• One
  • Two
November 2020

DeFi won’t last long without unlocking Bitcoin’s $ 250 billion treasure chest – Cointelegraph


Decentralized finance is a fairly new and nuanced concept for the general public. At its core, DeFi promises a revamped global financial system, endowed with savings, loans, and creative yield opportunities that enable innovative financial products without centralized gatekeepers. As of Jan. 1, that promise has been kept with demand that has surpassed $ 11 billion in total locked-in value, representing a more than 1,550% increase in value since the start of the year.

DeFi applications require the chain logic of smart contracts. Today, a lot of experimentation and early traction for DeFi applications is taking place in the Ethereum ecosystem, using the JavaScript-like language Solidity.

Related: Programming languages ​​used in blockchain, explained

As we’ve seen Ethereum-powered projects like Uniswap, Aave, and Compound championing the DeFi space, the community is starting to show signs of demand for solutions that integrate Bitcoin (BTC).

Bitcoin is the largest digital asset in terms of market capitalization, but it remains largely a passive asset. To actively deploy Bitcoin in DeFi products, custodians such as BitGo have started tokenize Wrapped Bitcoin (WBTC). Wrapped Bitcoin takes the value of Bitcoin and combines it with the programmability of Ethereum, giving investors a way to earn extra returns from their Bitcoin investments without cashing out. In the past two months alone, over $ 1 billion worth of WBTC has been introduced to the Ethereum network, indicating demand for Bitcoin as an actively deployed financial asset.

Putting Bitcoin in DeFi’s orbit

Bitcoin is the most powerful sovereign blockchain and is poised to become the world’s first truly sovereign currency. Bitcoin has the most robust blockchain security and the most common name recognition. Right now, the use of BTC in DeFi is at a very early stage.

Bitcoin can be used in two ways in DeFi products: The wrapped representations of BTC can be used on separate blockchains (like WBTC on Ethereum) or native smart contracts can happen to the Bitcoin blockchain itself. Creating DeFi products directly on Bitcoin is something that makes sense in practice, but has been difficult due to Bitcoin’s limited scripting language and scalability issues. Bitcoin has traditionally been viewed as a medium of exchange and a store of value. However, the recent shift from Bitcoin to Ethereum as a wrapped asset signals market demand for BTC in DeFi. In the process, people find unique, albeit unnatural and potentially dangerous, ways to do it.

Bitcoin’s limited scripting language has long been seen as a feature, not a bug, as it keeps the core blockchain secure. Smart contract logic can be added on top of Bitcoin through side chains like Liquid, connected chains like Stacks, or merged mined chains like RSK. Moving BTC from the main Bitcoin chain to such adjacent chains can be easier and safer than issuing wrapped assets on disconnected chains.

Bitcoin as active capital

In order to fully bridge the gap, Bitcoin will need to undergo the transformation from a passive asset to an active, yield-generating asset. One obstacle is the tribal nature of cryptocurrency users. Many Bitcoiners do not recognize wrapped Bitcoin as Bitcoin. In my opinion, this is because Bitcoiners and the Ethereum community share different philosophies.

Ethereum has created a culture that celebrates experimentation and testing in production. However, bold experimentation is not a trait that Bitcoiners share. Bitcoiners, by nature, are cautious and healthy skeptics who take great care not to lose their assets. Wrapped Bitcoin is one of the many DeFi innovations that invite danger by mixing these two philosophies. Taking a valuable asset like Bitcoin and placing it in a smart contract such as an ERC-20 token that shares Ethereum’s security properties can be a difficult concept for Bitcoin holders. There should be a safer solution to bringing BTC into DeFi’s orbit.

By recognizing the opportunity to build on Bitcoin, I think we might see a future where Bitcoin continues to be the king of blockchains. As DeFi continues to grow, it is entirely possible that Bitcoin will remain the center of gravity of crypto and that smart contracts around Bitcoin will natively unlock innovation and $ 250 billion in Bitcoin capital.

The views, thoughts and opinions expressed herein are the sole ones of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Muneeb Ali, a Ph.D. Graduated from Princeton University, is the co-founder of Blockstack, a project whose mission is to create a user-owned Internet. He is also the CEO of Blockstack PBC, a utility company that has raised over $ 75 million to develop basic Blockstack protocols.