Author: Kadeem Clarke, Head of M6Labs
Compiled by: Felix, PANews
As the leading smart contract platform and the second largest blockchain by market capitalization, DeFi has an advantage on the Ethereum network. In addition, benefiting from the first-mover advantage in the DeFi field, Ethereum became the first public chain to support decentralized applications since 2015.
However, emerging blockchains such as Solana, Avalanche, Cardano, and Polkadot pose increasing challenges to the Ethereum network. Bitcoin, the flagship public chain designed to enable peer-to-peer online transactions, frequently receives attention in this discussion.
Bitcoin network developers have recently found ways to extend the network’s functionality beyond payments, launching DeFi applications native to the Bitcoin ecosystem.
What is DeFi on Bitcoin?
The Taproot upgrade brings the Bitcoin network’s vision of supporting decentralized applications to fruition, making Bitcoin a viable alternative to Ethereum for developers looking to launch dApps.
Before DeFi applications were launched on the Bitcoin network, BTC holders could convert their BTC holdings into wrapped versions on other blockchains. The most popular asset (ERC-20 token) on the Ethereum network is the Wrapped BTC (wBTC) asset.
wBTC allows BTC holders to participate in Ethereum-based DeFi protocols by locking their assets in smart contracts and receiving an equal amount of assets (i.e. a 1:1 ratio) in a derivative protocol. Users can then participate in liquidity mining, deposit, borrow and earn passive income on these platforms.
However, since the launch of Bitcoin-based DeFi platforms, exchanging for other assets is a thing of the past and users can now spend native BTC tokens on these Bitcoin-based DeFi platforms.
The most common way DeFi interacts with Bitcoin is through the use of wrapped versions of BTC on non-Bitcoin blockchains. Users send BTC to a custodian, who stores the BTC and returns wBTC to the user at a 1:1 ratio.
For example, if you send one BTC, you will receive one wBTC. Wrapped tokens can be used in Ethereum-based DeFi protocols such as Curve, Balancer or AAVE. wBTC can also be exchanged for BTC and the custodian (smart contract) will refund your tokens.
With the release of the Bitcoin Taproot upgrade, DeFi is now available on Bitcoin, with the exception that smart contracts are not supported on the native Bitcoin blockchain. Taproot introduces second-layer scaling solutions and sidechains to enable this advanced functionality. Sidechains and second-layer protocols host dApps in a variety of markets, such as DeFi, NFTs, and Gamefi.
Top 3 Companies Building DeFi on Bitcoin
Stacks
Stacks, like Bitcoin, is an independent L1 blockchain. Stacks and the Bitcoin network are linked together through a process called "proof of transfer." Miners must send Bitcoins to the Bitcoin network to mine Stacks. Multiple network transaction stacks can correspond to a single Bitcoin network transaction.
A variety of DeFi applications are possible on the Stacks blockchain, from “staking” Stacks tokens to receive Bitcoin rewards, to decentralized applications that offer various DeFi strategies such as staking and liquidity mining. .
Rootstock
The Rootstock blockchain operates as a sidechain to the Bitcoin blockchain, and its utility token is Smart Bitcoin (RBTC). On the Rootstock blockchain, RBTC is used to pay fees, just like ETH is used to pay fees on the Ethereum blockchain.
The price of RBTC is pegged 1:1 to the cost of Bitcoin. Since the Rootstock blockchain is a side chain of Bitcoin, there is a two-way peg between RBTC and BTC, and the two assets can be exchanged back and forth between the two blockchain networks.
Mintlayer
Mintlayer is a layer 2 scalability solution for Bitcoin, supporting smart contracts such as DeFi, NFTs, and DEXs. Mintlayer is considered a strong competitor to Ethereum due to its security that is comparable to Bitcoin.
Mintlayer aims to develop and deploy infrastructure for DeFi on Bitcoin and the Lightning Network. Mintlayer is a Layer2 payment protocol designed to enable micropayments on the Bitcoin blockchain.
Like Ethereum, Mintlayer is a platform where developers can launch dApps that unlock and scale Bitcoin’s full potential, solving three problems DeFi faces on Bitcoin (scalability, compatibility, security).
WBTC token
WBTC was released on October 26, 2018 and went online on January 31, 2019. WBTC is a tokenized Bitcoin that runs on the Ethereum blockchain and was co-created by three organizations: BitGo, Kyber Network, and Ren,. WBTC complies with the ERC-20 standard of the Ethereum blockchain, allowing it to be fully integrated into DEXs, crypto lending services, and other ERC-20-enabled DeFi applications in the Ethereum ecosystem.
Benefits of WBTC
faster
WBTC does not run on the Bitcoin network. Therefore, their block speeds and network speeds are based on the Ethereum blockchain rather than Bitcoin. Ethereum verification takes much less time to be added to a block, so transactions on the network are faster.
lower cost
Ethereum has lower transaction fees than Bitcoin to encourage developers to use the network. Therefore, WBTC holders can trade at a lower cost than BTC holders.
For example, if a user plans to make multiple fund transfers, they would prefer to use WBTC. The fee difference is caused by Bitcoin’s congestion level. Transactions are blocked on the Bitcoin network, and clearing blocks is more expensive, while Ethereum clears them faster.
Strong interoperability
WBTC provides the opportunity to quickly transfer crypto assets between blockchains. Interoperability issues have been a long-standing and vexing issue for crypto users, especially DeFi users.
However, for wrapped cryptocurrencies, including WBTC, interoperability is a viable solution to this problem. This feature means that users do not have to sell Bitcoin to access DeFi services on Ethereum, and users can redeem their tokens back at any time.
The difference between Bitcoin and DeFi
The difference between Bitcoin and DeFi can be well explained by comparing email to the web. When the Internet first opened to the public, it only allowed the sending of email. People think of the Internet as a technology that enables rapid communication. However, as web technology grew and became more widespread over the next few years, everyone realized that it was not just limited to email, but a whole new world of possibilities.
Likewise, when the blockchain world only focused on Bitcoin. Bitcoin allows users to make P2P transfers anonymously. In less than a decade, however, the true potential of this technology became apparent. It’s not just a feature that makes blockchain payments faster and cheaper. Rather, it is a complete system where you can do anything related to money, free from the constraints of banks and financial institutions.
Why do we need DeFi on Bitcoin?
The underlying technology, blockchain, connects Bitcoin and DeFi. Despite the differences, Bitcoin is different from DeFi. It should be considered an integral part of the broader decentralized financial system. People can only use real-world money to perform some of the special operations supported by DeFi.
Since banknotes or fiat currencies, such as dollars or euros, involve banks and central institutions, it directly goes against DeFi principles. Therefore, Bitcoin and other crypto tokens (digital stores of value) can be used as governance currencies in the DeFi world.
BTC is primarily used as a store of value and to a lesser extent as payment. Through DeFi, Bitcoin increases its utility while attracting a wider user base. However, DeFi requires the security that Bitcoin has, which is what most DeFi investors and users value. Sometimes hacker attacks cause user funds to be lost, leading to a loss of trust. DeFi on Bitcoin solves these problems while increasing the credibility of various solutions and making them more attractive to potential developers and investors.
DeFi Challenges on Bitcoin
DeFi on Bitcoin faces three major challenges, namely:
Scalability
compatibility
Safety
Bitcoin is currently one of the slowest blockchains on the market, with processing speeds of around 7 TPS. Ethereum can handle around 12-15 TPS, while Cardano and Polkadot can handle up to 1000 TPS. Scalability is an important consideration for developers looking for a blockchain network for their DeFi platform. Bitcoin may currently be more scalable due to its limited scripting language. In contrast, Bitcoin's competitors, such as Ethereum, are built from the ground up and are more composable. Therefore, DeFi developers tend to use Ethereum as their preferred protocol for launching applications. These protocols make development easier by providing access to a wide range of easily compatible assets that are free to use and adhere to various internal coding standards.
Although these L2 blockchains rely on Bitcoin-proven security infrastructure, they pose security risks similar to those faced by other dApps and dApp platforms on Bitcoin’s competitor networks. The fragility of smart contracts is a significant risk that every investor and developer must consider before interacting with them.
Most DeFi platforms and applications on the Bitcoin network are nascent, which means they have not been thoroughly tested, iterated, and improved to ensure the security of the assets they manage.
Bitcoin L2
It all started with Ordinals. Ordinals are a way to mint NFTs on Bitcoin. Many venture capital funds are deploying in this area, and this popularity is expected to continue. Yuga Labs also releases an Ordinal series. Since Stacks was deployed on Bitcoin L2, the BTC Layer Narrative was born. Badger announces LSD-backed Bitcoin. LSD-backed Bitcoin will be called eBTC. Backed by liquidity-collateralized ETH and denominated in BTC, similar to DAI which is backed by many assets but denominated in USD.
Potential projects
In addition to Ordinals and LSD-backed Bitcoin, there are several projects worthy of attention, such as:
Ren
Ren Protocol (formerly Republic Protocol) was founded in 2017 and focuses on trustless OTC trading. Ren Protocol aims to focus on developing interoperability and is a platform that allows users to securely trade tokens between different blockchains. The project launched mainnet in May 2020, allowing BTC, Bitcoin Cash, and Zcash to be converted to the ERC 20 network through wrappers and the Ren virtual machine.
ZeroDAO
ZeroDAO is a messaging protocol that connects assets such as Bitcoin/Zcash and Ethereum. To integrate the Ethereum ecosystem with the Bitcoin layer, a reliable way to transfer assets from Bitcoin to Ethereum is required. ZeroDAO was previously based on Ren technology, but now that Ren has ceased service, ZeroDAO is being developed from scratch and will be launched soon.
in conclusion
Continuous innovation is needed to overcome barriers or challenges to widespread adoption, and one such innovation is encapsulated cryptocurrencies. Bitcoin is the most secure open network and one of the most well-known and trusted. Therefore, it is increasingly attractive to DeFi developers and investors. However, as Bitcoin DeFi grows, it remains to be seen whether it will become popular enough to replace Ethereum as the dApp deployment platform of choice. Overall, the continued building of BTCFi projects may bring new opportunities.
(The above content is excerpted and reprinted with the authorization of our partner PANews, original text link)
Statement: The article only represents the author's personal views and opinions, and does not represent the objective views and positions of the blockchain. All contents and opinions are for reference only and do not constitute investment advice. Investors should make their own decisions and transactions, and the author and Blockchain Client will not be held responsible for any direct or indirect losses caused by investors' transactions.
This article DeFi on Bitcoin: Is it a “breakout” or a “bubble”? First appeared in Block Guest.