Reported by Coin World:
In the past 15 years, Bitcoin has been dubbed “digital gold” and has earned a well-deserved reputation as an alternative store of value. But its potential goes far beyond that, and the developments of the past few 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 come to Bitcoin, which can leverage its unmatched security and over $1.2 trillion in idle capital. With just these two advantages, Bitcoin DeFi has become a breeze, and it has already made its mark in 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 simply did not exist. This is 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, crucially, it lacked the smart contracts necessary to enable the wide range of functionalities required for DeFi applications.
But the old Bitcoin is no longer the Bitcoin of today. It has evolved into a very different beast. It all started with the introduction of SegWit in 2017. SegWit did two key things: it helped alleviate some of Bitcoin’s data limitations, and, more importantly, it enabled the creation of the so-called “second layer networks,” such as the Lightning Network, Stacks, and Taproot. With L2, Bitcoin users are able to process transactions off-chain, improving speed and lowering costs, and then settle on the super-secure Bitcoin blockchain.
The next significant milestone in Bitcoin’s development was the Taproot upgrade. Introduced in November 2021, it paved the way for more complex transactions on Bitcoin, subsequently enabling Bitcoin-native smart contracts and decentralized applications. In a study in 2024, Coinmarketcap (CMC) Research and Footprint Analysis discussed how Taproot transforms Bitcoin into something more powerful.
“Through Merklized Alternative Script Trees (MAST), Taproot compresses complex transactions into a single hash, reducing transaction fees and minimizing memory usage,” it said in the report. “While Taproot upgrade itself is not a DeFi solution, it enhances Bitcoin’s smart contract capabilities, 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 such as 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 allows for the creation of fungible tokens, equivalent to ERC-20 tokens on Ethereum, giving rise to Bitcoin-based alternative cryptocurrencies like Pepe memecoin, Liquid Tether (L-USDT), and Sovryn Dollar (DLLR) stablecoin. Following Rodamor’s efforts, the BRC-20 standard was soon launched in March 2023 by an anonymous developer named Domo.
Bitcoin DeFi Takes Off
These developments 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 to rebuild similar ecosystems that exist on Ethereum, hoping to leverage the tremendous value Bitcoin represents, which accounts for 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 for seamless and low-cost exchange of Bitcoin-based tokens. Notably, it pioneered the first-ever Bitcoin-based perpetual DEX platform and provides BTC holders with a way to put their funds to use by providing liquidity in exchange for a portion of platform trading fees.
In September alone, Velar had the most active users (28%) in the Stacks ecosystem. Finally, Bitcoin users can do more than just “hodl” their assets.
Peter Watson, Chief Marketing Officer of Velar, believes that their commitment to the community is how they create real value and become the leading protocol on the Stacks Network. “Our uniqueness lies in having our core team come from the community itself. We have stood in their shoes, understood their challenges, and shared the same vision for the ecosystem. This unique perspective has driven 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 significant ways,” he said.
Other notable decentralized applications in the Bitcoin ecosystem include Sovryn and Gamma. Sovryn is a DeFi protocol hosted on Rootstock, supporting token swapping, 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, aiming to provide user-friendly interfaces for interacting with the emerging Bitcoin ecosystem. It allows users to directly exchange digital assets within the wallet, enabling them to buy meme coins, regular coins, NFTs, and collateralize their tokens, among other things.
Accelerating DeFi Adoption
The look and feel of the aforementioned dApps are very similar to their Ethereum-based counterparts, and their rapid growth in popularity demonstrates how Bitcoin DeFi is poised 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 remain less enthusiastic about the idea of traditional financial institutions getting involved in cryptocurrencies, the massive capital within TradFi will greatly accelerate mainstream adoption of Bitcoin.
Bitcoin DeFi has opened the door of opportunity, but it still faces many of the same challenges that have limited 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, is still an intimidating experience. Fortunately, Bitcoin developers have begun 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 leverages Dharma’s multi-hop technology to achieve instant, near real-time swaps. As a result, anyone holding BTC can easily access Bitcoin’s increasingly stable digital assets.
Beyond Digital Gold
With more capital flowing into the Bitcoin DeFi ecosystem, it provides entrepreneurs with greater avenues to fund and explore their innovative ideas. One of the most anticipated changes is the Nakamoto upgrade on Stacks, which aims to improve transaction throughput with enhanced finality guarantees and further solidify Bitcoin’s position as a reliable DeFi protocol.
Thakore states, “The expansion of the Bitcoin ecosystem proves that Bitcoin is not just digital gold and a store of value. Bitcoin can power DeFi, it can power NFTs, and it can be 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, massive liquidity, and mainstream appeal that Bitcoin already possesses.
