Bitcoin and DeFi (decentralized finance) are two significant concepts in the cryptocurrency industry that have become increasingly popular over the last few years. While Bitcoin has become increasingly popular as the first and largest cryptocurrency, DeFi aims to create new financial solutions built on decentralized blockchain networks.
Combining these two concepts led to the emergence of DeFi on Bitcoin. This new ecosystem allows users to leverage the benefits of both Bitcoin and DeFi to create new financial applications and services.
This article will comprehensively explain DeFi on Bitcoin, including its benefits and challenges. We will also explore some of the most popular Bitcoin DeFi applications, such as lending platforms, decentralized exchanges, and stablecoins.
The DeFi Concept
Before we delve into DeFi on Bitcoin, it is essential to understand what DeFi is and what it aims to achieve. DeFi refers to a financial system built on blockchain networks that operate in a decentralized manner. Unlike traditional finance, dominated by centralized institutions such as banks and other financial intermediaries, DeFi is a system designed to be transparent and accessible to everyone.
The core idea behind DeFi is to create financial applications and services that can operate without intermediaries or central authorities. Instead, these applications leverage blockchain technology’s decentralized ledgers that record all transactions on the blockchain network. These transactions are validated and confirmed by a network of nodes or miners, depending on the consensus type, who collectively secure the network and maintain its integrity. Some popular DeFi applications include lending and borrowing platforms, decentralized exchanges, prediction markets, insurance protocols, and stablecoins. These applications enable users to lend and borrow assets, trade cryptocurrencies, make predictions about future events, protect against financial risks, and create stable digital currencies that are pegged to the value of fiat currencies or digital assets.
What is DeFi on Bitcoin?
DeFi on Bitcoin refers to the integration of DeFi protocols with the Bitcoin blockchain. DeFi on Bitcoin is a relatively new concept. The Bitcoin network was originally designed for peer-to-peer transactions and not for executing smart contracts or building decentralized applications. However, the integration of DeFi with Bitcoin has become increasingly popular due to the growing demand for decentralized financial services that are more secure and transparent than traditional centralized finance.
One of the main advantages of DeFi on Bitcoin is the inherent security and immutability of the Bitcoin blockchain. The Bitcoin network has been around for over a decade and has proven to be highly secure and resistant to attacks. By building DeFi applications on the Bitcoin blockchain, developers can leverage this security and trustlessness to create financial products that are less vulnerable to fraud, censorship, or downtime.
To enable DeFi on Bitcoin, developers have created several layer-two solutions that operate on the Bitcoin blockchain. Examples include the Lightning Network and the Liquid Network. These layer-two solutions enable faster and cheaper transactions, the execution of smart contracts, and the creation of decentralized applications.
Are Bitcoin’s Smart Contracts the Future?
DeFi and NFT projects are currently emerging on newer blockchains like Avalanche, Binance Chain, and Algorand, challenging Ethereum's dominance. However, Ethereum remains the leading platform for smart contracts. Before its significant Taproot update, Bitcoin’s smart contract capabilities were limited, but it is now possible to use smart contracts on the blockchain.
The Ordinals protocol was launched on the Bitcoin main net in January 2023, allowing for a Bitcoin version of NFTs. Developers on Bitcoin Layer 2 solutions, Stacks, Mintlayer, etc., are building applications to make Bitcoin more functional and create Bitcoin-based DeFi applications.
Ethereum remains better suited for DeFi and NFTs, but Bitcoin may become the driving force behind this new generation of applications as technology evolves. But critics are concerned about the potential negative impact on the network and congestion caused by the rise of Bitcoin NFTs and DeFi applications.
Limitations To DeFi on Bitcoin
With a maximum processing capacity of only 7 transactions per second (TPS), Bitcoin’s scalability issue makes it impractical for high-speed transactions required in DeFi. In comparison, Ethereum has a TPS of around 30, while Polygon can process 7,000 TPS, and Solana claims to process 65,000 TPS at peak, averaging closer to 3,000 TPS.
In addition, Bitcoin's high transaction fees, especially during periods of high network congestion, make it less cost-effective for micropayment transactions. Other blockchain networks, such as Solana, have decided to keep transaction fees deterministically cheap, which has made them popular for DeFi and NFT applications.
DeFi on Bitcoin Applications
Many DeFi applications are built on the Bitcoin network but are not as popular as those built on other blockchains. However, a few notable Bitcoin-based DeFi projects that have gained some traction recently include:
Mintlayer
Mintlayer is a platform that aims to reshape the DeFi landscape by providing the necessary infrastructure and critical tools for projects to build on the Bitcoin blockchain. It addresses the challenges of sustainability, scalability, and usability that are often faced by existing blockchain networks.
One of the primary motivations behind Mintlayer is to solve the problem of network congestion and high transaction fees that plague many existing blockchains. By leveraging Bitcoin’s security model and inheriting its principles of decentralization, Mintlayer offers a Layer 2 solution that enables the development of a decentralized financial ecosystem rooted in the Bitcoin blockchain.
Mintlayer opens up new possibilities for the Bitcoin network by allowing the implementation of smart contracts, atomic swaps, non-fungible tokens (NFTs), and more. It aims to bring the benefits of DeFi to Bitcoin users and enable them to leverage their Bitcoin holdings for a wider range of financial activities while maintaining the trustless and transparent nature of the original Bitcoin vision.
The platform also addresses the issue of limited access to node participation in blockchain governance. Mintlayer empowers average users to run nodes and participate in the decision-making process, ensuring a more inclusive and decentralized approach to governance.
Furthermore, Mintlayer offers an ecosystem that supports and nurtures projects at various stages of development. It expands the capabilities of Bitcoin, allowing users to unlock its full potential for DeFi and other financial applications. The platform offers various opportunities for projects and developers, including funding, support, and advisory services through its Ecosystem Fund, Incubator Program, Accelerator Program, and grants for open-source development.
Rollux
Rollux is an innovative tool developed by the Bitcoin-backed Syscoin, the pioneering project to first incorporate the Bitcoin taproot upgrade, enabling all Syscoin-based projects and tokens to harness the benefits of one of Bitcoin’s groundbreaking advancements.
Rollux aims to revolutionize scalability for projects operating on the Sys network. Its primary objective is to address the pressing challenge of scalability faced by blockchain networks. By leveraging the power of Optimistic and ZK-Rollups technology, Rollux equips projects within
the Sys network with the necessary capabilities to deliver high-throughput Web3 services.
The integration of Optimistic and ZK-Rollups in Rollux offers significant advantages. Optimistic Rollups enable off-chain computation, reducing the computational burden on the network and allowing for subsequent validation on-chain. This enhances scalability by increasing transaction throughput.
On the other hand, ZK-Rollups employ zero-knowledge proofs to aggregate multiple transactions into a single proof, further optimizing efficiency and scalability.
The introduction of Rollux has helped its parent chain, Syscoin, to provide enhanced scalability to both existing projects on the Sys network and those connected via a bridge. This means that projects can handle a significantly larger volume of transactions and interactions, resulting in faster and more responsive Web3 services for their users.
Rollux’s scalability capabilities position it as a prominent player in the realm of scalable DeFi on Bitcoin solutions. By offering a practical and efficient solution, Rollux has the potential to attract more developers and users to the Syscoin ecosystem, facilitating the widespread adoption of DeFi on Bitcoin and ushering in a new era of high-performance Web3 services.
Liquid Network
Liquid Network is a sidechain built on the Bitcoin blockchain that aims to enhance Bitcoin’s functionality and improve its scalability. It is developed and maintained by Blockstream, a prominent blockchain technology company.
Liquid Network provides faster and more confidential transactions than the main Bitcoin blockchain. It achieves this by utilizing a federated consensus model, where a group of trusted entities collectively validate and secure transactions. This allows for faster confirmation times, typically within two minutes, compared to the longer confirmation times on the Bitcoin network.
Confidential transactions are another key feature of Liquid Network. They provide improved privacy by concealing transaction amounts, ensuring that only the sender and receiver know the transaction details.
The Liquid Network also introduced the issuance of new assets called “Liquid assets” or “L- BTC” which are pegged to Bitcoin at a 1:1 ratio. These assets can be used for various purposes, such as trading, tokenizations, and facilitating faster inter-exchange transfers.
The Liquid Network is primarily designed for exchanges, brokers, and other financial institutions that require fast and confidential transactions for their Bitcoin-related activities. It provides a secure and scalable platform for these entities and organizations to transact more efficiently with Bitcoin and its associated assets.
Final Thoughts
DeFi on Bitcoin is a relatively new but rapidly growing niche that aims to provide users with decentralized financial services on the Bitcoin blockchain. By leveraging the inherent security and trustlessness of the Bitcoin network, developers can create financial products that are less vulnerable to fraud and censorship and that offer greater financial freedom and autonomy to users.
However, it remains to be seen whether DeFi on Bitcoin will be able to compete with the more established DeFi ecosystems that already exist on other blockchains, such as Ethereum.
Brian Wang is a Futurist Thought Leader and a popular Science blogger with 1 million readers per month. His blog Nextbigfuture.com is ranked #1 Science News Blog. It covers many disruptive technology and trends including Space, Robotics, Artificial Intelligence, Medicine, Anti-aging Biotechnology, and Nanotechnology.
Known for identifying cutting edge technologies, he is currently a Co-Founder of a startup and fundraiser for high potential early-stage companies. He is the Head of Research for Allocations for deep technology investments and an Angel Investor at Space Angels.
A frequent speaker at corporations, he has been a TEDx speaker, a Singularity University speaker and guest at numerous interviews for radio and podcasts. He is open to public speaking and advising engagements.