The Rise of BTCFi: Bitcoin's New Role in Decentralized Finance

Bitcoin is rising in the DeFi space, beginning to challenge Ethereum's dominance. By analyzing on-chain data, we find that the combination of BTCFi( Bitcoin and DeFi) may trigger a paradigm shift in Bitcoin's role in DeFi, redefining the landscape of the entire DeFi sector.

The Rise of BTCFi

When Satoshi Nakamoto launched Bitcoin in 2008, the initial design was intended as a peer-to-peer electronic cash system. Although this architecture has revolutionary significance, it has limitations in complex financial applications such as DeFi.

The Original Design of Bitcoin and Its Limitations in Decentralized Finance

The core design elements of Bitcoin and its limitations:

1. UTXO Model: Lacks the flexibility required to support complex smart contracts.

2. Limited scripting language: The number of executable opcodes is limited, making it difficult to support complex Decentralized Finance applications.

3. Lack of Turing completeness: Difficult to implement complex smart contracts that rely on state.

4. Block size and transaction speed limitations: The transaction processing speed is far lower than that of 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 and Development of Introducing DeFi on Bitcoin

Despite the limitations, developers are still searching for innovative solutions:

1. Colored Coins (2012-2013): An early attempt to extend the functionality of Bitcoin.

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

3. Lightning Network ( since 2015 ): a second-layer protocol for enhancing transaction scalability.

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

5. Liquid Network ) From 2018 to present (: Supports the issuance of crypto assets and complex Bitcoin 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.

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Key Innovations: Implementing Smart Contracts on Bitcoin

In recent years, several protocols have emerged aimed at introducing smart contracts and Decentralized Finance functionalities for Bitcoin:

1. Rootstock: The pioneer of Bitcoin smart contracts, supporting dual mining and compatible with EVM.

2. Core: An EVM-compatible blockchain closely integrated with Bitcoin, featuring an innovative dual-staking model.

3. Merlin Chain: A Bitcoin Layer 2 network integrated with ZK-Rollup technology.

4. BEVM: The first fully decentralized and EVM-compatible second layer network for Bitcoin.

Key innovations of these protocols include: tokenizing Bitcoin assets, smart contracts and EVM compatibility, yield-bearing Bitcoin, scalability, and privacy enhancements.

As of September 8, 2024, the total locked value of Bitcoin's layer two solutions and sidechains is ) TVL (, reaching 1.07 billion USD, which represents a growth of 5.7 times since January 1, 2024, and 18.4 times since January 1, 2023.

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The Current State of Bitcoin Decentralized Finance

) main BTCFi projects

1. Pell Network: Cross-chain Re-staking Protocol.

2. Avalon Finance: Multi-chain DeFi platform, providing lending and trading services.

3. Colend Protocol: A decentralized lending platform built on the Core blockchain.

4. MoneyOnChain: A comprehensive DeFi protocol built on Rootstock.

5. Sovryn: A feature-rich DeFi platform built on Bitcoin.

6. Solv Protocol: A cutting-edge project in NFT financialization.

These projects showcase the dynamic development of Bitcoin in the DeFi field. Core occupies a leading position in the Bitcoin DeFi space, with the number of projects accounting for 25.2% of active projects.

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) key narratives in major BTCFi projects

1. Security and decentralization first
2. Bitcoin as a Programmable Token
3. Interoperability with Ethereum
4. Unlocking the Capital of Bitcoin

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Comparison and Analysis of ) and Ethereum DeFi

The integration of Bitcoin and Ethereum's Decentralized Finance ecosystem is mainly achieved through wrapped assets such as wBTC and renBTC. As of September 8, the amount of BTC locked in Ethereum DeFi protocols is 153,400, far exceeding the 8,970 in Bitcoin's native DeFi ecosystem.

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The Insights of Ethereum's Development on Bitcoin and Vice Versa

Bitcoin can learn from Ethereum:

1. Product Diversity
2. Developer Ecosystem
3. Interoperability

Ethereum can learn from Bitcoin:

1. Security and Decentralization
2. Simplicity and Robustness
3. Focus on Value Storage

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Challenges and Opportunities

Technical Barriers:

1. Scalability
2. Interoperability

Regulatory concerns: Regulatory scrutiny is expected to intensify, especially in terms of AML and KYC.

Future Opportunities:

1. Technological Advances: Improve Layer 2 solutions and develop frameworks with greater scalability and interoperability.
2. Future growth areas: revenue-generating products, DEX, cross-chain liquidity pools, and DeFi products targeting institutional needs.

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Conclusion

The Bitcoin DeFi ecosystem will continue to expand driven by technological advancements and institutional interest. Developing more scalable Layer 2 solutions, enhancing interoperability, and launching more sophisticated financial products are crucial. Products that are expected to generate revenue, DEXs, and institution-facing 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 momentum of Bitcoin DeFi and ensuring its long-term success.

In conclusion, the future of Bitcoin in Decentralized Finance 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 core participant in DeFi.

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