model utilizes Bitcoin directly — not through a wrapped version — as the asset being staked. By leveraging Bitcoin’s Check Lock Time Verify (CLTV) capability, holders can secure their BTC while participating in blockchain protection to earn yield, all while retaining full control. Their Bitcoin remains in their own wallets, safeguarded from being moved, rehypothecated, or lost — yet it becomes a productive asset.

This level of security aligns with what financial institutions require. No additional trust assumptions, no slashing risks, and no intricate smart contracts. Just the utilization of Bitcoin in its intended form, supplemented with incentives.

Institutional Adoption Is Advancing

Adoption of this model by institutions is already in motion. Valour Inc., a branch of DeFi Technologies, has recently introduced the world’s first yield-bearing Bitcoin ETP using this innovative approach — merging the immutability of Bitcoin custody with the benefits of secure staking.

These new solutions enable institutions to move past the hazardous realms of lending and speculative trading. For the first time, Bitcoin can not only serve as a store of value but also as a viable, yield-generating asset class.

Transitioning from Passive to Active Engagement

For institutions that hold Bitcoin through custodians or ETFs, Bitcoin currently functions as a negative carry asset. Management and custody fees diminish returns, contradicting Bitcoin’s foundational role as an inflation hedge and store of value.

Secure Bitcoin yield alters this scenario. Institutions are now able to generate yield while simultaneously supporting decentralized networks, creating a significant link between traditional finance and blockchain-based systems.

This transformation is still in its nascent phase, but the trajectory is evident: the future of Bitcoin lies not in idleness, but in active engagement, integration, and alignment with institutional needs.

The Implication

Successfully achieving Bitcoin yield no longer demands new trust structures or engagement with untested products. It’s anchored in Bitcoin’s inherent security, utilizing timelocks — originally a mechanism for holding — to safeguard principal while delivering returns.

As financial institutions begin to align with this trend, the competitive advantage will be given to those who take early action. The conversation has shifted from whether institutional Bitcoin yield is attainable to how it will be utilized.