The Rise of BTCFi: The Role of Bitcoin in Decentralized Finance

Bitcoin is undergoing significant transformation in the field of Decentralized Finance ( DeFi ). From its initial role as a peer-to-peer transfer tool, Bitcoin is gradually becoming an important force in DeFi, beginning to challenge Ethereum's dominance.

By analyzing on-chain data, we can clearly see that the combination of BTCFi( Bitcoin and Decentralized Finance not only represents a technological revolution but may also trigger a paradigm shift in Bitcoin's role within DeFi. This shift could redefine the entire DeFi landscape.

The Rise of BTCFi

In 2008, Satoshi Nakamoto created Bitcoin with the intention of establishing a peer-to-peer electronic cash system. Although this architecture has revolutionary significance in the field of crypto assets, it has limitations in complex financial applications such as Decentralized Finance.

) The original design of Bitcoin and its limitations in Decentralized Finance.

Core design elements and their limitations:

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

2. Limited scripting language: Restricted to avoid security vulnerabilities, hindering support for 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 limits: The transaction processing speed is far lower than other blockchains focused on Decentralized Finance.

These designs, while enhancing security and the degree of decentralization, also hinder the direct implementation of Decentralized Finance functions on the Bitcoin blockchain.

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) the early attempts and development of introducing DeFi on Bitcoin

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 ) Since 2015 (: A second-layer protocol that enhances transaction scalability.

4. Discrete Log Contracts ) DLC ( ) Since 2017: The possibility of implementing complex financial contracts.

5. Liquid Network ( Since 2018: Supports the issuance of crypto assets and complex Bitcoin transactions.

6. Taproot Upgrade )2021(: Enhancing Bitcoin smart contract capabilities.

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

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Key Innovation: Implementing Smart Contracts on Bitcoin

In recent years, multiple protocols have been dedicated to introducing smart contracts and Decentralized Finance features for Bitcoin:

1. Rootstock: the pioneer of Bitcoin smart contracts and the longest-running Bitcoin sidechain.

2. Core: A blockchain closely integrated with Bitcoin and compatible with EVM.

3. Merlin Chain: A Bitcoin Layer 2 network integrated with ZK-Rollup technology.

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

The key innovations of these protocols include:

• Tokenized Bitcoin assets
• Smart contracts and EVM compatibility
• Yield-bearing Bitcoin
• Scalability and privacy enhancement

As of September 8, 2024, the total locked value of Bitcoin Layer 2 solutions and sidechains )TVL( reached 1.07 billion USD, growing 5.7 times since January 1, 2024, and 18.4 times since January 1, 2023.

Core leads with a TVL of 27.6%, followed by Bitlayer)25.6%(, Rootstock)13.8%(, and Merlin Chain)11.0%(.

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The Current Status of Bitcoin DeFi

) main BTCFi project

1. Pell Network: Cross-chain Re-staking Protocol

2. Avalon Finance: Multi-chain Decentralized Finance platform

3. Colend Protocol: Decentralized Lending Platform

4. MoneyOnChain: Comprehensive Decentralized Finance Protocol

5. Sovryn: A feature-rich Decentralized Finance platform

6. Solv Protocol: Frontier of NFT Finance

As of September 8, 2024, Core leads the Bitcoin DeFi space, accounting for 25.2% of active projects. Rootstock and Bitlayer each account for 13.0%, while Merlin Chain accounts for 9.9%.

Pell Network has become a leading DeFi project with a TVL of $260.8 million, followed by Avalon Finance with $206.2 million and Colend Protocol with $115.5 million.

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) Key narratives in major BTCFi projects

• Security and decentralization first
• Bitcoin as a programmable Token
• Interoperability with Ethereum
• Unlocking the capital of Bitcoin

( comparison analysis with Ethereum Decentralized Finance

As of September 8, the amount of BTC locked in Ethereum DeFi protocols is 153,400, far exceeding the 8,970 in the native Bitcoin DeFi ecosystem.

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The Insights of Ethereum's Development for Bitcoin and Vice Versa

Bitcoin can learn from Ethereum:

• Product diversity
• Developer Ecosystem
• Interoperability

Ethereum can learn from Bitcoin:

• Security and Decentralization
• Simplicity and robustness
• Focus on value storage

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Challenges and Opportunities

Technical barriers:

• Scalability
• Interoperability

Regulatory concerns:

• AML and KYC Compliance

Future Opportunities:

• Layer 2 solutions improvement
• Advances in privacy protection technology
• Development of yield-generating products, DEX, and cross-chain liquidity pools
• The demand for DeFi products aimed at institutions is increasing

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Conclusion

The Bitcoin DeFi ecosystem is expected to continue expanding driven by technological advancements and institutional interest. The key lies in developing scalable Layer 2 solutions, enhancing interoperability, and launching complex financial products. Yield-generating products, DEXs, and institutional-grade DeFi services may attract significant attention and capital.

However, responding to changes in the regulatory environment and overcoming technical challenges remain a challenge. Solving these issues is crucial for maintaining growth momentum and long-term success.

Overall, the future of Bitcoin DeFi is bright, containing rich innovation and growth opportunities. As the ecosystem evolves, it is expected to have a profound impact on the entire DeFi ecosystem, making Bitcoin a core participant in DeFi.

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