May 1, 2021
What’s Bitcoin DeFi?
Using Bitcoin in DeFi or DeFi on Bitcoin…
When people talk about decentralized finance, the chances are that they are referring to some decentralized App built on top of Ethereum. Very few will be associating DeFi with EOS (it also exists, somewhat) and probably even less with Bitcoin.
However, if decentralized finance existed on Ethereum only, Bitcoin HODLers are arguably left out, so is the rest of the investors holding non-ethereum assets. Luckily, this isn't the end of the story. Innovation is constantly pushing the boundaries of what’s possible, and already today, Bitcoin enables DeFi.
Bitcoin DeFi can be two things. Either we’re talking about using our Bitcoin to access existing DeFi services and products on Ethereum, or we’re building on top of the Bitcoin Blockchain. I’ll cover both cases in this post.
Using your Bitcoin to access Ethereum DeFi
Let’s say you’ve frequently been buying a small amount of Bitcoin throughout the years and don’t want to give up your holdings. Then you learn about all the exciting DeFi lending protocols and yield farming. Still, you’re not ready to buy Ether solely for accessing a DeFi service.
One reason for your reluctance might be that you’re very sure that Bitcoin will continue rising in value, and you don’t want to miss out on the potential earnings. For traders in that Situation, a collaboration between several leading DeFi companies, including Maker, Compound, Kyber Network, and Aave, has developed wrapped Bitcoin (wBTC). With wrapped Bitcoin, you can make your Bitcoin work for you without going through buying Ether.
What happens when converting your Bitcoin into wBTC is that your original Bitcoin is locked up in a smart contract, and an ERC-20 token (wBTC) with the same value is issued, which will enable you to benefit from DeFi.
Another protocol that allows the creation of an ERC token mirroring the value of your Bitcoin is RenVM. Unlike the above-described wBTC, which is overseen by a centralized coalition of Defi companies, RenVM relies on a decentralized network to enable conversion and ensure the integrity of transactions.
RAMP DeFi is also working on enabling traders to use their Bitcoin for DeFi access and yield farming by minting a Bitcoin-backed, ERC-based stablecoin for use in their ecosystem.
Still doesn’t sound right to lock up your Bitcoin in a smart contract to create another token based on Ethereum? Then you might share the view of Sovryn CEO and co-founder Edan Yago:
There is simply no reason to build Bitcoin DeFi on Ethereum. Bitcoin’s layer 2 provides all the tools to do this in a bitcoin-native environment.
DeFi built on Bitcoin.
When Satoshi Nakamoto created Bitcoin, he (she or they, we don’t know 😉) envisioned it to be a peer-to-peer payment network. Bitcoin is written in a Bitcoin script language, making it unsuitable to accommodate complex smart contracts — which are the foundation of DeFi.
Therefore, trying to build a decentralized App directly on top of the Bitcoin blockchain remains mission impossible. Nevertheless, with the use of sidechains, it’s possible to benefit from the bitcoin network’s computing power and security while running smart contracts.
One company to pioneer this idea was RSK (Rootstock)
RSK
The idea for building such a platform was born in late 2014 when the CEO & Co-founder of RSK, Diego Gutierrez Zaldivar, met Nick Szabo. The team announced developing a smart contract layer on the Bitcoin network in 2015 and launched their main net in January 2018. The RSK sidechain is connected to the Bitcoin network with a two-way peg. Smart contracts can be executed just like on Ethereum. RSK is even using the same programming language and virtual machine as Ethereum. This enables developers to run smart contracts originally developed on Ethereum with ease on RSK.
As all sidechains, RSK comes with its native currency called smart Bitcoin (RBTC). Smart Bitcoin is pegged one to one to the price of Bitcoin. To access services on RSK, traders will convert their Bitcoin to smart Bitcoin. The original coins are locked and can be converted back instantly anytime. However, even if you decided to leave your smart Bitcoin on RSK, you wouldn’t miss out on the next bull run. RBTC appreciates the same way Bitcoin does. 🐮
From the point of view of developers looking for a smart contract platform to run their apps, Ethereums' high fees have driven many recently to deploy BSC. Nevertheless, as is well-known, transaction fees on BSC are just so low due to a high degree of centralization. As a side-chain of Bitcoin, RSK benefits from high security while still offering low fees.
Another often mentioned benefit of RSK is merged mining. Merged mining enables miners to generate smart Bitcoin (RBTC) simultaneously as they generate Bitcoin. This way, miners can make twice as much money with just minimal extra cost and effort. RSK has partnered with several major mining pools to guarantee the performance of their sidechain.
To sum it up, with RSK’s platform, developers can now build DeFi on top of the Bitcoin network. But what’s been built so far?
Money On Chain
Money On Chain is a DeFi protocol on top of RSK that empowers Bitcoiners to improve the performance of the assets they hold (mainly Bitcoin, of course). The protocol offers different tokens for different use cases:
- Bitcoin-backed stablecoin (DoC), for those that want an asset without volatility
- Bitcoin on Steroids (BitPro), a token for Bitcoin Hodlers who want to generate passive income from their holdings and are willing to take on some risk. The income for BitPro tokens is generated by small leverage on the Bitcoin price, a share of interest paid by traders for the third token in the system (BTCx), and a proportion of fees charged for minting DoCs, BitPro, and BTCx. BitPro tokens are performing great during a bull market but can increase losses whenever the price decreases.
- BTCx tokens: these tokens are designed for traders willing to accept more significant risks. When buying BTCx tokens, traders will essentially be entering a leveraged position. At the moment, they can take out a BTC2x position. Whatever the change in Bitcoin price is, it will be reflected double in their income (or losses). If the Bitcoin price goes up and with a normal position, they’d make a $1000 return. Thanks to their leverage, it would double to $2000. Unfortunately, the same is true for losses, making this a token for traders very comfortable with risk.
Money On Chain is working to bring together the decentralization, security, and immutability of Bitcoin with the stability of traditional fiat currencies to enable anyone to benefit from instant, cost-efficient transactions.
If you feel like this after reading about Money On Chain…
It’s not too late. You can start using Money On Chain’s platform today. Head to their website.💃
Another platform that just launched in April this year aiming to capture Bitcoin DeFi interest is Sovryn.
Sovryn
Sovryn aims to offer Bitcoin Hodlers ways to leverage their Bitcoin for lending, borrowing, and margin trading based on smart contracts. Many Bitcoin HODLers are unwilling to give up custody of their private keys for the sake of increasing their potential returns. “Not your keys, not your crypto” — as we’re all aware.
On Sovryn, all trading and other activities are permissionless. Therefore traders retain custody of their own bitcoin at any time with no central authority safeguarding their keys. Currently, Sovryn offers:
- Lending Pool: allowing traders to lend their tokens to borrowers and margin traders in return for earning interest
- Margin Trading: traders can create long and short positions with up to 5x leverage by accessing funds from the lending pool
- Spot exchange: basically a DEX but on RSK that is using automated market-making (AMM) to enable instant trades between different tokens at a low cost
The Sovryn team is planning to add further features in the future increasing the number of services bitcoin holders can access.
These are just 2 platforms currently employed on RSK. A complete overview of all use cases of the Bitcoin sidechain can be found here including, charity, logistics, and social impact. With Ethereums scaling and fee problems becoming more obvious daily, the Bitcoin sidechain could attract many more developers to deploy their smart contracts on the most powerful blockchain. As Bitcoin remains the first crypto (and for some only) they buy, a thriving DeFi ecosystem on Bitcoin might contribute to the growth of the whole crypto space. It’s an exciting space worth watching. 👀
