https://twitter.com/th_sat/status/1500326665670443011?s=12
by Zhong Yang Chan - February 25, 2022
A version of this presentation was first presented at the Stacks Foundation’s Bitcoin Innovation Virtual Summit on 24 February 2022. You can watch a replay of the event on YouTube here.
Bitcoin is the granddaddy of all blockchains, and was built to be a “purely peer-to-peer version of electronic cash (that) would allow online payments to be sent directly from one party to another without going through a financial institution”. Thus far, Bitcoin has proven to be pretty resilient, and with the introduction of the Lightning Network, is also starting to scale to become viable for micro-transactions as well.
However, payments should just serve as the starting point, and there are many other tradfi verticals left to conquer. The advent of smart contracts, particularly on Ethereum, has enabled an entirely new world of decentralized finance (or DeFi for short) to be built and deployed, allowing crypto users access to other financial service verticals directly on-chain, in a permissionless and trustless manner, the same way payments on Bitcoin are executed.
While other chains may have taken the lead in terms of DeFi development, the Bitcoin community has also not been resting on its laurels and have ploughed ahead with implementing DeFi dApps on the blockchain. We took a dive into this budding ecosystem and here are some of the key takeaways.
Since its inception, the Bitcoin blockchain was built for peer-to-peer payments, and not much else. Early development of Bitcoin was really centered on how the chain could become more stable, secure, and scale with a growing userbase (anybody remembers the blocksize wars?). This meant that the Bitcoin blockchain itself was not meant to be a platform for smart contracts and dApps. While this could change with the implementation of the Taproot upgrade deployed late 2021, for now, smart contract functionality for the Bitcoin blockchain had to come via sidechains / Layer 2 solutions.
From the diagram above, you could see that each Bitcoin sidechain / Layer 2 has chosen a slightly different technical implementation. Each has its own upsides and downsides, and there isn’t a perfect solution. Of note, Liquid Network and Lightning Network were also early scaling solutions for Bitcoin, and probably don’t offer such rich programming possibilities compared to the rest of the 3 (RSK, DeFiChain and Stacks). Nonetheless, that hasn’t stopped people from trying.
Thus far, we could probably say that the Bitcoin DeFi ecosystem is still in its initial phase, judging from the projects which are live. DEXes, stablecoins, lending protocols and oracles are mandatory starting points for any DeFi ecosystem, as they form the basis for other DeFi primitives to be built. For example, there is no need for yield aggregators if there are no liquidity mining incentives on DEXes and lending protocols, and no need for insurance if there isn’t potential liquidations from lending protocols.
While gaps still exist, the ecosystem is starting to branch out into more advanced DeFi verticals such as derivatives. Cynics will say these have all been done before, but the Bitcoin ecosystem can really take onboard lessons on what works and what didn’t on other chains. Designing tokenomics for DeFi protocols is still an evolving field, and it doesn’t hurt to have a nice roadmap laid out with potholes to avoid. Since Bitcoin’s mantra has been steady and secure since the start, having sound, non-scammy DeFi projects would enhance the confidence of users in its ecosystem.
Finally, it’s probably important to point out that while we’re focused on the DeFi ecosystem, there are also other cool and interesting projects being deployed on Bitcoin sidechains and Layer 2s. Projects such as CityCoins, Bitcoin NFTs, cross-chain bridges, are equally exciting and serve to further enrich the overall Bitcoin ecosystem.
Note: The data excludes TVL from staking governance tokens, e.g. the staking of STX for governance rewards. Charts areas which are shaded represent an estimate and not actual data.