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The Ethereum network gave birth to the concept of decentralized finance, or DeFi, which presents itself as a more accessible alternative financial ecosystem that anyone can access for savings, loans, loans, and investments.
DeFi has grown into a massive global market worth billions of dollars, and numerous other blockchains, including Solana, Polkadot, Avalanche, and Cardano, have emerged to take on Ethereum, boasting more efficient networks, faster transactions, and more sophisticated smart contracts. ability. However, to date, none of these alternatives have come close to taking away Ethereum’s crown as the best DeFi chain.
So can Bitcoin finally do this? Over the past few years, the Bitcoin community has been innovating ways to expand Bitcoin’s utility beyond its current limited payment use cases and store of value. Given that Bitcoin remains the most valuable cryptocurrency, it is reasonable to assume that it could threaten Ethereum’s dominance in DeFi.
What is Bitcoin DeFi?
Bitcoin’s native DeFi was introduced through a major upgrade to the underlying protocol known as Taproot. Launched in November 2021, Taproot extends Bitcoin’s capabilities to support more complex scripting and thus smart contracts, contracts that automatically execute when specified conditions are met. Smart contracts are the driving force that powers DeFi, and their availability in Bitcoin opens the door to a world of possibilities.
Previously, the only way to use BTC within the DeFi ecosystem was to connect BTC to alternative networks, most commonly Ethereum. The idea is that you can convert BTC into an asset called wrapped BTC that is compatible with Ethereum and use this alternative asset to participate in DeFI protocols built on that chain. However, thanks to the features introduced in Taproot, you no longer need to use wrapped assets. Because you can now build DeFi protocols natively on Bitcoin.
How does Bitcoin DeFi work?
Taproot does not bring smart contract functionality to Bitcoin itself, but rather paves the way for Bitcoin’s blockchain to leverage layer 2 networks and sidechains that support high-level scripting languages.
A number of notable L2s and sidechains have emerged to address the challenge of connecting DeFi to Bitcoin. This includes MintLayer, an L2 scalability network that supports smart contracts for DeFi, NFTs, decentralized exchange platforms, and more. It provides the infrastructure and tools needed to build DeFi applications on top of the Bitcoin network as well as the Lightning Network, another Bitcoin L2 used to scale transactions.
Alternatives to MintLayer include Stack, which is often incorrectly referred to as a sidechain or L2, but is actually somewhat unique in that it is an independent layer 1 network. Stacks regularly leverages the new Proof-of-Transfer consensus protocol to settle transactions on the Bitcoin blockchain. In other words, it works very similar to L2.
The third proposal is the Rootstack project, an L2 that has been operating as a sidechain for Bitcoin since 2017. This pioneered the concept of “merge mining,” where Rootstock miners mine BTC while also securing and earning RSK tokens.
What is Bitcoin DeFi Protocol?
Bitcoin’s DeFi ecosystem is still in its infancy, but several projects have already gained impressive traction. For example, Solv Protocol, an integrated yield and liquidity layer, created SolvBTC, a liquidity yield token that provides BTC holders the opportunity to earn competitive returns on their holdings. The Solv protocol boasts multi-chain integration capabilities, connecting not only to Bitcoin but also other chains such as Ethereum, Arbitrum, BNB Chain, and Merlin Chain. This architecture allows SolvBTC to be used to increase liquidity in the emerging BTCfi market on L1 and L2 networks.
Solv’s progress is very evident in that the protocol’s total value recently surpassed $1 billion, making it the 32nd largest DeFi protocol in the industry, according to DeFiLlama.
Another Bitcoin DeFi protocol making waves is BadgerDAO. BadgerDAO provides a way to use BTC as collateral in a variety of DeFi applications. The Sett Vaults product allows you to earn passive income from synthetic or tokenized BTC by adding BTC to pools that are reinvested in other DeFi protocols via smart contracts, generating returns in the form of bTokens.
One of Stacks’ most promising projects is ALEX, which is building a Bitcoin-based DeFi hub with services including BTC lending and borrowing. This allows users to lend BTC to earn a fixed interest rate or use other assets as collateral to borrow BTC.
Ultimately, ALEX plans to build a complete DeFi ecosystem for Bitcoin with DEX, derivatives trading, yield farming, and a launchpad for startups looking to raise BTC funding.
Why do you need Bitcoin DeFi?
Bitcoin is not only the oldest and most secure blockchain, but it is also the most valuable and widely adopted blockchain of all digital assets. However, the flagship cryptocurrency is pretty useless compared to most other cryptocurrencies. The only real use cases are payments and “hodling”, where people buy and hold assets in the hope that their value will rise.
Therefore, there is a lot of pent-up demand from Bitcoin investors looking to put their assets to work while “holding” them. Bitcoin DeFi can increase the value of BTC by transforming it from an idle asset to an asset with tremendous utility. At the same time, the security of Bitcoin itself will continue to bring greater confidence to DeFi, a world full of scams and hacks.
Disclaimer: This article is provided for informational purposes only. It is not provided or intended to be used as legal, tax, investment, financial or other advice.
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