Crypto trading startup Velar said Thursday it raised $3.5 million in venture funding to build a suite of decentralized finance (DeFi) tools for Bitcoin's nascent DeFi scene.

CEO Mithil Thakore told CoinDesk that Velar plans to launch the first perpetual swaps exchange to utilize the Bitcoin network – the oldest and most prevalent blockchain and one that – unlike Ethereum – cannot host the smart contracts necessary for DeFi.

That's begun to change with the proliferation of side chains and Layer-2s to Bitcoin. These smart contract-capable networks take their underlying security from Bitcoin through techniques like merge mining, Thakore said.

In particular, Thakore and Velar are betting on Stacks' upcoming Nakamoto Release, an upgrade to its universe of Bitcoin layer that will see the introduction of a synthetic bitcoin asset called sBTC that's pegged to the mother-of-all-cryptos, BTC. The plan is for sBTC to give bitcoin-holders a way to unlock the DeFi value of their holdings without giving up custody, Thakore said.

One of the use cases could be in the trading context. "People will be able to use sBTC as collateral and trade with leverage," Thakore said of Velar v3, named Artha, which is planned for launch in Q2 2024.

For now, the concept of Bitcoin DeFi is more theoretical than reality despite some attempts to bring it to life, Thakore said.

That's partly because some solutions are stuck following Bitcoin's 10-minute block times, which are far too slow for trading settlement. Stacks' Nakamoto release will cut this down to five seconds.

"Bitcoin DeFi is just too nascent as of now," he said. "Even the infrastructure isn't there to cater to 100 million users right now – but it's all progress."

There's also hesitancy by many bitcoin holders to participate in newfangled ways to leverage their assets. If even a sliver of holders changed their minds, the impact would be massive because of how prevalent BTC is, Thakore said.

Bitcoin Startup Lab, CMS Holdings, Black Edge Capital, GBV, Cypher Capital, Trust Machines SPV, Transform Capital, Maple Block and Samara Asset Group participated in the funding round, a press release said.