In recent years, decentralized finance and Bitcoin exploded into mainstream consciousness. From 2020 to 2021, the DeFi market grew a staggering 210x his, while Bitcoin rose more than 700% in value. Everyone was talking about cryptocurrencies, discussing exciting new ways to invest beyond just “holding” and hoping the value would reach the moon.
DeFi has emerged as an enabler for these new ways of investing, introducing concepts such as staking, liquidity provision, and yield farming to the world. crypto investmentHowever, these innovations remain largely separate from Bitcoin itself.
Instead, the majority of the world’s DeFi applications and protocols reside not on Bitcoin, but on Ethereum or other blockchains that claim to be faster. During that time, Bitcoin remained what it was always intended to be: a simple digital currency and store of value.
Times are changing. For all the ups and downs it has experienced over the past year, research shows that Bitcoin is gaining more and more widespread adoption and growing. Along with that, the demand for Bitcoin to merge with the world is increasing. DeFi.
After all, Bitcoin is the world’s most popular cryptocurrency and by far the largest market capitalization. However, most of these assets are unused. By introducing BTC into his DeFi, the opportunities for Bitcoin holders could be transformative.
How Does Bitcoin DeFi Work?
The most common method is bitcoin is used Within the DeFi ecosystem, via so-called “wrapped” tokens. As an example, the Wrapped Bitcoin token (WBTC), which is an ERC-20 token (meaning it runs on the Ethereum blockchain) backed 1:1 with a real Bitcoin token. Launched in 2019, WBTC offers Bitcoin holders a way to participate in her Ethereum-based DeFi without first exchanging her BTC assets to another cryptocurrency. Simply exchange BTC for an equal amount of WBTC to stake or deploy or use as collateral in various DeFi applications.
WBTC offers Bitcoin holders easy access to DeFi, but the token has not proven to be particularly popular. What keeps investors away from her WBTC is its reliance on a centralized administrator. When buying WBTC, users must transfer their BTC to a company called bit go – Lock that BTC and create WBTC on the Ethereum blockchain. Once users have completed staking WBTC, they can exchange these tokens for real BTC. The WBTC is then “burned” and removed from circulation, and his BTC that is entrenched is returned to the user.
Wrapped Bitcoin gives you access to various cryptocurrency margin lending and staking services. This means that BTC holders can earn yield without selling their assets. There are many decentralized exchanges (DEXs) that allow you to freely trade Bitcoin using their APIs, such as Atomex and JellySwap.
However, this is a bit more complicated and not as simple as depositing BTC into centralized lending apps like Nexo or BlockFi. To earn yield on BTC tokens, a user must first tokenize his BTC or purchase those assets on his DEX such as: Uniswap (for Bitcoin wrapped in ETH) or pancake swap (For Bitcoin wrapped in BNB).
Another way to get into DeFi with wrapped Bitcoin is to trade and lend pools on protocols like Aave and Compound Finance. Alternatively, you can deposit your wrapped Bitcoins into decentralized liquidity pools and earn mining earnings in Curve Finance or Harvest Finance.
Aave also offers users the possibility to obtain BTC loans through their cryptocurrency lending service. At competitive rates, he offers BTC loans and benefits such as investors being able to add liquidity to their bank accounts without worrying about tax implications. It is also possible to get a Bitcoin loan without collateral. Flash loans for example, but such transactions are very complicated and require deep knowledge of cryptocurrencies.
Native Bitcoin DeFi
The idea of using a wrapped bitcoin and entrusting it to a custodian is unacceptable to many bitcoin advocates as it goes against the whole ethos of decentralization. No one wants to put their trust in a centralized entity. stack It is very promising as it brings smart contract functionality to Bitcoin and allows it to become self-sufficient in the DeFi world.
Bitcoin creator Satoshi Nakamoto intentionally created a limited scripting language for Bitcoin because he envisioned Bitcoin only as a simple payment mechanism. For this reason, Bitcoin He cannot create smart contracts that can run on the blockchain.
stack changes this Unique Transfer certificate A consensus mechanism that brings programmability to Bitcoin. Like Bitcoin, Stack is an independent Layer 1 blockchain. The trick is to use the PoX protocol to connect to Bitcoin. To mine STX tokens, a miner must send her BTC to the Bitcoin blockchain. In this way, the history of multiple transactions on the Bitcoin network can be recorded.
Stacks says there are good reasons for this. So, by integrating with Bitcoin in this way, you benefit from unbreakable security. Transactions on the Bitcoin blockchain are irreversible once settled and the network has never been hacked. Also, it cannot be hacked. The economic cost of doing so is estimated to be many times the potential benefit obtained.
This high level of payment assurance will greatly benefit DeFi apps. His stack-based DeFi app has new security properties that make it superior to any other blockchain. At the same time, we ensure that all forks are public, allowing nodes to identify legitimate stack forks and find blocks they haven’t downloaded yet. Most importantly, the stack has the same level of security as Bitcoin itself. Stacks is an independent blockchain, but hacking it is as difficult as taking out Bitcoin itself.
Another reason for wanting to integrate with Bitcoin is its network effect. Bitcoin enjoys a special status as the world’s premier cryptocurrency, and its demand and use cases are growing daily. There are billions of dollars worth of capital trapped in that network, most of which is unused and serves as a store of value and little else. Stack allows BTC holders to lend his BTC, get loans with BTC, buy and sell NFTs, instead of competing with Bitcoin like all other blockchains try to do. I’m trying to build a new use case that does something like
Stacks with native BTC already has a variety of exciting new DeFi applications. For example, an STX holder can “stack” tokens (similar to staking) and be rewarded in BTC (this is from her BTC a miner must pay to mine her STX). obtained). There are dozens of other apps such as DEXes, wallets, digital identity apps, city coins, NFT marketplaces, social media services, survey apps, etc. that use native BTC.
But why does Bitcoin need DeFi?
The Bitcoin community has taken much longer to adopt DeFi than most other communities in the cryptocurrency industry, and there are good reasons to be cautious. The DeFi movement has been hit with multiple scams and its history is littered with false promises. based on speculation 1 person.
There may be some truth to these arguments, but that doesn’t mean DeFi will always be this way. It could go up significantly and certainly provide the extra liquidity you need.
That’s good for DeFi, but what about Bitcoin? How can it help? The answer is that it could be more widely adopted through DeFi.
In a recent op-ed, Dr. Chiente Hsu, co-founder and CEO of ALEX, said: claim For Bitcoin to be accepted by the masses, it must evolve beyond its current role as a store of value and a means of transaction.
“As Bitcoin DeFi grows, sovereign collectives will be able to determine their own Bitcoin yield curve, increase the capital efficiency of Bitcoin as an asset, and accelerate mass adoption and development of the Bitcoin economy. We can,” Hsu wrote.
The point of Bitcoin DeFi’s argument is that the modern world is built on finance, not money. The world’s debt far exceeds what is actually in circulation due to the way the banking system and the economy work. Finance underpins everything from banks to markets to financial instruments to credit to leverage. For example, there is an estimated $1.5 trillion in physical US dollars in circulation, US government bonds Over $30 trillion (and growing).
Hsu explains that it’s not money, it’s time, the most precious resource on the planet. Liabilities, and more specifically yields and interest rates, are the medium of exchange for the time value of money. The way this system works is that there are millions of people who need money today and are willing to pay a premium for that cash. At the same time, those with a lot of resources are willing to risk lending at a premium because they will only need the money in the future.
Bitcoin enthusiasts love to talk about how Bitcoin enables people be your own bankThis is because anyone who holds Bitcoin is responsible for keeping their assets safe. But for people to truly become their own bankers, they need to do more than just be vaults. Banks borrow money from depositors at a low interest rate, use that money to invest at a higher interest rate, and profit from the difference. Therefore, if Bitcoiners become their own bank, they must take responsibility not only for the safety of their money, but also for its productivity.
For Bitcoin to become a productive asset, it needs DeFi as a vehicle for that productivity.
Marriage Made in Crypto Heaven
If the Bitcoin community decides to embrace DeFi en masse, it will almost certainly result in higher total value locked in both Bitcoin and the wider DeFi ecosystem. As Bitcoin gains more liquidity, this will generate greater interest, accelerating its adoption and leading to further use cases that will accelerate its evolution as a mainstream asset.
Bitcoin enthusiasts may be wary of DeFi, but Bitcoin enthusiasts also want Bitcoin to succeed. And it stands to reason that making Bitcoin more convenient increases your chances of success.
Combining Bitcoin and DeFi increases the potential of Bitcoin. swap token, creating more options for staking to generate interest and yield. In this way Bitcoin can become a more useful, versatile and profitable asset. is also very difficult. DeFi promises to change this dynamic and make it easier for Bitcoin holders to manage their funds.
What we need now is more awareness of the possibilities DeFi and Bitcoin offer when they work together. This space will attract more and more liquidity as more people understand how to use DeFi to leverage their Bitcoin holdings. This will allow Bitcoin to appreciate its value, attract more users, and create a virtuous cycle that will lead to unprecedented levels of adoption and value.