DeFi-ing Bitcoin on Cosmos with Nomic
This space has moved so rapidly that sometimes it’s important to stop for a moment and look how far we’ve come.
1. Bitcoin and crypto have emerged from the fringes and are well and truly in the mainstream.
2. We’ve seen the first ‘Killer App’ with NFTs.
3. DeFi logic is now more sophisticated than TradFi.
This all started with the reinvention of money which prompted the reinvention of finance and has now begun the reinvention of consumer-facing digital applications. Throughout these developments, Bitcoin has served as the bedrock, attracting financial and human capital and setting new standards as ‘digital gold.’
Nomic recognizes the integral part Bitcoin plays in this ecosystem and aims to create more value for holders with the ability to gain macro inflation-hedging yield and increase portfolio liquidity.
Building on Solid Ground
Due to the incentive structures of DeFi, decentralized tooling is designed for composability to ensure the largest accessible market and, therefore, profit-earning capabilities. With inflationary assets, because the intrinsic value of the asset depreciates over time, there is a necessity to invent methods with which to ensure it retains its relative value, hence the explosion of DeFi products on Ethereum and other public chains.
DeFi on Bitcoin has remained a complicated non-issue, however, as bitcoin is not inflationary or deflationary but disinflationary, essentially flat. In addition, the simplicity of the Bitcoin code in not supporting smart contracts means on-chain DeFi cannot exist, and holders must use 3rd party applications if they wish to earn yield on their coins. In most cases, the 3rd-party risk does not outweigh the rewards; therefore, Bitcoin DeFi has been largely overlooked in the creation of the DeFi industry and its respective bubbles.
Despite DeFi on Bitcoin as not being as necessary for the coin’s survival as native tokens on inflationary chains, Nomic has identified the lack of credible DeFi solutions on Bitcoin as being an opportunity for innovation. Leveraging the power of IBC,
How Secure?
To create the standard for DeFi on Bitcoin, Nomic recognizes security as being paramount in building trust with users and reputation within the industry. The Nomic L1 is designed as a sidechain based on the Tendermint consensus protocol, which exists as its own sovereign network, allowing for custom application code and smart contracts which use Bitcoin as the native currency. Nomic is supported by a network of independent validators, which are also signatories of the Network’s Bitcoin reserves, with each identified by a known Bitcoin-compatible public key with held values corresponding to their voting power.
Given the Network is upheld by validators, the sidechain is inherently at risk of malicious collusion between a majority and fatal software vulnerabilities. To counter this risk, Nomic employs the use of a staked native token ($NOM) mechanism which acts as collateral for signatories, an emergency disbursal process that protects against liveness failures, and a stake-locking mechanism with slashing, which ensures that signatories are economically disincentivized from stealing from the reserves even when they are able to censor fraud proofs on the sidechain.
To ensure the 1:1 pegging of Bitcoin, many Bitcoin custodial projects propose policies of overcollateralization, which is typically capital inefficient and does not effectively protect against malicious validator collusion as the gains may offset losses from slashing. Nomic proposes an alternate mechanism wherein staked $NOM pays recurring revenue by charging demurrage (negative interest) from all accounts holding claims to BTC on the sidechain. The result is an increase in the value of staked assets over time, providing less incentive for malicious collusion and a greater incentive for healthy cooperation and support of the network.
Not your keys, still your Bitcoin
Central to the 3rd-party risk of custodial projects is the ‘code is law’ dynamic of blockchain-powered systems. The undisputed ownership of digital assets on blockchains is reserved for the owners of the private keys, and for that reason, giving up ‘ownership’ of one’s digital assets by entrusting them to a custodial service, be it a DeFi protocol, custodial wallet, or centralized exchange, is inherently risky.
With Nomic, the sidechain attempts to alleviate these risks by designing an economic system that incentives good behavior from custodians, meaning nBTC/BTC retains its 1:1 peg and is always redeemable for Bitcoin.
Moving forwards, the project is also geared to support DAOs that hold nBTC reserves, a series of overcollateralized BTC-backed stablecoins, and yield-generating lending/borrowing products that allow Bitcoin holders to extract more value from their holdings whilst not having to worry about 3rd-party risks.
