Bitcoin DeFi - How it can revolutionize the flagship crypto

However, payments are just the beginning, and there are many more trade-fi verticals to be conquered in the future. Smart contracts, notably on Ethereum, have opened up a whole new world of decentralized finance, enabling crypto users to access various financial service verticals directly on-chain, in a permissionless and trustless manner, the same way Bitcoin payments are processed.

Despite the fact that other chains may have gained the lead in DeFi development, the Bitcoin community has not rested on its laurels and has continued to push forward with the implementation of DeFi dApps on the blockchain. We dug deep into this emerging ecosystem, and here are some significant findings that not many might be aware of.

Bitcoin dApps are being implemented on the second layer

Peer-to-peer payments have been the sole focus of the Bitcoin network since its creation. During the first stages of Bitcoin's development, the focus was on making the network more secure, reliable, and scalable. This means that the Bitcoin blockchain was not supposed to be a platform for smart contracts and decentralized applications (dApps). While this may change with the Taproot update deployed in late 2021, smart contract capability for the Bitcoin blockchain has to date been enabled through sidechains/layer 2 solutions.

There isn't a perfect solution, and each has advantages and disadvantages. The Liquid Network and the Lightning Network were early scaling options for Bitcoin and presumably don't have the same level of programming flexibility as the other two (RSK, DeFiChain, and Stacks). It hasn't, however, deterred many from attempting to do so.

Most Bitcoin DeFi projects still target Specific Sectors

Based on the current efforts, the Bitcoin DeFi ecosystem is certainly still in its infancy. DEXes, stablecoins, lending protocols, and oracles are required DeFi primitives for every DeFi ecosystem. As an example, if there are no liquidity mining incentives on DEXes and lending protocols, there is no need for yield aggregators and no need for insurance.

While there are still gaps, the ecosystem is expanding into complex DeFi sectors like derivatives. Some may argue that this has been done before, but the Bitcoin ecosystem can learn from other networks' successes and failures. There remains a lot of room for progress when it comes to designing tokenomics for DeFi protocols, and having a clear path to follow can help. Since Bitcoin's credo has always been stability and security, having solid, non-scammy DeFi implementations would further boost user confidence in the premiere cryptocurrency.

Finally, it's worth noting that while we're focusing on the DeFi ecosystem, there are other intriguing initiatives being implemented on the Bitcoin sidechains and Layer 2s. Projects like CityCoins, Bitcoin NFTs, and cross-chain bridges are equally intriguing and help to enhance the broader Bitcoin ecosystem.

Bitcoin's DeFi TVL has seen a significant rise

By mid-February 2022, the DeFi ecosystem had $1.15 billion in TVL locked within its dApps. While TVL may not be a perfect measure of a chain's DeFi ecosystem, it does show general user interest and engagement. While this is still a modest portion of the overall DeFi economy, it represents an almost threefold rise since January 2021.

When it comes to TVL, DeFiChain, thanks to its DEX and lending protocol, is the uncontested leader among the many sidechain / layer 2 implementations. While Stacks began in 2021, its TVL has swiftly caught up to those locked into RSK, which has a considerably longer history.

Across all DeFi sectors, DEXes (DeFiChain DEX, Stackswap, and Sovryn) retain the most TVL.

Looking ahead, there are reasons to be optimistic about DeFi on Bitcoin

We remain hopeful and optimistic about the Bitcoin DeFi ecosystem's possibilities. Regardless of your opinions on Bitcoin, it is still the first choice for newcomers to the crypto-verse, both retail and institutional. This explains the proliferation of Bitcoin wallets and fiat on-ramps. As crucial as bringing in new users is, DeFi could also serve as a showcase for what they can do with their newly acquired BTC beyond just Hodling or transacting with it. On the institutional side, there may be chances to hedge downside risk or provide access to more yield-generating opportunities.

With more money and skill flooding into crypto, there has never been a greater time to explore and design DeFi protocols than now. There may not be much of a DeFi innovation advantage in the Bitcoin ecosystem, but its repute for stability and security may provide it an advantage over rival chains.