Bitcoin DeFi Explained

Bitcoin was originally just a cryptocurrency. That is to say it only allowed you to make direct payments to your peers on the network. However ever since the Taproot upgrade Bitcoin can do many more things. Hence it is able to support its own Bitcoin DeFi ecosystem.

What is DeFi?

For those of you that do not know; DeFi is short for decentralised finance. Decentralised finance needs to offer the same services as traditional banks and financial services.

Like for example savings, lending and borrowing, trading, insurance and more. So that it is more of a complete service where all your needs are catered for. The difference is that all transactions and contracts are all done in crypto and all decentralised.

There is an article dedicated to explaining DeFi you can read which has more detail. In short for a DeFi ecosystem including Bitcoin Defi to function it needs several things:

  • Blockchain – the foundations of where to build the dapps for the DeFi system.
  • Cryptocurrency or assets – to transact on the network.
  • Dapps – decentralised applications that offer their services.
  • Smart contracts – the contracts that people sign to agree to receive a service. They do this through the dapps.
  • Oracles – an oracle notifies a smart contracts when an event happened. They are used in smart contracts that are set to execute payments or functions in the future.

Taproot Enables DeFi for Bitcoin

The Taproot upgrade had a number of features that got updated. That included:

  • Schnorr Signatures – this has more capabilities than the signature Bitcoin previously used.
  • Taproot – which submits less information to the blockchain. Hence making transactions more private and more scalable.
  • Tapscript – a better programming language for payments on the network.

Ever since the upgrade which happened on the 11th August 2021, Bitcoin can support its very own DeFi system.

Bitcoin DeFi Projects

There are not that many Bitcoin DeFi projects at the moment. Especially because DeFi for Bitcoin only just got started. In fact there are only a couple that are fully launched at the moment. There are many others that are still under development and in the pipeline.

On the other hand Ethereum has many more DeFi projects. This is only because it was the first platform that supported DeFi.

Sourced from DeFi prime

Bitcoin DeFi is split between the dapps that use Bitcoin and the dapps that use their own tokens. The dapps that use Bitcoin are great for people that do not want to handle any other cryptocurrencies.

Dapps that use Bitcoin use discrete log contracts (DLCs). As the name implies they are private and you can use them to make bets.

That is to say for prediction markets like for example who will win an election or a sports match. Additionally that also means you can use them for derivatives trading.

Here are some examples of Dapps that are on Bitcoin DeFi.

Bitcoin DeFi Projects: Stacks

Bitcoin DeFi Stacks Logo

Firstly to build Defi on Bitcoin developers can use Stacks. Stacks is a specifically built application that allows developers to build other dapps easily on the Stacks blockchain.

The Stacks blockchain is in turn built on Bitcoin’s blockchain. That is to say it is a second layer on top of Bitcoin’s core blockchain layer.

Stacks has a proof of transfer consensus mechanism. It is like a hybrid between proof of work and proof of stake. Stack is open source and built on Bitcoin so that it takes advantage of Bitcoin’s security.

As a result Stacks also benefits from the same level of security as Bitcoin does. That is to say even though Stacks has a separate blockchain in the Bitcoin Defi ecosystem. So since Bitcoin is the most secure network out of all cryptos, Stacks is just as secure.

Stacks has different types of Dapps built on its platform. Some categories of app include:

  • Survey apps
  • Digital identity
  • DEX’s – decentralised exchanges
  • Wallets
  • Tokens
  • Stacking pools
  • NFT marketplaces
  • Social

Meanwhile the nice thing about Stacks is that you can earn Bitcoin from holding (stacking) Stacks tokens. The Bitcoin you receive comes directly from Stacks miners.

The miners commit (stake) Bitcoin to the Stacks blockchain. They do this so that they can get a chance to mine a block on the Stacks blockchain. If they win it they get an STX token reward.  

Bitcoin DeFi Projects: Sovryn

Bitcoin DeFi Sovryn Logo

Sovryn is one of the very first dapps on Bitcoin DeFi, if not the first. It caters for bitcoin lending and borrowing, yield farming, margin trading and staking.

Sovryn is a non-custodial dapp which means you can have full control of your keys. The dapp does not require you to sign up and provide your personal details. This is because it is permissionless and plug and play. So all you need to do is connect your crypto wallet and off you go.

Additionally you can connect a hardware wallet to Sovryn’s network. This is great because hardware wallet are far more secure than any other type of wallet.

Different wallets you can connect on Sovryn:

Sovryn Wallet Types

Sovryn uses the Rootstock (RSK) network which has fused the Lightning network to increase Bitcoin’s transaction capacity. You don’t need to use Sovryn’s cryptocurrency which is SOV. You can use RBTC which is wrapped Bitcoin where 1 RBTC is equal to 1BTC.

Decentralised vs Centralised

For you to have full control of your funds is great for decentralisation. On the other hand Sovryn does have a federation that makes decisions about the future of the dapp. The federation is able to release and lock up coins when it is required on the network.

Critics would say that this sounds very centralised and they have a point. However the members of the federation are trusted and reputable individuals and companies.

At least so far this is the case at this point in time. Hopefully the people within the federation will not get corrupted and it will remain honest in the long term. Additionally the federation have many members which makes it harder for several members to do anything malicious.

Bitcoin Staking

What is nice about Sovryn is that you can lend your Bitcoin. Unfortunately you can only earn less than 1% which is not much. However some people reason that it is better than nothing.

You should know that Sovryn does collect 10% of the lending fees and places it in an insurance fund. That is to say just in case there is a loan default and lenders would need to get compensated.

Advantages of Bitcoin DeFi vs Other DeFi Ecosystems

1. Bitcoin Only

One clear benefit of a Bitcoin DeFi ecosystem is that some dapps will only use Bitcoin. As a result Bitcoin maximalists will feel more comfortable the services. This is because Bitcoin maxis would not want to touch any other coins or tokens in any other DeFi ecosystem. Albeit it’s not like there is a disproportionate amount of Bitcoin maxis vs the rest of the crypto community.

Additionally Bitcoin maxis will not just be able to make payments. However they will also have access to many different financial services.

2. Security

Secondly the Bitcoin network is the largest and the most decentralised network. This means it is by far the most secure network. So the Dapps that are set up properly can benefit directly from Bitcoin’s network security.

As a result any hacker that tries to attack a dapp on the network will have a very hard time. In fact it is almost impossible for anyone to mount a successful attack on Bitcoin.

Disadvantages Of Bitcoin DeFi

Since Bitcoin DeFi is still new it has a tieny tiny budding system. In fact the amount of investment that is in Bitcoin DeFi so far is negligible. It needs far more traction by way of developers that are building Bitcoin DeFi projects as well as investors.

The Future Of Bitcoin DeFi

Similarly to Ethereum, the Bitcoin DeFi ecosystem is going to have a slow start. Meanwhile as time goes by it is going to have more investment and dapps built on it. So it is expected to grow especially because Bitcoin is the most popular cryptocurrency.

No one knows if Bitcoin’s DeFi is going to work out in the long run. However Bitcoin is already successful without DeFi because it is the most established cryptocurrency.

DeFi is more of an additional feature that is nice to have. This is especially because it will provide many more services that are decentralised. So people will not need to resort to other crypto platforms or even traditional financial institutions. Bitcoin will become a one stop shop where you can sort out everything you need on one platform.

As a result Bitcoin will take a greater percentage of market share away from the competition. In fact here is the currency Bitcoin dominance chart:

Bitcoin Dominance Chart

Sourced on 20th May 2022 from TradingView

Bitcoin’s dominance has slipped down since there are so many other cryptocurrencies. As a result:

This risks the scarcity aspect of the commodity and thus risks its value by potentially diluting it and dividing the community among multiple protocols. Each cryptocurrency is scarce, but there is no scarcity to the number of cryptocurrencies that can exist.

Lyn Alden

However there are a lot of cryptocurrencies that do not have much to offer. They will eventually fail. Additionally since Bitcoin is going to offer more services with Bitcoin DeFi Bitcoin dominance could go up. This is because people will not have a reason to leave the Bitcoin ecosystem.

On the other hand if Bitcoin DeFi does not work out well, other cryptos will have their own ecosystem. So Bitcoin will have less of a market dominance than it would otherwise.

Frequently Asked Questions

Is Bitcoin DeFi?

Bitcoin is a blockchain that has its own cryptocurrency. However Bitcoin has its own defi (decentralised finance) ecosystem. Learn more about Bitcoin DeFi.

Is there a DeFi for Bitcoin?

Ever since Bitcoin had the Taproot upgrade on the 11th August 2021, Bitcoin can support its own DeFi ecosystem.

How does Bitcoin DeFi work?

Bitcoin DeFi works similarly to other DeFi networks. It offers the same services as traditional banks and financial services, but in a decentralised way. Read more about Bitcoin DeFi here.

How do I buy Bitcoin DeFi?

To invest into Bitcoin’s DeFi you have to figure out which dapps you want to invest into first. Then you can buy tokens of the dapps.