What is Bitcoin DeFi?
The Bitcoin Taproot update supports the creation of DApps on the Bitcoin blockchain, enhancing the long-term sustainability of the blockchain by accelerating the DeFi movement on the Bitcoin network.
Decentralized finance (DeFi) has grown tremendously since 2020, with Ethereum accounting for nearly all of the growth. Ethereum paves the way for innovative financial services and products such as decentralized exchanges (DEXs), automated lending platforms, and non-fungible tokens (NFTs).
In contrast, implementing smart contract-driven decentralized applications (DApps) on the Bitcoin blockchain was not feasible until the Taproot update, which enables DeFi for the world’s first cryptocurrency. In this sense, Bitcoin DeFi refers to the development of novel decentralized applications on the Bitcoin network that were previously unachievable due to transaction scalability issues.
Bitcoin transactions are very slow due to the need to verify each digital signature against a public key before adopting Taproot updates. Thanks to Taproot, networks can now aggregate large numbers of digital signatures and verify them instantly. As a result, less capacity is required per block, making the Bitcoin network adaptable to the development of DeFi applications.
How does Bitcoin DeFi work?
DeFi on Bitcoin is made possible by Wrapped tokens such as Wrapped Bitcoin, Layer-1 blockchains such as Stacks, and sidechains such as Rootstock.
Bitcoin’s programming language, Script, is not Turing complete, which means it lacks many logical features, such as loops. Therefore, despite Taproot’s updates, the Bitcoin network offers limited programmability, which means that Bitcoin DeFi systems rely on layer 2 scaling solutions and sidechains to accommodate their smart contracts.
DeFi on Bitcoin is made possible by Wrapped tokens like Wrapped Bitcoin (wBTC), Layer-1 blockchains like Stacks, and sidechains like Rootstock. For example, wBTC, the Ethereum token launched in January 2019, is backed one-to-one with Bitcoin (BTC), meaning that 1 wBTC is always equal to 1 BTC. The wBTC coin can be used to interact with numerous Ethereum DApps.
Stacks is an independent layer-1 blockchain that provides access to hundreds of billions of dollars in BTC capital and gives Bitcoin holders new options to use and profit from cryptocurrency. It uses a proof-of-transmission consensus process to secure its blockchain, similar to Bitcoin’s proof-of-work blockchain.
DeFi products such as Stackswap DEX leverage the Stacks blockchain to allow users to trade and mint NFTs, borrow algorithmic stablecoins, and launch and exchange tokens on the Bitcoin network. Additionally, because Stacks and Bitcoin are interconnected, NFTs created on Stacks will adapt to and be protected by the Bitcoin blockchain.
Rootstock runs in parallel with the network, enabling Turing-complete smart contracts on the Bitcoin blockchain. When BTC is delivered to Rootstock, it is converted into RBTC, a type of Bitcoin with smart contracts. The protocol is based on two-way communication and acts as a bridge connecting the two chains. For example, Sovryn is one of the first permissionless financial applications that uses RSK’s technology to connect to the Lightning Network, Ethereum, Bitcoin and BNB smart chains.
The future of Bitcoin DeFi
The long-term stability and security of the Bitcoin DeFi platform and protocol, as well as the degree of innovation and incentives for investors, will determine its efficacy.
Through Bitcoin scaling solutions such as Rootstock, Stack, and Liquid Network, it is obvious that DeFi is penetrating the Bitcoin network. On the other hand, DeFi on Bitcoin is more difficult to deposit and withdraw than the Ethereum blockchain and other smart contract platforms.
However, unlike the Ethereum network, developers must rely on Layer-1 or Layer-2 solutions if they wish to use the Bitcoin blockchain to build DApps or mint NFTs. For example, DApps can be built using Ethereum testnets such as Ropsten. On the other hand, Bitcoin DeFi platforms require bridges like RenBrdige to connect to the Bitcoin network in order to build decentralized applications.
Furthermore, NFTs on Bitcoin are still in their infancy; nevertheless, considering that Bitcoin laid the foundation for cryptocurrencies, it seems only a matter of time before developers flock to the Bitcoin network to build unique financial tools and platforms.
Therefore, DeFi on Bitcoin must include novel decentralized financial applications that are not accessible on other blockchains, have a large user base, and provide clear advantages over existing DeFi solutions.
