Coinworld reported:
In the past 15 years, Bitcoin has been hailed as “digital gold” and has rightfully earned a reputation as an alternative store of value. But its potential goes far beyond that, and the developments in recent years have sparked a new wave of innovation around the world’s oldest cryptocurrency.
The DeFi revolution, first introduced by Ethereum’s smart contracts, has finally made its way to Bitcoin, which can leverage its unmatched security and over $1.2 trillion of idle capital. With these two advantages, Bitcoin DeFi has become a breeze, leaving its mark on the crypto world with hundreds of exciting new projects, including Bitcoin-based DEXs like Velar Dharma, Bitcoin-centric lending protocols like Sovryn, and native Bitcoin wallets like Xverse.
The Transformation of Bitcoin
Until recently, DeFi on Bitcoin was simply not possible. The infrastructure needed to build decentralized financial applications on the Bitcoin blockchain was nonexistent. That’s why DeFi flourished on Ethereum and later on other blockchains like Solana and Avalanche. The idea of creating a similar ecosystem on Bitcoin was largely dismissed because its blockchain was considered too rigid, and most importantly, it couldn’t support the smart contracts necessary for the wide range of functionalities required by DeFi applications.
But the old Bitcoin is no longer the Bitcoin of today. It has evolved into a very different beast since the introduction of SegWit in 2017. SegWit did two crucial things: it helped alleviate some of Bitcoin’s data limitations, and more importantly, it made the creation of the so-called “second layer networks” possible, such as the Lightning Network, Stacks, and Taproot. With L2, Bitcoin users can process transactions off-chain, increasing speed and reducing costs, and then settle on the super-secure Bitcoin blockchain.
The next important milestone in the development of Bitcoin was the Taproot upgrade. It was launched in November 2021 and paved the way for more complex transactions on Bitcoin, subsequently enabling native smart contracts and decentralized applications. In a research conducted in 2024, Coinmarketcap (CMC) Research and Footprint Analysis discussed how Taproot transformed Bitcoin into something more powerful.
“Through Merklized Alternative Script Trees (MAST), Taproot compresses complex transactions into a hash, reducing transaction fees and minimizing memory usage,” it said in the report. “Although the Taproot upgrade itself is not a DeFi solution, it enhances the smart contract capabilities of Bitcoin, making it easier and more efficient to implement complex transactions and laying the foundation for future DeFi developments.”
It is because of Taproot that Bitcoin developer Casey Rodamor was able to create the Ordinals and Runes protocols, fundamentally changing the utility of Bitcoin. Launched in 2023, Ordinals made it possible to “record” data like images or documents onto the smallest unit of Bitcoin, satoshi, effectively turning them into non-fungible tokens or NFTs on the Bitcoin network.
Meanwhile, Runes allowed for the creation of fungible tokens, equivalent to ERC-20 tokens on Ethereum, resulting in Bitcoin-based alternative cryptocurrencies like Pepe memecoin, Liquid Tether (L-USDT), and Sovryn Dollar (DLLR) stablecoin. Following Rodamor’s effort, the BRC-20 standard was quickly launched in March 2023 by an anonymous developer named Domo.
Bitcoin DeFi Takes Off
The developments mentioned above have sparked a wave of innovation on the Bitcoin network, and the resulting DeFi ecosystem has become one of the fastest-growing areas in the cryptocurrency market, with a total value exceeding $560 million as of October 2024. Developers are working hard to rebuild similar ecosystems that exist on Ethereum, hoping to leverage the immense value Bitcoin holds, representing over 54% of the total capital in the cryptocurrency industry.
With the existence of the Ethereum DeFi space as a framework, developers largely skipped the experimental phase. Hundreds of Bitcoin-native decentralized applications have already been launched, covering various areas from DEXs, stablecoins, and NFTs to lending markets and “real-world assets.”
Velar itself has become one of the largest players in the Bitcoin ecosystem. It has built a comprehensive decentralized trading platform that allows seamless and low-cost exchange of Bitcoin-based tokens. Notably, it pioneered the first-ever Bitcoin-based permanent DEX platform and offers BTC holders a way to put their funds to use by providing liquidity in exchange for a portion of platform transaction fees.
Just in September, Velar had the highest number of active users (28%) in the Stacks ecosystem. Bitcoin users can now do more than just “hodl” their assets.
Peter Watson, Chief Marketing Officer of Velar, believes their commitment to the community is how they create real value and become the leading protocol on the Stacks Network. “Our uniqueness lies in the fact that our core team comes from the community itself. We have always stood in their shoes, understood their challenges, and shared the same vision for the ecosystem. This unique perspective drives us to build purposefully and precisely. Everything we create is for the long-term benefit of the community, ensuring that the ecosystem not only thrives but evolves in meaningful ways.”
Other notable decentralized applications in the Bitcoin ecosystem include Sovryn and Gamma. Sovryn is a DeFi protocol hosted on Rootstock, supporting token swaps, lending, and staking. Gamma has become the largest marketplace for Ordinals and Bitcoin-based NFTs issued on the Stacks network.
Furthermore, the Bitcoin ecosystem now boasts innovative wallets like Xverse, designed to provide a user-friendly interface for interacting with the emerging Bitcoin ecosystem. It allows users to directly exchange digital assets within the wallet, enabling them to purchase meme coins, utility coins, NFTs, and collateralize their tokens, among other features.
Accelerating DeFi Adoption
The appearance and feel of the aforementioned dApps bear a striking resemblance to their Ethereum-based counterparts, and their rapid growth in popularity demonstrates how Bitcoin DeFi is well-prepared for success. They also help explain the sudden surge in institutional interest in Bitcoin, which contributed to its significant value increase earlier this year.
While some Bitcoin maximalists and cypherpunks are still not keen on the idea of traditional financial institutions getting involved in cryptocurrencies, the massive capital within TradFi will greatly accelerate the mainstream adoption of Bitcoin.
Bitcoin DeFi has opened the door of opportunity, but it still faces many of the same challenges that limit its adoption on Ethereum and other blockchains. One of the most important ones is user experience. For many new investors, entering the world of cryptocurrencies, especially DeFi, remains an intimidating experience. Fortunately, Bitcoin developers have started to focus on accessibility, breaking down barriers to adoption.
For example, the recent collaboration between Velar Dharma and Xverse provides a more seamless way for users to explore the Bitcoin ecosystem. With Xverse, users can now directly convert their BTC into a wide range of Bitcoin assets, including stablecoins, meme coins, and utility tokens, with over 60 trading pairs available at launch. The wallet utilizes Dharma’s multi-hop technology to achieve instant, near-real-time exchanges. As a result, anyone holding BTC can easily access the increasingly stable digital assets of Bitcoin.
Beyond Digital Gold
With more capital flowing into the Bitcoin DeFi ecosystem, it provides entrepreneurs with a bigger channel to fund and explore their innovative ideas. One of the most anticipated changes is the Nakamoto upgrade on Stacks, aimed at increasing transaction throughput with enhanced finality guarantees and further solidifying Bitcoin’s position as a reliable DeFi protocol.
Thakore states, “The expansion of the Bitcoin ecosystem proves that Bitcoin is more than just digital gold and a store of value. Bitcoin can power DeFi, it can power NFTs, and it can serve as the foundation for many other emerging decentralized applications.”
The evolution of Bitcoin will naturally have a significant impact on the wider DeFi industry. If DeFi is to achieve its goal of widespread adoption, it needs to be built on a solid foundation. And nothing compares to the industry-leading security, immense liquidity, and mainstream appeal that Bitcoin already possesses.