Defi on Bitcoin

Today, the decentralized finance (DeFi) landscape is brimming with potential. Bitcoin’s DeFi ecosystem is still in its nascent stages of development.

Defi on Bitcoin
Today, the decentralized finance (DeFi) landscape is brimming with potential, and there are well over 200 DeFi applications running across the ten most popular smart contract platforms.
Until recently and despite its success as a digital currency, Bitcoin (BTC) wasn’t even in the running as a platform for DeFi. This largely boiled down to its limited programmability, which made it difficult to develop complex DeFi applications like those found on smart contract platforms.

But in November 2021, Bitcoin underwent an upgrade that could make DeFi on Bitcoin a more viable and attractive prospect.

The upgrade, known as Taproot, changed the way that transactions are verified and opened the doors to DeFi on the platform. It improves the platform’s efficiency by condensing complex transactions and reducing both memory utilization and fees while increasing scalability.

Now, the platform is entering the DeFi ecosystem, which could be set to expand considerably in the coming months and years.

The Bitcoin DeFi Landscape as It Stands

Right now, Bitcoin’s DeFi ecosystem is still in its nascent stages of development. Only a small number of projects currently leverage its smart contract capabilities and even fewer can be considered bonafide DeFi applications.

Bitcoin’s native programmability is rather limited — despite the recent Taproot upgrade. Its scripting capabilities are limited to the more than 100 opcodes included in the Bitcoin script. Each of these opcodes carries out a predefined function and can be stacked together to form more complex scripts — or rudimentary smart contracts.

Because of this, most Bitcoin DeFi platforms host their smart contracts on a separate chain, such as the Bitcoin side chain or layer 2. This then connects to the Bitcoin blockchain to settle transactions or use Bitcoin as the storage, data availability or security layer.

Some of the most popular DeFi applications for Bitcoin include:

Wrapped Bitcoin (WBTC)

Currently, by far the best-known Bitcoin DeFi application, Wrapped Bitcoin allows users to move their native BTC from the Bitcoin blockchain to another platform through a simple wrapping process.

This sees users interact with a merchant and deposit their BTC with a custodian who mints an equivalent amount of Wrapped BTC (WBTC) on a separate blockchain. This WBTC can then be used throughout the DeFi ecosystem of the chain it is minted on — such as Ethereum or BNB Chain.

To redeem their original BTC (a process known as unwrapping), they must again interact with a merchant who verifies the user and communicates with a custodian who burns the WBTC and releases the original BTC back to the user.

Stacks

Stacks is an open-source blockchain network that supports smart contracts and decentralized applications. It's designed to improve the capabilities of the Bitcoin network dramatically and unlock new use cases by providing a parallel execution layer.
Since the Stacks blockchain launched in January 2021, its ecosystem has been gradually expanding. Today, there are dozens of DApps operating on the chain, including NFT marketplaces, digital identity solutions, DAOs and DeFi applications.
Perhaps most notably, Stacks is being used to power NOVA Miningverse — an ecosystem of play-to-earn games that reward players in BTC.

The platform connects to the original Bitcoin blockchain through a consensus system known as Proof-of-Transfer (PoX). This allows Stacks dApps to leverage Bitcoin’s state and security.

Portal

Billed as the "gateway to uncensorable applications", Portal is a new platform that is designed to power DeFi on Bitcoin.

The platform recently raised $8.5 million in its bid to bring Bitcoin to the world's first blockchain. It plans to achieve this using a multi-layered architecture that stacks a decentralized exchange and DeFi ecosystem on top of Bitcoin’s base layer.
Built using the Fabric framework, Portal will provide multiple censorship-resistant layers on top of Bitcoin, these will facilitate general-purpose computation for decentralized applications, atomic swaps, new financial primitives and more.

Rootstock

One of the first Bitcoin smart contract platforms, Rootstock (also known as RSK) has been in development since 2015 and was first launched in 2018.

As a two-way pegged virtual machine platform for Bitcoin, Rootstock allows developers to create Turing complete smart contracts for Bitcoin. To access the Rootstock ecosystem, users need to lock up their native BTC to receive an equivalent amount of RSK Smart Bitcoin (RBTC).

This RBTC can be used throughout the Rootstock DeFi ecosystem much in the same way that WBTC can be used throughout the Ethereum dApp landscape.

Today, Rootstock is used to build a variety of dApps for Bitcoin. Sovryn is arguably one of the most popular — since it’s looking to bring DeFi to Bitcoin using RSK’s technology.

The Future of DeFi on Bitcoin

According to data from DeFi Llama, Bitcoin currently has a TVL of $111.58 million (at the time of writing) — the vast majority of which is associated with the layer-2 payments platform, Lightning. The total TVL of current Bitcoin DeFi platforms isn’t yet tracked.

To put this into perspective, it took Ethereum just three years to grow its DeFi TVL from $100 million to $100 billion. Should Bitcoin take a similar path, it could see substantial growth in its DeFi ecosystem and TVL over the coming years, reaching $100 billion in approximately 2025.

Rudimentary versions of most blockchain innovations appeared on Bitcoin first. This includes the first non-fungible tokens (known as colored coins) as well as the first basic smart contracts.

But Bitcoin on DeFi doesn’t work as it does on Ethereum and other smart contract platforms. Instead, most Bitcoin DeFi platforms are either independent layer-1s connected to Bitcoin via a bridge-like system or simply settle/record transaction receipts on Bitcoin like a regular layer 2.

Developers that opt to build on these platforms need to overcome the technical hurdles that come with the territory. Besides RSK, many of these have a custom virtual machine implementation (not the standard EVM) and often only support uncommon programming languages — such as Stack’s Clarity language.

This can make development more challenging while preventing the Cambrian explosion of DeFi apps that EVM platforms like Avalanche, Fantom and BNB Chain saw due to developer migration and DApp porting.

Likewise, developers will need to overcome the challenge of blockchain bloat, ensuring minimal data is stored on-chain to keep the network decentralized by minimizing the storage requirements for full nodes.

For DeFi on Bitcoin to succeed, it needs to provide a clear advantage over existing DeFi solutions, host novel DeFi applications not found elsewhere, and rally up a large user base.

Given that it is well-known for breaking boundaries and shattering expectations, this isn’t entirely out of the question — but it’s safe to say that it’s still early days for Bitcoin’s DeFi landscape. But if retail and VC money floods in to help add rocket fuel to the system, it might not stay this way for long.

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