DeFi (Decentralized Finance) on Ethereum has dominated in recent years, but recently, a new trend has begun to capture the attention of the cryptocurrency community: DeFi on Bitcoin. Known for its superior security and stability, Bitcoin is gradually becoming a platform for decentralized financial applications, opening up new opportunities in this space.
In this article, Financial Insight Daily will explore Is DeFi on Bitcoin the Next Hype Wave, diving into the factors driving the development of DeFi on Bitcoin, its challenges, and its potential for the future.
The Current DeFi Landscape of Bitcoin
Currently, Bitcoin’s DeFi ecosystem is still in its early development stages. Although Bitcoin is a well-known and trusted platform, its smart contract capabilities remain limited, making it challenging to implement DeFi applications directly on-chain. Only a few projects are attempting to leverage Bitcoin’s smart contract capabilities, and even fewer can be considered true DeFi applications.
Bitcoin’s Programming Capabilities
Although the recent Taproot upgrade has improved Bitcoin’s programming capabilities, these capabilities are still limited, with only around 100 available opcodes in Bitcoin’s script language. Each opcode performs a predefined function and can be stacked to form more complex operations or basic smart contracts. For this reason, most Bitcoin DeFi platforms store their smart contracts on an external chain, such as a sidechain or layer 2, which then connects to the Bitcoin blockchain to settle transactions or use Bitcoin for security.
Popular DeFi Applications for Bitcoin
Here are some notable DeFi applications being deployed on Bitcoin:
- Wrapped Bitcoin (WBTC): This is currently the most popular Bitcoin DeFi application. Wrapped Bitcoin (WBTC) allows users to move their native BTC from the Bitcoin blockchain to other platforms via a simple wrapping process. Users send their BTC to a custodian, who then mints an equivalent amount of WBTC on another blockchain (such as Ethereum or BNB Chain). Once the transaction is complete, WBTC can be used across the entire DeFi ecosystem of the chain it was minted on. Users can also redeem WBTC back into BTC through a process called “unwrapping.”
- Stacks: Stacks is an open-source blockchain that supports smart contracts and decentralized applications, designed to enhance Bitcoin’s capabilities. Stacks connects to Bitcoin via a consensus mechanism known as Proof-of-Transfer (PoX), enabling dApps on Stacks to leverage Bitcoin’s security and state. The Stacks ecosystem has grown to include a wide range of DeFi, NFT, and DAO applications, with NOVA Miningverse being a prominent example in the gaming sector.
- Portal: Portal is a new platform designed for DeFi on Bitcoin, aiming to build a DeFi ecosystem and decentralized exchange on top of Bitcoin’s base layer. Built on the Fabric framework, Portal offers censorship-resistant layers, facilitating decentralized computing, atomic swaps, and new financial principles.
- Rootstock (RSK): Rootstock (RSK) is one of the first smart contract platforms developed for Bitcoin, enabling developers to create Turing-complete smart contracts on the Bitcoin network. To access the Rootstock ecosystem, users must lock their BTC to receive an equivalent amount of RSK Smart Bitcoin (RBTC). RBTC can then be used across the Rootstock DeFi ecosystem in a similar way to how WBTC is used within Ethereum’s dApp ecosystem. Sovryn, a DeFi dApp, is utilizing Rootstock’s technology to bring DeFi to Bitcoin.
The Future of DeFi on Bitcoin
According to data from DeFi Llama, Bitcoin currently has a Total Value Locked (TVL) of $111.58 million (at the time of writing), with most of it being related to Layer 2 payment platforms like Lightning Network. The total TVL across Bitcoin DeFi platforms is not yet tracked.
To understand this better, Ethereum took just three years to grow its DeFi TVL from $100 million to $100 billion. If Bitcoin follows a similar trajectory, its DeFi ecosystem and TVL could experience significant growth in the coming years, potentially reaching $100 billion by around 2025.
Most of the first iterations of blockchain improvements appeared first on Bitcoin. This includes the first non-fungible tokens (NFTs) — known as colored coins — as well as the first basic smart contracts.
Developers who choose to build on these platforms must overcome technical barriers that come with the territory. In addition to RSK, many of these platforms deploy custom virtual machines (not the standard EVM) and often support less common programming languages — such as Clarity, used by Stacks.
DeFi on Bitcoin is gradually attracting the attention of the cryptocurrency community and could become the next big wave in the decentralized finance industry. Although Bitcoin’s DeFi ecosystem is still in its early stages, applications such as Wrapped Bitcoin (WBTC), Stacks, Portal, and Rootstock (RSK) are opening up new opportunities and showing significant potential for Bitcoin in this space.
With increasing TVL and the potential for further expansion, it can be said that DeFi on Bitcoin has a bright future, although there are still many challenges to overcome. In the coming years, we may witness the rapid growth of DeFi applications on Bitcoin, helping it become an essential part of the global decentralized finance ecosystem.