The Rise of Bitcoin in the Decentralized Finance Field

Bitcoin is gradually becoming an important force in the DeFi field, starting to challenge Ethereum's dominance. By analyzing on-chain data, we find that the combination of BTCFi( Bitcoin and DeFi) is triggering a paradigm shift in Bitcoin's role within DeFi, potentially redefining the entire DeFi landscape.

The Rise of BTCFi

When Satoshi Nakamoto launched Bitcoin in 2008, the initial design was intended as a peer-to-peer electronic cash system. Although this architecture has revolutionary significance in the field of crypto assets, it has obvious limitations in more complex financial applications such as Decentralized Finance (.

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The Original Design of Bitcoin and Its Limitations in Decentralized Finance

Core Design Elements and Their Limitations:

1. UTXO model: Effective for handling simple transfers, but lacks the flexibility needed to support complex smart contracts.

2. Limited scripting language: the number of executable opcodes is limited, making it difficult to support complex Decentralized Finance applications.

3. Lack of Turing completeness: it is difficult to implement complex smart contracts that rely on state.

4. Block size and transaction speed limitations: The transaction processing speed is far lower than that of other blockchains focused on Decentralized Finance.

These design choices enhance the security and decentralization of Bitcoin, but they also create obstacles for directly implementing DeFi functionalities on the Bitcoin blockchain.

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Early Attempts and Development of Introducing DeFi on Bitcoin

Despite facing limitations, developers are still searching for innovative solutions:

1. Colored coins )2012-2013(: An early attempt to expand the functionality of Bitcoin.

2. Counterparty)2014(: Introduces the ability to create and trade custom assets.

3. Lightning Network ) From 2015 to present (: A second-layer protocol that enhances transaction scalability.

4. Discrete Log Contracts ) DLC ( ) Since 2017: New possibilities for implementing complex financial contracts.

5. Liquid Network ( From 2018 to present ): Sidechain supporting the issuance of crypto assets and more complex transactions.

6. Taproot upgrade (2021): Enhanced the smart contract capabilities of Bitcoin.

These early developments laid the foundation for the expansion of Bitcoin's functionality, demonstrating the potential of the Bitcoin ecosystem.

Key Innovations: Implementing Smart Contracts on Bitcoin

In recent years, several protocols have emerged aimed at introducing smart contract and Decentralized Finance features:

1. Rootstock: The pioneer of Bitcoin smart contracts, compatible with the Ethereum Virtual Machine (EVM).

2. Core: Closely integrated with Bitcoin, compatible with EVM, innovative dual-staking model.

3. Merlin Chain: Integrates ZK-Rollup technology, decentralized oracles, and on-chain anti-fraud modules.

4. BEVM: The first fully decentralized Bitcoin Layer 2 network compatible with EVM.

These protocols not only replicate Ethereum's Decentralized Finance strategies but also leverage Bitcoin's unique characteristics to explore new directions. As of September 8, 2024, the total locked value of Bitcoin's layer two solutions and sidechains reached 1.07 billion USD, growing 5.7 times since the beginning of the year.

The Current Situation of Bitcoin Decentralized Finance

( Main BTCFi projects

1. Pell Network: Cross-chain re-staking protocol that enhances the security of the Bitcoin ecosystem and optimizes returns.

2. Avalon Finance: A multi-chain DeFi platform that offers comprehensive lending and trading services.

3. Colend Protocol: A decentralized lending platform built on the Core blockchain.

4. MoneyOnChain: A comprehensive Decentralized Finance protocol built on Rootstock, issuing the stablecoin DoC.

5. Sovryn: A feature-rich DeFi platform bridging BOB and Rootstock.

6. Solv Protocol: A cutting-edge project in NFT financialization, creating, trading, and managing on-chain certificates.

These projects highlight the rapid development of Bitcoin in the DeFi field. Core occupies a leading position in the Bitcoin DeFi space, with the number of projects accounting for 25.2% of active projects.

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) the key narrative in major BTCFi projects

1. Security and Decentralization First
2. Bitcoin as a programmable Token
3. Interoperability with Ethereum
4. Unlocking the Capital of Bitcoin

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) Ethereum Decentralized Finance VS Bitcoin and native Bitcoin Decentralized Finance

The integration of Bitcoin and the Ethereum DeFi ecosystem is mainly achieved through wrapped assets such as wBTC and renBTC. As of September 8, the amount of BTC locked in Ethereum DeFi protocols is ###15.34 million (, far exceeding the Bitcoin native DeFi ecosystem of )0.897 million ###.

( The development of Ethereum provides insights for Bitcoin and vice versa.

Bitcoin can learn from Ethereum:

1. Product Diversity
2. Developer Ecosystem
3. Interoperability

Ethereum can learn from Bitcoin:

1. Security and Decentralization
2. Simplicity and Robustness
3. Attention to Value Storage

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Challenges and Opportunities

) technical barriers

1. Scalability limitations
2. Interoperability Complexity

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) Regulatory Concerns

Regulatory scrutiny is expected to intensify, especially regarding AML and KYC.

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) Future Opportunities

1. Technological advancements: Improve Layer 2 solutions and develop frameworks with greater scalability and interoperability.
2. Future growth areas: revenue-generating products, DEX, cross-chain liquidity pools, and DeFi products catering to institutional needs.

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Conclusion

The Bitcoin DeFi ecosystem will continue to expand driven by technological advancements and institutional interest. Products that are expected to generate returns, DEXs, and DeFi services aimed at institutions will attract significant attention and funding. However, this growth will also face regulatory and technical challenges. Overall, the future of Bitcoin DeFi is promising, with the potential to have a profound impact on the entire DeFi ecosystem, making Bitcoin a core participant in DeFi.

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