Since decentralized financing (DeFi) first exploded in 2020, the majority of DeFi projects have been built on it ether Blockchain.
Bitcoin holders looking to access DeFi have often chosen to use packaged versions of Bitcoin, such as WBTC. This has enabled them to use tokens tied 1:1 to Bitcoin.
But in 2021 and 2022 there were big changes in the world of DeFi. Not only potential “Ethereum killers” such as Solana As DeFi market share was taken away from Ethereum, there has been increased growth and profitability of DeFi projects built around the Bitcoin blockchain itself.
What is DeFi?
DeFi products are tools predominantly based on Ethereum that aim to revolutionize and replace current methods of borrowing, lending and banking. DeFi has also spawned relatively new concepts like yield farming.
The goal of DeFi is to make the world of finance accessible to everyone—or at least anyone with an internet connection.
What does Bitcoin have to do with DeFi?
The majority of DeFi platforms are still being built smart contract Platforms like Ethereum. But there are many people who own Bitcoin and want to get involved as well. This has led to a number of solutions being developed to help Bitcoin holders invest in DeFi.
Bitcoin is the largest cryptocurrency by market cap, so unsurprisingly there is a demand for solutions among Bitcoin holders.
How does Bitcoin DeFi work?
Bitcoin DeFi works in different ways depending on the blockchain it is deployed on.
Bitcoin DeFi is based on Ethereum:
To use Bitcoin on Ethereum, Bitcoin holders must use a token such as Wrapped Bitcoin (WBTC). Wrapped Bitcoin is essentially a 1:1 representation of Bitcoin that can be used on other blockchains. On Ethereum, the Wrapped Bitcoin (WBTC) ERC-20 Tokens can be used on DeFi platforms like any other asset on the Ethereum blockchain.
A bitcoin holder could convert bitcoin to WBTC and then borrow money from WBTC to borrow stablecoins through a platform like MakerDAO. These stablecoins can then be reinvested back into the DeFi ecosystem. This strategy carries the risk that the WBTC used as collateral may be liquidated.
Bitcoin DeFi built on stacks:
Like Bitcoin, Stacks is an independent Layer 1 blockchain. The Stacks and Bitcoin networks are connected through a process called Proof-of-Transfer. To mine stacks, miners need to send bitcoin to the bitcoin network. Multiple transactions on the Stacks network can correspond to one transaction on the Bitcoin network.
A range of DeFi applications are possible on the Stacks blockchain, from “stacking” the Stacks token to earn rewards in Bitcoin to exploring decentralized applications (daps) that offer well-known DeFi strategies such as staking and yield farming.
Bitcoin DeFi based on Rootstock (RSK):
The RSK blockchain works as a sidechain to the Bitcoin blockchain and uses Smart Bitcoin (RBTC) as a utility token. RBTC is used to pay smart contract fees on the RSK blockchain, just like ETH is used to pay fees on the Ethereum blockchain.
Smart Bitcoin (RBTC) is pegged 1:1 to the Bitcoin (BTC) price. Since the RSK blockchain is a sidechain of Bitcoin, there is a two-way connection between RBTC and BTC, and the two assets can be sent back and forth interchangeably between the two blockchain networks.
Using Bitcoin DeFi to generate passive income
Why would anyone want to put their Bitcoin in DeFi when they could get into DeFi by buying Ethereum directly? Many people hold bitcoin as a store of value. Using Bitcoin for DeFi, while not without risks, can potentially unlock passive income on top of this store of value.
What Are Some Bitcoin DeFi Projects?
- Wrapped Bitcoin (WBTC) – An ERC-20 token on the Ethereum blockchain that is tied 1:1 to the price of Bitcoin and backed by an equivalent amount of Bitcoin held in a digital vault. Originally started by BitGo, Ren and Kyber, WBTC is now maintained and managed by the WBTC DAO.
- Ren VM – A network that allows cryptocurrencies including Bitcoin to be packaged and sent to other blockchains using the RenBridge.
- RSK (Rootstock) – A smart contract blockchain that acts as a Bitcoin sidechain, supporting multiple DeFi platforms.
- BadgerDAO – A Decentralized Autonomous Organization (DAO), which offers solutions for using Bitcoin in the DeFi ecosystem, BadgerDAO fell victim to a $120 million hack in late 2021.
- Stacks – An independent Layer 1 blockchain connected to the Bitcoin network, supporting a range of dapps.
What is the future of Bitcoin DeFi?
As of May 2022, almost $9 billion worth of Bitcoin was locked in Wrapped Bitcoin (WBTC). That’s more than a market cap of just over $4 million (not billions) in early 2020.
While the rise in WBTC is just one metric showing an increase in bitcoin supplies flowing into DeFi, there are now a growing number of avenues that bitcoin holders can take advantage of. Which Bitcoin DeFi platforms and protocols are the most successful depends on their long-term security and longevity, as well as the rewards offered to investors.
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