January 24th, 2023

An Ultimate Guide to Bitcoin DeFi

What is a Bitcoin DeFi?

The Bitcoin Taproot update enabled the creation of DApps on the Bitcoin blockchain, enhancing the blockchain’s long-term sustainability by speeding up the DeFi movement on the Bitcoin network.

Since 2020, decentralized finance (DeFi) has seen enormous development, with Ethereum accounting for virtually all of that growth. Ethereum paved the way for innovative financial services and products like as decentralized exchanges (DEXs), automated lending platforms, and nonfungible tokens (NFTs).

On the contrary, implementing smart contracts-powered decentralized apps (DApps) on the Bitcoin blockchain was not feasible until the Taproot update, which enabled DeFi for the world’s first cryptocurrency. In this sense, Bitcoin DeFi refers to developing novel decentralized applications on the Bitcoin network that were previously impossible owing to transaction scalability issues.

Bitcoin transactions were quite sluggish due to the necessity that each digital signature be validated against a public key before the adoption of the Taproot update. The network can now aggregate numerous digital signatures and validate them all at once, thanks to Taproot. As a result, each block requires less capacity, allowing the Bitcoin network to accommodate the development of DeFi apps.

How does Bitcoin DeFi work?

Wrapped tokens such as Wrapped Bitcoin, layer-1 blockchains such as Stacks, and sidechains such as Rootstock make DeFi possible on Bitcoin.

Bitcoin’s programming language, Script, is not Turing complete, which implies it lacks many logical functions, such as loops. As a result, despite the Taproot update, the Bitcoin network offers limited programmability, which means that Bitcoin DeFi systems rely on layer-2 scaling solutions and sidechains to house their smart contracts.

Wrapped tokens like Wrapped Bitcoin (wBTC), layer-1 blockchains like Stacks, and sidechains like Rootstock enable DeFi on Bitcoin. For example, wBTC, an Ethereum token launched in January 2019, is backed one-to-one by Bitcoin (BTC), which means that one wBTC is always equal to one BTC. The wBTC coin may be used to interact with numerous Ethereum DApps.

Stacks, an independent layer-1 blockchain, makes hundreds of billions of dollars in BTC capital available and provides Bitcoin holders with new options to use and profit from the cryptocurrency. It employs a proof-of-transfer consensus process to protect its blockchain, which is similar to Bitcoin’s proof-of-work blockchain.

DeFi products like the 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, since Stacks and Bitcoin are linked, NFTs created on Stacks settle to and are secured by the Bitcoin blockchain.

Rootstock, which runs parallel to the network, enables Turing-complete smart contracts on the Bitcoin blockchain. When BTC is delivered to Rootstock, it is converted into RBTC, a Bitcoin with smart contracts. This protocol, which is based on bidirectional communication, acts as a bridge to connect both chains. For example, Sovryn, one of the first permissionless financial apps, connects to the Lightning Network, Ethereum, Bitcoin, and BNB Smart Chain using RSK’s technology.

Future of Bitcoin DeFi

The long-term sturdiness and security of Bitcoin DeFi platforms and protocols, as well as the amount of innovation and incentives given to investors, will determine their efficacy.

With Bitcoin scaling solutions like as Rootstock, Stack, Liquid Network, and others, it is clear that DeFi is infiltrating the Bitcoin network. DeFi on Bitcoin, on the other hand, is less accessible than on the Ethereum blockchain and other smart contract platforms.

However, unlike the Ethereum network, if developers wish to use the Bitcoin blockchain to construct DApps or mint NFTs, they must rely on layer-1 or layer-2 solutions. DApps may be built using Ethereum testnets such as Ropsten, for example. Bitcoin DeFi platforms, on the other hand, require bridges like RenBrdige to connect to the Bitcoin Network in order to construct decentralized apps.

Furthermore, NFTs on Bitcoin are still in their infancy; nevertheless, considering that Bitcoin created the groundwork for cryptocurrencies, it appears just a matter of time until developers rush to the Bitcoin network to construct unique financial instruments and platforms.

As a result, DeFi on Bitcoin must contain novel decentralized financial apps that are not accessible on other blockchains, have a large user base, and provide a clear benefit over existing DeFi solutions.

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