Decentralised Finance has taken the crypto world by storm, making Ethereum the second largest blockchain by market capitalisation and spawning legions of parallel EVM-based, Web3, layer one, blockchains. It’s a little known fact, but DeFi also exists in Bitcoin-land and is growing quickly. Let’s examine some of the current efforts!
DeFi, DEXs, and DApps, Oh My!
One of the key factors behind Ethereum’s overwhelming success is its thriving smart contract-driven Web3 ecosystem which offers an array of decentralised platforms and apps. Ethereum has provided new ways for cryptocurrency users to interact economically and permissionless, through the various smart contracts and token projects erected on top of Ethereum.
Decentralised Exchanges (DEXs), Decentralised Finance (DeFi), and Decentralised Applications (DApps) have allowed users to trade, borrow and lend via Peer-to-Peer (P2P), as well as create, mint, and trade Non-Fungible-Tokens (NFTs), passively earn from providing liquidity, and more.
Through trust-minimised, decentralised platforms and P2P interactions, a growing multichain Web3 ecosystem has sparked the birth of a circular crypto-economy, which spans across multiple EVM-based blockchains. Strangely absent from Web3, however, is Bitcoin. Bitcoin, as the first and largest cryptocurrency by market capitalisation, should be among the pioneering projects in Web3, but so far, it hasn’t been.
Bitcoin’s design does not permit for Turing-complete smart contracts and associated data to be stored on the base layer of its blockchain. While Ordinals, Inscriptions, and Stamps have recently challenged this notion, it has been true for the majority of Bitcoin’s history.
Due to its limited native smart contract capabilities, Bitcoin developers have instead opted for a layer-based approach to scaling, where the layer one blockchain is seen as a final settlement layer for the economic activity taking place off-chain, on the layers above.
More complex use cases are intended to be implemented on the layers above the base layer, which can handle logic, data, and throughput off-chain. This has created several layer two projects which provide smart contract capabilities, EVM compatibility, and other Web3 use cases, without negatively impacting Bitcoin’s scalability, security, or adversely impacting on-chain growth of the blockchain.
Even though Bitcoin may have once led the initial charge to spearhead smart contracts, secondary layers, and tokenisation, via efforts like Counterparty and Omni, Bitcoin still has gotten off to a slower start in implementing Web3-style features and use cases, en masse. This is really because of a philosophy of conservative design decisions made by Bitcoin developers, rather than a lack of technical capability.
This has changed, however, with the recent launch of several rapidly growing DeFi platforms on Bitcoin, Bitcoin sidechains, and layer two development, along with DeFi platforms, DApps, DEXs and other projects being built for, and primarily used on Bitcoin.
With the advent of Taproot, Schnorr signature aggregation of signatures from different inputs in the same transaction, and several different efforts at creating tokenised assets which can be sent and received via Lightning Network, the stage has been set for Bitcoin’s next generation of use cases to be rolled out to users.
We could soon see Bitcoin-driven smart contracts which utilise Lightning Network and/or Chaumian eCash to have cheap, instant, private, and highly trust-minimised transactions with the security of the Bitcoin blockchain behind them.
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