Bitcoin in DeFi: An Introduction
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Bitcoin in DeFi: An Introduction
@serkhitrovSergei Khitrov
Entrepreneur, Listing.Help Agency Founder and CEO
Bitcoin is still king in the cryptocurrency sphere. It is eloquently demonstrated by the dominance index and the recently updated ATH. However, the past year has shown that it is now possible to earn in the cryptocurrency sphere by investing in an asset and using it in the DeFi ecosystem. And what is about Bitcoin?
Bitcoin and DeFi
Let's define right away that bitcoin itself does not currently have a DeFi ecosystem like Ethereum, Solana and BSC. Bitcoin can even do smart contracts, but it can’t do loops by design (perhaps the Blockstack solution can help us with that).
As a result, the two largest areas in cryptocurrency, bitcoin and DeFi are often perceived as separate, as the vast majority of DeFi applications and protocols run on Ethereum and BSC blockchains. However, as we've seen bitcoin grow, so has the demand for its ability to interact with DeFi. Fortunately, several convenient and affordable entry points into the DeFi marketplace for bitcoin investors and HODLers.
How can I use Bitcoin in DeFi?
One of the most common ways to use bitcoin in DeFi is through wrapped tokens and bitcoin tokenization.
The leading type of bitcoin tokenization is Wrapped Bitcoin (WBTC), launched in 2019 to allow bitcoin to participate in the Ethereum blockchain. WBTC is also the first ERC-20 token that is secured 1:1 with Bitcoin. This allows decentralized applications on the Ethereum network to integrate Bitcoin in tokenized form. This is made possible by the liquidity of ERC-20 tokens, which allows interaction with Bitcoin in the DeFi space.
In the case of WBTC, bitcoin owners transfer their cryptocurrency to a custodian, BitGo, a digital asset trust company. BitGo collaborates with several market makers and mines WBTC on the Ethereum blockchain. This process is reversible - just send WBTC back to BitGo, where the token is "burned," and the BTC amount is provided back.
Another type of token that combines Bitcoin and DeFi is hashrate tokens. This type of token, such as BTCST, is a bitcoin wrapper, but unlike WBTC, there is no custodian because all transactions are decentralized to Binance Smart Chain.
BTCST is issued by Standard Hashrate Group and is backed by bitcoin hashrate (BTC), with each token representing 0.1 TH/s of bitcoin mining power at 60 W/TH efficiency. In addition, BTCST can be steamed and receive daily rewards in the form of bitcoin. In this way, BTCST allows users to mine bitcoin within the decentralized finance (DeFi) ecosystem.
Bitcoin-DeFi transactions
Some of the most popular ways to interact with DeFi are margin lending and cryptocurrency stacking. This method is becoming increasingly popular for bitcoin holders as it helps them earn income on their BTC assets.
Earning bitcoin in a decentralized financial market is more difficult than depositing bitcoin into a centralized credit application such as BlockFi or Nexo. To earn bitcoin in DeFi, bitcoin owners must either tokenize their BTC or buy already tokenized bitcoin on decentralized exchanges (DEX) like Pancake Swap or Uniswap.
Users can deposit their WBTC into decentralized liquidity pools to profit from liquidity mining on Curve Finance or Harvest Finance platforms.
Another popular transaction in the DeFi segment is lending. Loans in DeFi are issued in the form of smart contracts, which provide full transparency of transactions. Aave and Cream are among the most popular cryptocurrency projects. At the same time, they provide opportunities in bitcoin lending.
Bitcoin's prospects in DeFi
The prospect of more widespread decentralized financial protocols is quite enticing. If we add the ability to freely trade bitcoin on other blockchain platforms with more "wrapped" bitcoin assets, the total value locked in by both Bitcoin and DeFi will reach new heights.
By adding additional liquidity to bitcoin, other use-cases for cryptocurrencies emerge. In addition, the concept of decentralized finance can greatly expand Bitcoin's existing capabilities, allowing for simplified swaps and stacking capabilities through wrapped tokens. But these everyday DeFi activities are nearly impossible in the modern state of Bitcoin.
An important factor for a successful and enduring DeFi and Bitcoin merge is awareness. The more users in this space know that the two concepts are compatible and can be used in tandem, the more they will use existing platforms that help bring bitcoin to DeFi.
The days when Bitcoin and DeFi were considered two separate entities are gone. There are many new and emerging technologies in this space that help bridge the gap between the two. The more people realize the benefits, the more opportunities there are to develop both. For example, people are creating protocols to bring bitcoin to Ethereum-based DeFi - because the opportunity to capitalize on the new technology and increase the liquidity of existing assets is driving the community.
Having more decentralized protocols in the cryptocurrency space will make a significant shift. The more technologies and products that allow bitcoin and DeFi to interact, the more unprecedented the future of both fields will be.
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