Given the $ 250 billion worth of Bitcoins existing today, it is difficult to imagine a future where BTC is not used in DeFi products .
Decentralized financing is a very new and nuanced concept for the dominant public. In essence, DeFi promises a renewed global financial system, equipped with savings, loans and creative income-earning opportunities that enable innovative financial products without centralized custodians. Since January 1, that promise has been fulfilled with a demand that exceeded $ 11 billion in total blocked value, which represents a more than 1,550% increase in the year-to-date value.
Although we have seen projects driven by Ethereum, such as Uniswap, Aave and Compound, defending the DeFi space, the community is starting to show signs of demand for solutions that incorporate Bitcoin ( BTC ).
Bitcoin is the largest digital asset by market capitalization, but it largely remains a passive asset. To actively deploy Bitcoin in DeFi products, custodians like BitGo have started to create Bitcoin Wrapped (WBTC) tokens. Wrapped Bitcoin takes the value of Bitcoin and associates it with Ethereum’s programmability, giving investors a way to earn additional income from their Bitcoin investments without making withdrawals. In the past two months alone, more than $ 1 billion in WBTC has been brought to the Ethereum network, indicating a demand for Bitcoin as an actively implemented financial asset.
Bringing Bitcoin into the DeFi orbit
Bitcoin is the strongest sovereign blockchain and is on its way to becoming the world’s first truly sovereign currency. Bitcoin has the most robust blockchain security and the most popular name recognition. At the moment, the use of BTC in DeFi is at a very early stage.
There are two ways that Bitcoin can be used in DeFi products: Wrapped BTC representations can be used in separate blockchains (like WBTC on Ethereum) or native smart contracts can reach the Bitcoin blockchain itself. Building DeFi products directly on Bitcoin is something that makes practical sense, but it has been difficult due to Bitcoin’s limited scripting language and scalability issues. Bitcoin is traditionally considered a means of exchange and a store of value. However, the recent move from Bitcoin to Ethereum as a packaged asset signals the market demand for BTC in DeFi. In the process, people are finding unique, though unnatural and potentially dangerous, ways to do this.
Bitcoin’s limited scripting language has long been considered a feature, not a bug, because it keeps the basic blockchain secure. Smart contract logic can be added to Bitcoin through secondary chains like Liquid, connected chains like Stacks or fusion-mined chains like RSK. Moving BTC from the main Bitcoin chain to these adjacent chains can be easier and safer than issuing packaged assets in disconnected chains.
Bitcoin as active capital
To fully fill the gap, Bitcoin will have to go through the transformation of a passive asset into a yielding asset. One obstacle is the tribal nature of cryptocurrency users. Many Bitcoiners do not recognize Wrapped Bitcoin as Bitcoin. In my opinion, this is because Bitcoiners and the Ethereum community share different philosophies.
Ethereum has created a culture that celebrates experimentation and testing in production. However, bold experimentation is not a feature shared by Bitcoiners. Bitcoiners, by nature, are careful and healthy skeptics who take great care not to lose their assets. Wrapped Bitcoin is one of several DeFi innovations that invite danger by mixing these two philosophies. Taking a valuable asset like Bitcoin and placing it in a smart contract as an ERC-20 token that shares the security properties of Ethereum can be an uncomfortable concept for Bitcoin holders. There must be a safer solution to getting BTC into DeFi’s orbit.
By recognizing the opportunity to build on Bitcoin, I believe that we can see a future where Bitcoin remains the king of blockchains. As DeFi continues to grow, it is entirely possible that Bitcoin remains the center of gravity for cryptography and that smart contracts around Bitcoin natively unlock innovation and $ 250 billion in Bitcoin capital.