The decentralized finance (DeFi) landscape is on the brink of a significant transformation, particularly as it relates to Bitcoin. Recent insights from industry leaders highlight the immense potential for DeFi solutions for the Bitcoin network, positing that the first company to successfully launch a user-friendly suite of DeFi products on Bitcoin could dominate this burgeoning market.
During the TOKEN2049 event in Dubai, Alexei Zamyatin, co-founder of the Bitcoin layer 2 initiative Build on Bitcoin, articulated that Bitcoin currently has a user base of 300 million, far surpassing that of Ethereum and Solana. He stated, “The advantage of Bitcoin DeFi is that the market is much bigger, you have a much bigger retail user base that you can tap into.” Zamyatin emphasized that winning over this user base in Bitcoin’s DeFi space could translate to capturing the entire market.
“It’s not easy to convert it, but if you manage to win in Bitcoin DeFi, you win the entire market.”
Build on Bitcoin is at the forefront of this competition, aiming to offer a hybrid layer 2 solution that effectively marries Bitcoin’s robust security with Ethereum’s DeFi capabilities through innovative platforms like BitVM. This initiative focuses on creating Turing-complete contracts on Bitcoin, which may provide the necessary tools and connectivity that are currently lacking.
Zamyatin pointed out that while Bitcoin’s security is unmatched, there is a notable deficit in terms of human talent and the ecosystem’s network effects compared to Ethereum. Consequently, he advocates for the development of Bitcoin-native bridges to bolster DeFi operations on the Bitcoin blockchain.
Another avenue fueling the demand for Bitcoin-based DeFi solutions is the increasing interest in Bitcoin yield and stablecoin products. Zamyatin noted, “A lot of institutions that are buying Bitcoin now usually have to find yield on the assets they hold. So Bitcoin yield is becoming a very hot and highly sought-after thing.” This shift underscores the viability of Bitcoin as the “best collateral” in the growing demand for Bitcoin-backed stablecoins.
Currently, Bitcoin staking remains the most popular DeFi use case beyond payment transactions, as holders lock their coins in vaults to earn rewards on proof-of-stake blockchains. The leading protocol in this market, Babylon, holds approximately $4.64 billion worth of assets, accounting for nearly 80% of all Bitcoin value locked in DeFi.
Bridging Solutions: A Double-Edged Sword
Despite the burgeoning opportunities, Zamyatin candidly recognizes the challenges associated with bridging solutions. While many blockchain hacks stem from failures in private key management rather than smart contract vulnerabilities, institutional hesitancy persists. Institutions often express reluctance to utilize bridges, which facilitate value transfer across incompatible blockchains, due to concerns regarding the anonymity of transaction signers.
For instance, the Ren Protocol’s RenBTC uses a decentralized network of nodes called Darknodes, posing anonymity issues that deter institutional adoption. Instead, many institutions prefer established custodians like BitGo and Coinbase Custody.
As the competition intensifies, the pursuit of secure and scalable DeFi solutions on Bitcoin is poised to accelerate. The potential for Bitcoin DeFi to eclipse the current offerings on Ethereum and Solana may herald a new era for decentralized finance. As industry players innovate and expand their services, we can expect dramatic shifts within DeFi’s landscape that could redefine finance as we know it.
