The integration of Decentralized Finance (DeFi) over Bitcoin is a topic of growing interest in the crypto ecosystem. The combination of DeFi with Bitcoin can significantly expand the financial capabilities of the Bitcoin network, enabling a range of decentralized financial applications and services.
One of the first DeFi projects on Bitcoin is Rootstock (RSK). This Smart Contract platform has been operating as a Bitcoin sidechain since 2015, allowing developers to create decentralized applications and smart contracts compatible with Bitcoin. This network opened the door to new DeFi opportunities on the Bitcoin blockchain.
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DeFi on Bitcoin
However, the DeFi ecosystem on Bitcoin has been expanding and improving. There are now multiple opportunities for participation and growth. Bitcoin accounts for 54% of all crypto capitalization, making it a DeFi development space. Many companies are starting to explore the development of solutions on Bitcoin. There are many ways to enable DeFi integration over Bitcoin. Some technologies allow the creation of Smart Contracts and decentralized exchange of assets on the Bitcoin network. Although Bitcoin does not initially support Smart Contracts, as with Ethereum, some developers have solutions that pave the way for DeFi integration into the Bitcoin network.
Sidechains or Layer 2
One of the first ways to integrate DeFi over Bitcoin is through sidechains or Layer2. Sidechains are blockchains operating independently but linked to a main blockchain, in this case, Bitcoin. These sidechains can implement specific features, such as smart contracts, not native to the Bitcoin blockchain. It is possible to run DeFi applications on top of Bitcoin using sidechains, which extends its capabilities.
One of the most popular Bitcoin sidechains is the Lightning Network (LN), which has enabled faster and cheaper transactions outside the main Bitcoin blockchain. A functionality that can facilitate the implementation of DeFi applications that require fast and efficient interactions. A use that, precisely, projects such as Taproot Assets (formerly Taro Protocol) seek to achieve within LN and Bitcoin.
Interoperability Protocols
Another way DeFi integrates with Bitcoin is through the well-known interoperability protocols. Interoperability protocols, such as Atomic Swaps, enable the decentralized exchange of assets between different blockchains. These protocols have facilitated the creation of bridges between Bitcoin and other blockchains, the transfer of value, and the execution of smart contracts between Bitcoin and other DeFi ecosystems.
There are several notable projects:
THORChain: An inter-chain liquidity protocol that allows the exchange of Bitcoin for other cryptocurrencies on different blockchains. THORChain uses Atomic Swaps to execute exchanges securely and without centralized exchange.
AtomicDEX: A decentralized exchange that offers an easy-to-use interface to perform Atomic Swaps between bitcoin and other cryptocurrencies. AtomicDEX has an escrow service for users who do not wish to have control over their private keys.
Samourai Wallet: It is a privacy-focused Bitcoin wallet. It also offers the possibility to perform Atomic Swaps with the Monero network. Samourai Wallet is popular for users seeking greater privacy and control over their assets.
Evolution of “DeFi over Bitcoin” platforms
However, since the introduction of RSK, other platforms and projects have emerged to expand DeFi capabilities over Bitcoin. The Sovryn project offers decentralized lending services, allowing users to lend and borrow Bitcoin and other cryptocurrencies without centralized intermediaries. In addition, layer two solutions, such as Liquid Network, facilitate instant and low-cost payments on the Bitcoin network, expanding DeFi capabilities on Bitcoin.
The DeFi ecosystem in Bitcoin has experienced remarkable growth in recent years, with many platforms offering decentralized financial services. Below is an overview of some of the most popular DeFi platforms in Bitcoin:
Stacks
Stacks is a reconciliation network developed on a Layer2 blockchain. Its design brings Smart Contracts and decentralized applications (DApps) to Bitcoin. Blockstack PBC, a New York-based company founded by Muneeb Ali and Ryan Shea, develops the platform. This network allows the generation of Smart Contracts added to Bitcoin without the need to modify its fundamental elements, including its robustness and security. Stacks uses Bitcoin as a base layer, and its token, STX, powers the execution of Smart contracts, processes transactions, and records digital assets on the Stacks 2.0 blockchain.
The success of Stacks within the DeFi ecosystem on Bitcoin has been enormous. Its Stacks token (STX) plays a significant role in the DeFi over the Bitcoin world by enabling the extension of the capabilities of the Bitcoin network with smart contracts and decentralized applications (DApps).
An example of this can be seen in the Bitcoin Oddysey project, backed by investors such as Okcoin, Digital Currency Group, GSR, and White Star Capital. That project aims to use the Stacks blockchain network to create a support layer for the Bitcoin network, similar to the Layer 2s devised for Ethereum. This initiative seeks to accelerate the adoption of Bitcoin as the epicenter of cryptocurrencies, threatening Ethereum’s hegemony in the DeFi world. The announcement of this project to energize Bitcoin and its network, thanks to the Stacks cryptocurrency, triggered a significant increase in STX’s share price, demonstrating its relevance in the DeFi ecosystem over Bitcoin. STX is trading at $2.72.
Liquid Network
Liquid Network is a well-known Bitcoin sidechain created by Blockstream. It enables fast and private transfer of digital assets. This network is a scalability solution for Bitcoin, designed to facilitate faster and more confidential transactions. It also offers digital asset issuance and Smart Contract execution. The Liquid Network offers several advantages for participants in the cryptocurrency ecosystem by providing an efficient and private way to transfer digital assets.
Because of this, Liquid Network’s role in the DeFi world on Bitcoin is critical, providing a layer of confidential transactions and asset issuance. Operating as a Layer2 solution for Bitcoin, Liquid Network enables the fast and confidential settlement and issuance of digital assets, such as stablecoins and security tokens, over the Bitcoin blockchain. This role is crucial for the evolution of decentralized finance (DeFi) in the Bitcoin ecosystem, as it allows users to conduct Bitcoin transactions more privately and develop DeFi projects, such as security tokens, trustless exchanges, and private P2P payments.
In addition, Liquid Network facilitates the creation of new digital assets, the execution of Smart Contracts, and the rapid transfer of digital assets between network participants, contributing significantly to the expansion of Bitcoin’s financial capabilities and a broader and more diversified DeFi ecosystem.
THORChain
Thorchain is a decentralized liquidity network that facilitates the instantaneous exchange of assets between chains without authorization. It also provided decentralized funding between currencies. The network allows users to place assets in liquidity pools to receive commissions, instantly exchange assets at open market prices, borrow and lend any asset, and pay in any currency. Thorchain’s native cryptocurrency is RUNE, which trades at $5.19.
In addition, Thorchain plays a significant role in offering the ability to exchange assets across decentralized chains. Users can exchange Bitcoin or digital assets for other tokens, leveraging DeFi functionality, without relying on centralized exchanges. In addition, Thorchain’s interoperability could allow Bitcoin to participate in a wide range of DeFi applications across the Thorchain network, expanding DeFi participation opportunities for Bitcoin holders.
In this way, Thorchain plays a crucial role in providing a platform for decentralized cross-chain asset exchange, which has the potential to enrich and expand DeFi’s capabilities over Bitcoin and the crypto ecosystem in general.
DeFi’s Perspectives on Bitcoin
In summary, DeFi integration into Bitcoin is possible by using technologies that enable the creation of smart contracts and the decentralized exchange of assets on Bitcoin, using sidechains, Layer2 extensions, interoperability protocols, and the development of Bitcoin-specific DeFi platforms. Thus, with the continued advancement of these technologies, it is expected to offer users a wide range of opportunities to participate in decentralized financial services within the Bitcoin ecosystem.