What Does the Bitcoin DeFi Ecosystem Look Like? - Bitfinex blog
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What Does the Bitcoin DeFi Ecosystem Look Like?

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.

Bitcoin’s Smart Contract Platforms

Since Bitcoin’s base layer doesn’t allow for complex smart contracts (it does allow for limited scripting), all of its Web3-style smart contracts are made possible by platforms built on top of Bitcoin, or parallel to it. Let’s take a look!

RSK

RSK, formerly known as Rootstock, is a merge-mined Bitcoin sidechain which has full Turing-complete smart contracts and EVM compatibility for Bitcoin. RSK’s native coin is RBTC, which is created through RSK’s 1:1 built-in two-way peg. When a user deposits BTC, an equivalent amount of RBTC is created on the RSK sidechain. The process is reversed to withdraw funds from RSK. Projects on RSK include Sovryn, Tropykus Finance, Money On Chain, and Liquality Wallet.

Liquid

Liquid is Blockstream’s federated Bitcoin sidechain. Liquid’s native token is LBTC, which is created in a similar two-way peg mechanism as RSK’s RBTC. Liquid provides the tools for asset issuance, decentralised trades, swaps, and order books, confidential transactions which are backed by Bitcoin. Liquid lets users create, mint, and issue tokens, stablecoins, NFTs, and security tokens, which can be traded permissionless, via P2P.

Stacks

Stacks is an open DApp and smart contract layer for Bitcoin, which is its own blockchain that leverages a mechanism known as Proof of Transfer (PoT). PoT uses Bitcoin’s Proof of Work (PoW), to secure the Stacks blockchain. Stacks also utilises PoT in its pegging mechanism. Stacks brings DApps, NFTs, and DeFi to Bitcoin, and has a thriving community and ecosystem with more than 90 DApps in operation. 

Mintlayer

Mintlayer is a Bitcoin sidechain that utilises Dynamic Slot Allocation (DSA) consensus that merges Proof of Stake (PoS) and Bitcoin’s PoW mined blocks. Mintlayer is a PoS chain that allows for smart contracts, asset issuance, its own tokenisation standard, Lightning Network compatibility, and confidential transactions. Mintlayer will be highly scalable and let users mint stablecoins, tokenised securities, NFTs, and tokens, which can be traded and settled instantly via its Lightning Network-compatible DEX. Cross-blockchain transfers, several token transaction grouping or even peg-in/out will also be made possible under the protocol.

RGB

RGB is a smart contract layer and off-chain protocol built on the Bitcoin blockchain, which allows for the minting and issuing of Bitcoin-based digital assets. With RGB, users will be able to issue stablecoins, tokens, NFTs, and create client-validated confidential smart contracts on Bitcoin. RGB leverages Bitcoin’s Unspent Transaction Outputs (UTXOs) as single-use seals, which take advantage of Bitcoin’s double-spending protection and censorship resistance without any trust compromise. RGB has full Lightning Network compatibility for instant settlement and scalability.

Counterparty

Counterparty is the first and oldest smart contract platform available for Bitcoin, started in 2014. Its native token is XCP which was created by burning Bitcoin. Counterparty lets users create tokens, NFTs, Stablecoins, allows for crowdfunding and voting, and it is compatible with multi-sig addresses. Counterparty’s popularity has waned in the years after its launch, but it has seen a resurgence in popularity with the advent of Ordinals, Inscriptions, and Stamps on Bitcoin, this year.

Omni Layer & Omni Bolt

Omni Layer is a smart contract layer and asset issuance platform for Bitcoin which is almost as old as Counterparty and which also launched in 2014. Omni Layer lets users mint and issue tokens, stablecoins, NFTs, and has a decentralised exchange. Omni was the original blockchain on which Tether (USDt) was launched. Omni Bolt is an upgrade to Omni which adds Lightning Network payment channel compatibility to Omni. This makes it possible to trade Omni tokens instantly and cheaply, with a high degree of scalability, through the Omni Lightning Network’s bidirectional payment channels.

Unorthodox Methods for Creating & Issuing Tokens on Bitcoin

Chaumian eCash as a Method for Tokenization on Bitcoin

Another less discussed means for tokenisation and asset issuance on Bitcoin could be made possible by Chaumian eCash mint operators acting as de facto Bitcoin banks, and issuing Bitcoin-backed currencies, tokens, and stablecoins with cash-like privacy, and Lightning-like transaction speed, scalability and settlement speed. 

While eCash implementations like Cashu, and Fedi are still in the early stages of development, and still only custodial, the community has already been experimenting with the different use cases surrounding private and fungible Bitcoin-backed tokenised assets. Ongoing research and development are taking place in the eCash world, with crucial breakthroughs still being worked on, like the ability on Cashu, to audit a Chaumian ecash mint’s Bitcoin reserves, which was recently announced.

Ordinals & Inscriptions

Ordinals and Inscriptions have been a semi-controversial way to create NFTs on Bitcoin, which are inscribed on to single Satoshis, or Sats, the smallest unit of Bitcoin. There are 100 million Satoshis in a single Bitcoin. Ordinals give Satoshis numismatic value, and allow them to be “inscribed” with arbitrary content, creating unique Bitcoin-native digital artefacts which can be collected and traded. Ordinals data is stored on-chain, but the way the data is stored makes it possible to prune, if so desired.

BRC-20 Tokens

BRC-20 tokens take Ordinal Inscriptions one step further. While Ordinals inscribe a serial number onto a Satoshi, BRC-20 tokens inscribe JSON (JavaScript Object Notation) ordinals inscriptions onto a Satoshi creating a rudimentary and primitive token contract to issue the tokens. BRC-20 token issuance has a fixed supply. BRC-20 tokens have limitations in comparison to other tokenisation schemes.

ORC-20 Tokens

ORC-20 tokens are an improvement upon the method of creating tokens as BRC-20 tokens. ORC-20 tokens also leverage Segwit witness data and JSON, and the tokens themselves also have a few advanced capabilities over BRC-20 tokens. ORC-20 tokens also have the ability to be minted with a flexible supply, and re-use the “mint” to send ORC-20 tokens within a transaction, thus saving blockspace.

Stamps & SRC-20 Tokens

Stamps and SRC-20 tokens are similar in nature to Ordinal Inscriptions and BRC-20 tokens in that they both take advantage of the Bitcoin blockchain to insert arbitrary data blobs to create native Bitcoin digital artefacts. Stamps differ from Inscriptions in that they cannot be pruned from Bitcoin’s on-chain data. SRC-20 tokens also differ from Ordinals-based BRC-20 tokens in the sense that they do not utilise Segwit witness data, they are a multi-signature transaction with SRC-20 token data included in the other key’s space for signature data.

Rollkit Sovereign Rollups

Rollkit allows for Sovereign Rollups using Bitcoin for data availability. As an added bonus, Sovereign Rollups increase the possibilities for rollups in general, and make it possible to run the EVM on Bitcoin as a Rollkit sovereign rollup. This means that developers can now create rollups with arbitrary execution environments which benefit wholly from Bitcoin’s on-chain security. Sovereign Rollups make it possible to launch a sovereign chain that inherits the data availability and consensus, and security guarantees of Bitcoin’s layer one blockchain.

Decentralised Finance on Bitcoin: The Best Bitcoin DApps

Atomic.Finance

Atomic Finance is a P2P decentralised lending platform for Bitcoin which lets users lend or borrow against their Bitcoin by leveraging Bitcoin’s native smart contracts, known as Discrete Log Contracts (DLCs). Users can borrow popular stablecoins and tokens using Bitcoin as collateral or lend their Bitcoin at interest to earn a return, in a trust-minimised way. Atomic Finance is a new DeFi offering for Bitcoin, but interested users can already use it on iOS or sign up for the waiting list for Android, to gain early access to the lending platform.

Bisq Network

Bisq is a DEX for P2P trading, which lets users trade Bitcoin for national fiat currencies and other cryptocurrencies, in a private and trust-minimised way. Bisq is a free and open-source software project which is run by a Decentralised Autonomous Organization (DAO), which compensates contributors and allows BSQ token (Bisq’s native token, which is a coloured coin on BTC) holders to vote on proposals and features. BSQ allows contributors to earn BSQ, which can be sold to Bisq’s traders for BTC, which traders are incentivised to do, as BSQ allows for heavily discounted trading fees. Bisq is a totally autonomous project, directed totally under its DAO.

Liquality Wallet

Liquality wallet is a free and open-source multichain Web3 wallet for DApps which supports BTC, ETH, MATIC, NEAR, and RSK. Liquality is a non-custodial wallet which allows for trustless trading via DEXs, Relays, and cross-chain Atomic swaps. Liquality also has NFT and multi-chain support which lets users trade and swap 10,000+ Assets across 10+ Chains.

Money On Chain

Money On Chain is an RSK-based Bitcoin (RBTC) collateralised, dollar-denominated and price-pegged stablecoin, known as DOC, along with a secondary investment token, called BPro which allows users to HODL Bitcoin with a little bit of additional leverage. Within the Money On Chain ecosystem, there is also the MOC token which is a governance token of the Money On Chain DAO, which grants holders the rights to governance and allows them to stake for passive income.

Peach Bitcoin

Peach Bitcoin is a P2P Bitcoin trading platform which lets users acquire KYC-free Satoshis using cash, and a variety of popular payment methods. Peach is a platform which simply connects Bitcoin users and provides a multisig escrow system, so that users can trustlessly trade non-custodial Bitcoin. Peach provides a simple and easy way to privately acquire Bitcoin directly from other Bitcoiners, without compromising sensitive personal information.

RoboSats

RoboSats is a Lightning Network-based P2P Bitcoin trading platform similar in nature to Peach Bitcoin, although RoboSats has an even more privacy-focused platform for executing P2P trades. RoboSats utilises the Tor network by default for user privacy and also implements Lightning Network compatibility for instant trades. RoboSats lets users trade non-custodial Bitcoin for national fiat currencies with the best privacy practices to ensure user safety and data protection. It is not advised to use RoboSats via clearnet, and users are encouraged instead to use the Tor Onion site for the platform.

Sovryn

Sovryn is an RSK-based DeFi platform for Bitcoin which offers decentralised lending and borrowing, a USD-denominated Stablecoin and allows users to trade and earn passive income. By using the Sovryn app, users can enjoy 0% P2P loans and earn up to 5% to 100% APR by providing Liquidity to Sovryn’s Stability Pool. Sovryn takes advantage of over-collateralising its loans with Bitcoin to ensure that loans are repaid.

Tropykus Finance

Tropykus Finance is a DeFi platform designed specifically to meet the needs of Latin American users. Tropykus allows users to access Bitcoin and Dollar-denominated Stablecoins (DOC and XUSD) as savings vehicles, which is important in a region with weak fiat currencies. Tropykus also provides very cheap decentralised lending and borrowing services for users, allowing them to access credit in a P2P decentralised loan. 

10101 Finance

10101 (“Ten-Ten-One”) Finance, is a Lightning Network-first P2P trading platform and wallet app for trustlessly trading non-custodial Bitcoin. 10101 leverages DLCs to facilitate instant trades between the platform’s users. Users can also connect 10101 to their own node for additional privacy. 10101 is a new platform that aims to provide a true trustless and decentralised trading experience for Lightning Network and Bitcoin.