Since decentralized finance (defi) first exploded in 2020, most defi projects have been built on the ethereum blockchain.
bitcoin holders who want to access defi often choose to use wrapped versions of bitcoin like wbtc. this has allowed them to use tokens pegged 1:1 to bitcoin.
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but in 2021 and 2022 there have been big changes in the world of defi. not only have potential “ethereum killers” like solana taken market share away from ethereum, but there has been increasing growth and viability for defi projects built around the bitcoin blockchain itself.
what is defi?
defi products are tools built predominantly on ethereum that aim to revolutionize and replace current lending, borrowing, and banking methods. defi has also spawned relatively new concepts such as yield farming.
defi’s goal is to make the world of finance available to everyone, or at least anyone with an internet connection.
what does bitcoin have to do with defi?
most defi platforms are still based on smart contract platforms like ethereum. but there are plenty of people who own bitcoin who also want to get involved. this has led to the creation of a range of solutions to help bitcoin holders invest in defi.
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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 where it is implemented.
bitcoin defi built 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 erc-20 token (wbtc) 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 against wbtc to borrow stablecoins using a platform like makerdao. those stablecoins can be reinvested in the defi ecosystem. this strategy carries the risk that the wbtc used as collateral could be liquidated.
bitcoin defi built on stacks:
stacks, like bitcoin, is an independent layer 1 blockchain. Bitcoin stacks and networks are connected through a process called proof of transfer. To mine stacks, miners must send bitcoins to the bitcoin network. multiple transactions on the stack network can correspond to one transaction on the bitcoin network.
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A range of defi applications are possible on the stacks blockchain, from “stacking” the stacks token to earn bitcoin rewards, to exploring decentralized applications (dapps) that offer familiar defi strategies such as staking and yield farming.
bitcoin defi built on rootstock (rsk):
the rsk blockchain works as a sidechain of 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 price of bitcoin (btc). Since the rsk blockchain is a bitcoin sidechain, there is a two-way peg between rbtc and btc, and the two assets can be sent interchangeably between the two blockchain networks.
using bitcoin defi to generate passive income
why would anyone want to put their bitcoin into 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 risk, can potentially unlock passive income on top of that store of value.
what are some bitcoin defi projects?
- wrapped bitcoin (wbtc) – an erc-20 token on the ethereum blockchain pegged 1:1 to the price of bitcoin and backed by an equivalent amount of bitcoin stored in a digital vault. Originally started by bitgo, ren and kyber, wbtc is now maintained and managed by wbtc dao.
- ren vm – a network that allows cryptocurrencies, including bitcoin, to be wrapped and sent to other chains using the renbridge.
- rsk (rootstock): a smart contract blockchain that works as a bitcoin sidechain and is compatible with various defi platforms.
- badgerdao : A decentralized autonomous organization (dao) that provides solutions for using bitcoin in the defi ecosystem, badgerdao was the victim of a $120 million hack in late 2021.
- stacks – an independent layer 1 blockchain linked to the bitcoin network and compatible with a range of dapps.
what is the future of bitcoin defi?
As of May 2022, nearly $9 billion worth of bitcoins were locked in wrapped bitcoins (wbtc). that’s more than a market capitalization of just over $4 million (not a billion) dollars in early 2020.
while wbtc rise is just one metric showing an increase in bitcoin holdings flowing into defi, there are now a growing number of avenues bitcoin holders can use. Which bitcoin defi platforms and protocols are most successful will depend on their long-term security and durability, as well as the rewards offered to investors.
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