The Rise of BTCFi: Bitcoin's New Role in the DeFi Space

Bitcoin's role in Decentralized Finance ( DeFi ) is undergoing significant changes. From its initial use as a peer-to-peer transfer tool, Bitcoin is gradually becoming a powerful force in the DeFi space, starting to challenge Ethereum's dominance.

By analyzing on-chain data, we found that the combination of BTCFi( Bitcoin and Decentralized Finance is not only a technological shift but may also trigger a paradigm shift in the role of Bitcoin in DeFi. This shift could redefine the landscape of the entire DeFi sector.

The Rise of BTCFi

In 2008, Satoshi Nakamoto introduced Bitcoin, initially designed as a peer-to-peer electronic cash system. Although this architecture has revolutionary significance, it has limitations in complex financial applications.

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The Original Design of Bitcoin and Its Limitations

Core design elements and limitations of Bitcoin:

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

2. Limited scripting language: The restricted design avoids security vulnerabilities, but hinders the support for complex Decentralized Finance applications.

3. Lack of Turing completeness: It is difficult to implement complex smart contracts that depend 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 decentralization, also hinder the direct implementation of DeFi functions on Bitcoin.

Early Attempts to Introduce DeFi on Bitcoin

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

1. Colored coin )2012-2013(: early attempts to expand Bitcoin functionality.

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

3. Lightning Network ) Since 2015 (: A Layer 2 protocol to enhance transaction scalability.

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

5. Liquid Network ( 2018 to present ): a sidechain that supports the issuance of crypto assets and 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, showcasing the potential of the Bitcoin ecosystem.

Key Innovations: Implementing Smart Contracts on Bitcoin

In recent years, multiple protocols have aimed to introduce smart contracts and Decentralized Finance features for Bitcoin:

1. Rootstock: A pioneer of Bitcoin smart contracts, supports dual mining, and is EVM compatible.

2. Core: An innovative dual-staking model that transforms Bitcoin into a yield-bearing asset.

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

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

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's Layer 2 solutions and sidechains reached $1.07 billion, increasing 5.7 times from January 1, 2024, and 18.4 times from January 1, 2023.

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

The Current State of Bitcoin DeFi

( Main BTCFi projects

1. Pell Network) Multi-chain(: Cross-chain re-staking protocol, enhancing the security of the Bitcoin ecosystem and optimizing yields.

2. Avalon Finance) Multi-chain(: Provides comprehensive borrowing and trading services.

3. Colend Protocol)Core(: A decentralized lending platform that utilizes Core's dual staking model.

4. MoneyOnChain)Rootstock(: A comprehensive Decentralized Finance protocol that issues the stablecoin Dollar on Chain)DoC###.

5. Sovryn( Multi-chain ): A feature-rich Decentralized Finance platform that offers trading, borrowing, and earning services.

6. Solv Protocol(Merlin Chain): NFT financialization platform, creating, trading, and managing on-chain credentials.

Core occupies a leading position in the Bitcoin DeFi space, accounting for 25.2% of active projects. Rootstock and Bitlayer each support 13.0% of projects, 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.

( Key narratives in the BTCFi project

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

Comparison and analysis of ) and Ethereum DeFi

As of September 8, the amount of BTC locked in Ethereum Decentralized Finance protocols is 153,400, far exceeding the 8,970 in the native Bitcoin DeFi ecosystem. The scale of native Bitcoin DeFi projects is relatively small, but they operate within Bitcoin's own security framework, avoiding many risks associated with cross-chain transfers.

The Development of Ethereum and Its Insights 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

Challenges and Opportunities

Technical barriers:

• Scalability
• Interoperability

Regulatory concerns:

• AML and KYC compliance

Future Opportunities:

• Improve Layer 2 solutions
• Develop a more scalable and interoperable framework
• Secret log contract ( DLCs ) and advancements in privacy protection technology

Future Growth Area Predictions:

• Income-generating products
• DEX and cross-chain liquidity pools
• DeFi products tailored for institutional needs

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Conclusion

The Bitcoin DeFi ecosystem will continue to expand with the driving forces of technological advancements and institutional interest. Developing more scalable Layer 2 solutions, enhancing interoperability, and launching more complex financial products are crucial. Products expected to generate returns, DEXs, and institutional-focused DeFi services will attract significant attention and funding.

However, this growth will also face regulatory and technical challenges. Addressing these issues is crucial for maintaining the growth momentum of Bitcoin DeFi and ensuring its long-term success.

In summary, the future of Bitcoin DeFi is promising, with abundant opportunities for innovation and growth. It has the potential to have a profound impact on the entire DeFi ecosystem, making Bitcoin a key player in DeFi.