For many years, Ethereum dominated the decentralized finance (DeFi) landscape, with blockchain serving as the target of choice for many of the most innovative projects that showcased their take on decentralized finance. More recently, however, DeFi projects have emerged across multiple ecosystems, challenging Ethereum’s hegemony. And as we look to a future where the technical problem of interoperability is solved, an unlikely contender for the role of DeFi power player is emerging – Bitcoin (BTC).
In that future, Bitcoin may play the most important role in DeFi — and not in a triumphant, maximalist sense. Rather, Bitcoin can complement the rest of crypto as the heart of multichain DeFi. The key to doing this is to tie everything together so Bitcoin can interact with Ethereum as seamlessly as iOS and Android do today.
One argument for harmonizing Bitcoin with DeFi may come as a surprise. Commentators often pit the established Bitcoin blockchain against its more agile and functional counterpart, Ethereum. However, the real “flip” is DeFi’s association with Bitcoin. This way, users get the best of both worlds, combining the dexterity of Ethereum with the purity of Bitcoin. The debate revolves around what a Bitcoin-enabled DeFi industry looks like, or if it’s even possible.
The rocky road to interoperability
The Bitcoin network’s underlying Proof-of-Work (PoW) consensus mechanism provides a rock-solid foundation for a global payments network that is separate from any state. The built-in computational guarantees are enough to attract institutional money, showing that it’s good enough for traditional finance’s rulers. Although Bitcoin is designed to become the money of the internet, Bitcoin’s intrinsic properties have inspired less resource-intensive networks like Ethereum.
Despite the arrival of challengers, Ethereum-native projects still dominate DeFi, which remains a fragmented ecosystem of smart-contract-driven applications enabling an open peer-to-peer financial system. Global networks of developers are working tirelessly to put this array of decentralized applications (DApps) in context, largely without success, although atomic swaps have emerged as a viable option. In general, sub-optimal solutions like cross-chain bridges are proliferating, leaving DeFi users vulnerable to exploits, while other popular solutions like wrapped tokens have their own drawbacks, which is centralization.
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So far, the DeFi products have not been used for on-chain bitcoin transactions because the bitcoin protocol does not allow for smart contracts. This is a consequence of Bitcoin’s design, which was constructed with a limited scripting language to optimize security over data storage and programming capacity. Remember that this stuff is only as valuable as the extent to which it is decentralized.
Permissionless Multichain Funding
So Bitcoin isn’t compatible with DeFi, and for some, collateralized exposure to non-native chains through wrapped tokens like Wrapped Bitcoin (wBTC) is a step too far from the core ethos of the industry. While this might lead some to believe that interoperability between DeFi and the Bitcoin network is a hopeless task, there are ways to do it. For many, Bitcoin was the first step in re-understanding what it means to have access to financial services and experience financial independence.
Self-custody requires financial literacy, and with more than half of the users involved with cryptocurrencies under the age of 35, I’d bet we’re just at the tip of the economic iceberg. Over time, the innovation will filter out DeFi-native downsides like slippage and fickle loss. More specifically, enabling unilateral returns for DeFi and Bitcoin would open up new opportunities that could tip the scales in favor of mainstream adoption. Unilateral is significantly more secure as it involves depositing a single token into a liquidity pool as opposed to a token pair.
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The introduction of one-way yield to a bitcoin-enabled DeFi ecosystem is when things get interesting, not just for the maximalists, but for everyone in the game. This would be an authentic way to add value without sacrificing decentralization. The risk would be taken by the protocol enabling the one-way return, meaning users could explore credit and loan options not currently available.
A by-product of this development would likely be the consolidation of decentralized exchange (DEX) aggregators. Saturation of aggregators decomposes the available liquidity, which correlates with an increase in transaction costs. With that in mind, there are thousands of cryptocurrencies on the market, which means there are more assets, more chains, and more layers to consider. While modularity can be great for specs, it’s time for a “less is more” countermove.
Unlocking a new world of possibilities for Bitcoin
Building a seamless, distributed, multichain financial system like this is no easy task. It reaches a complexity that is difficult to grasp. The consolidation could narrow the focus enough to allow users to tweak speed or security without losing access to the rest of blockchain-based finance.
Still, the impact these alternative financial technologies have had in such a short amount of time is incredible. Bitcoin has been an integral part of the broader movement as most people’s introduction to the world of cryptography. Perhaps Bitcoin can power the next DeFi revolution, return to cypherpunk culture and open up new financial opportunities for everyone.
Marcel Hartman is the founder and CEO of THORWallet DEX and a board member of the Crypto Valley Association. Previously, he co-founded the DEC Institute, which offers online certifications for digital asset specialists backed by leading blockchain universities. In 2012 he graduated from the University of Zurich with a Master of Arts in Banking and Finance.
This article is for general informational purposes and should not be construed as legal or investment advice. The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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