Decentralized finance (DeFi) built on Ethereum and other networks has grown tremendously over the years. However, a new, growing DeFi market has emerged on Bitcoin, powered by numerous second-layer solutions and the recent Taproot update, which has opened the door for more use cases on Bitcoin.
Read on to learn more about Bitcoin DeFi, how it is made possible on Bitcoin, and what Bitcoin DeFi applications already exist.
What Is Bitcoin DeFi?
To understand Bitcoin DeFi, we first need to understand what DeFi is.
Decentralized finance (DeFi) is a peer-to-peer financial system that eliminates (financial) intermediaries, allowing you to utilize Internet-native financial products and services powered by smart contracts from anywhere in the world. All you need is Internet connectivity and a crypto wallet.
Bitcoin DeFi refers to decentralized finance applications and protocols built on Bitcoin, whether on-chain or on second-layer solutions.
Why Are More DeFi Protocols Being Built on Bitcoin?
Bitcoin is the largest and most secure cryptocurrency network in the world. Moreover, it’s also the most decentralized, providing the ideal infrastructure for decentralized finance that is highly decentralized.
The downtimes of popular DeFi chains like Solana and even Ethereum highlight the need for DeFi to be built on a robust foundation to fulfill its full potential of providing crypto-native financial services to the world.
That’s where Bitcoin could come in.
Moreover, Bitcoin DeFi enables the digital currency bitcoin to become a productive asset, allowing BTC holders to earn a yield on their holdings in a decentralized, permissionless manner. Given the large number of BTC holders, there is ample demand for income-generating protocols that allow Bitcoiners to earn a yield on the asset they are HODLing.
How Is DeFi Made Possible on Bitcoin?
DeFi on Bitcoin is primarily enabled by layer-2 solutions that provide smart contract functionalities to the Bitcoin ecosystem. Listed below are some current solutions set to unlock Bitcoin’s true potential.
Liquid NetworkLiquid Network is a layer-2 sidechain that brings asset issuance to Bitcoin and improves security and scalability on the network. Liquid Network operates on top of Bitcoin but doesn’t alter its base layer, acting independently with its own ledger and consensus mechanism. It increases transaction settlement speed and confidentiality.
MintlayerMintlayer is a layer-2 solution built on the Bitcoin network that brings tokenization and value transfer without compromising security. It unlocks opportunities for Bitcoin users to access all types of DeFi applications with real-life value without wrapped tokes or token bridges.
Rootstock (RSK) is a sidechain that adds smart contract functionality to Bitcoin through the use of a two-way peg, enabling BTC to be turned into rBTC and used in a range of DeFi applications built on RSK.
StacksStacks is a layer-2 smart contract platform that enhances the functionality of Bitcoin through contracts and decentralized applications. Stacks may add new functionalities to Bitcoin without compromising security.
Taproot AssetsTaproot Assets is a layer-3 protocol allowing users to issue fungible and non-fungible digital assets on the Bitcoin blockchain, which can also be transferred over to the Lightning Network. Taproot Assets leverages the recent Taproot upgrade to enable asset issuance on the Bitcoin blockchain.
Examples of Bitcoin DeFi Applications
Let’s now take a look at two examples of Bitcoin DeFi applications.
ALEX on StacksALEX is the leading full-service Bitcoin DeFi platform on Stacks that allows users to trade, lend and borrow digital assets with Stacks as the smart contract layer and Bitcoin as the settlement layer. The idea behind ALEX is to provide permissionless and decentralized financial services for the Bitcoin ecosystem.
Sovryn on RootstockSovryn is the first non-custodial smart contract application on Rootstock for lending, borrowing, and margin trading with Bitcoin. The protocol provides a range of DeFi services that enable BTC holders to earn yield on their assets, making it a popular destination for Bitcoiners who want to earn yield on their holdings.
Bitcoin DeFi continues to grow with more and more layer-2 solutions emerging for Bitcoin to bring more use cases and functionality to the Bitcoin ecosystem.
While the DeFi market on Bitcoin is still small compared to that of Ethereum and BNB Chain, the recent innovations on Bitcoin, including Ordinals and BRC-20 tokens, could attract more crypto users from other chains (back) to Bitcoin to explore the latest possibilities in the Bitcoin sphere.