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The Rise of BTCFi: Analysis of the Current Status and Prospects of the Bitcoin DeFi Ecosystem
The Rise of Bitcoin DeFi: Current Status and Development Prospects of the BTCFi Ecosystem
Bitcoin's role in Decentralized Finance ( DeFi ) is undergoing a significant transformation. Initially only serving as a peer-to-peer transfer tool, Bitcoin is now gradually becoming a powerful force in the DeFi space, beginning to challenge Ethereum's long-standing dominance.
By analyzing on-chain data, we can clearly see that the combination of BTCFi( Bitcoin and Decentralized Finance is not just a technological shift, but may also trigger a paradigm shift in Bitcoin's role within DeFi. This transformation could redefine the landscape of the entire DeFi space.
![How is the progress of BTCFi that the Bitcoin community has been thinking about?])https://img-cdn.gateio.im/webp-social/moments-9ddf98df6b29f5f5a302df767cf752f9.webp(
The Rise of BTCFi
In 2008, when Satoshi Nakamoto launched Bitcoin, the original intention was to create a peer-to-peer electronic cash system. Although this architecture has revolutionary significance in the field of crypto assets, it has obvious limitations in more complex financial applications like Decentralized Finance ).
The Original Design of Bitcoin and Its Limitations in Decentralized Finance
Core design elements and limitations of Bitcoin:
UTXO Model: Bitcoin uses the Unspent Transaction Output ( UTXO ) model, which is very effective for handling simple transfers but lacks the flexibility needed to support complex smart contracts.
Limited scripting language: The scripting language of Bitcoin is designed with limitations, mainly to avoid security vulnerabilities. However, this limitation also hinders its support for complex Decentralized Finance applications, as the number of executable opcodes is limited.
Lack of Turing Completeness: Unlike Ethereum, Bitcoin's script is not Turing complete, which makes it difficult to implement complex smart contracts that rely on state, and these smart contracts are crucial for many Decentralized Finance protocols.
Block Size and Transaction Speed: Bitcoin's 1MB block size limit and 10-minute block generation time result in its transaction processing speed being far lower than other blockchains focused on Decentralized Finance.
Although these design choices enhance the security and decentralization of Bitcoin, they also create obstacles for directly implementing DeFi functionalities on the Bitcoin blockchain. The lack of native support for features such as loops, complex conditions, and state storage makes it very difficult to build applications like DEXs, lending platforms, or liquidity mining protocols on Bitcoin.
Early Attempts and Development of Introducing DeFi on Bitcoin
Despite these limitations, Bitcoin's strong security and widespread application encourage developers to seek innovative solutions:
Colored coins (2012-2013): This is one of the early attempts to expand the functionality of Bitcoin. Colored coins represent and transfer real-world assets by "coloring" specific Bitcoins and attaching unique metadata. Although this is not truly Decentralized Finance, it laid the groundwork for developing more complex financial applications on Bitcoin.
Counterparty(2014): This protocol introduced the ability to create and trade custom assets on the Bitcoin blockchain, including the first NFT. Counterparty demonstrates the potential for developing more complex financial instruments on Bitcoin.
Lightning Network (2015 to present ): The Lightning Network is a second-layer protocol designed to enhance transaction scalability. It opens up possibilities for more complex financial interactions by introducing payment channels, including some preliminary Decentralized Finance applications.
Discrete Log Contracts ( DLC ) ( Since 2017: Proposed by Tadge Dryja, DLCs allow for complex financial contracts to be implemented without changing the Bitcoin base layer, providing new possibilities for derivatives and other Decentralized Finance tools.
Liquid Network ) 2018 to present (: This is a sidechain-based settlement network that supports the issuance of crypto assets as well as more complex Bitcoin transactions, paving the way for applications similar to Decentralized Finance.
Taproot Upgrade ) 2021(: By introducing Merkleized Abstract Syntax Trees ) MAST (, Taproot compresses complex transactions into a single hash, reducing transaction fees and memory usage. Although it is not a DeFi solution itself, it enhances Bitcoin's smart contract capabilities, making it easier and more efficient to implement complex transactions, thereby laying the foundation for the future development of Decentralized Finance.
These early developments laid the foundation for Bitcoin's functionality to expand from simple transfers to more applications. Although introducing DeFi on Bitcoin faces challenges, these innovations also showcase the potential of the Bitcoin ecosystem. This foundation paved the way for layer two solutions, sidechains, and the wave of innovation in Bitcoin DeFi.
![How is the progress of BTCFi that the Bitcoin community has been thinking about?])https://img-cdn.gateio.im/webp-social/moments-c8b397022b71e50bbd0790f20dbea0a7.webp(
Key Innovations: Implementing Smart Contracts on Bitcoin
In recent years, the Bitcoin ecosystem has seen the emergence of multiple protocols aimed at introducing smart contract and Decentralized Finance functionalities to the world's first cryptocurrency. These innovations are transforming the use of Bitcoin, making it not just a store of value or a medium of exchange. Here are some of the key protocols driving the realization of smart contracts on Bitcoin:
It utilizes 60% of Bitcoin's computing power, supports dual mining, and is compatible with the Ethereum Virtual Machine )EVM(, allowing Ethereum smart contracts to run on Bitcoin. Rootstock's unique Powpeg mechanism ensures seamless conversion between Bitcoin )BTC( and Rootstock Bitcoin )RBTC(, and its "depth defense" security model emphasizes simplicity and robustness.
Since the mainnet launch in 2018, Rootstock's on-chain activity has steadily grown, establishing a stable and scalable solution position within the Bitcoin ecosystem.
Core stands out with its innovative dual staking model, which combines Bitcoin and Core. Through non-custodial Bitcoin staking, Core establishes a risk-free yield for Bitcoin, effectively transforming Bitcoin into a yield-bearing asset. Core reports that 55% of Bitcoin mining hash power is delegated to its network, which helps enhance its security in Decentralized Finance applications.
Merlin Chain: Merlin Chain is a relatively new Bitcoin Layer 2 network dedicated to unlocking the DeFi potential of Bitcoin and is receiving increasing attention. It integrates ZK-Rollup technology, decentralized oracles, and on-chain anti-fraud modules, providing a complete set of DeFi functionalities for Bitcoin holders. The M-BTC launched by Merlin is a wrapped Bitcoin asset that earns staking rewards, opening new avenues for yield generation and participation in DeFi.
BEVM: BEVM represents an important advancement in directly bringing the extensive Decentralized Finance ecosystem of Ethereum to Bitcoin. As the first fully decentralized and EVM-compatible second-layer network for Bitcoin, BEVM uses Bitcoin as fuel, allowing for the seamless deployment of Ethereum's decentralized applications)DApps( on Bitcoin. BEVM has received support from several large mining companies, pioneering the concept of "computing power RWA," which may unlock new dimensions of value for the Bitcoin ecosystem.
Key Innovations of Bitcoin Layer 2 Networks and Sidechains:
These protocols are not just replicating Ethereum's DeFi strategies on Bitcoin, but are opening new directions by leveraging Bitcoin's unique characteristics. From Rootstock's deep defense mechanisms, to Core's dual staking model, to the comprehensive DeFi solutions offered by Merlin and the computational power RWA innovations of BEVM, the BTCFi sector is rapidly evolving.
As of September 8, 2024, the total locked value of Bitcoin's layer two solutions and sidechains reached $1.07 billion, an increase of 5.7 times since January 1, 2024, and an astonishing increase of 18.4 times since January 1, 2023.
Core leads with 27.6% of the total locked value ) TVL (, followed by Bitlayer at 25.6%; Rootstock at 13.8%; and Merlin Chain at 11.0%.
![How is the progress of the BTCFi that the Bitcoin community has been eagerly anticipating?])https://img-cdn.gateio.im/webp-social/moments-91a0585dbf87dcef2e31e43ad04504d4.webp(
The Current Status of Bitcoin Decentralized Finance
With the continuous development of the Bitcoin DeFi ecosystem, several key projects have emerged as important participants, driving innovation and user adoption. These projects rely on Bitcoin's layer two solutions and sidechains to provide various DeFi services:
) Main BTCFi projects
Pell Network is a cross-chain re-staking protocol designed to enhance the security of the Bitcoin ecosystem and optimize yields. Users earn rewards by staking Bitcoin or liquid staking derivatives (LSD), while decentralized operators are responsible for running validation nodes to ensure the security of the network. Pell offers a range of active validation services, such as oracles, cross-chain bridges, and data availability, supporting a broader Bitcoin Layer 2 ecosystem. With its robust infrastructure, Pell aims to become a key participant in providing liquidity and ensuring the security of the crypto economy, promoting sustainable growth of the Bitcoin economy.
Avalon Finance is a multi-chain DeFi platform that spans Bitlayer, Core, and Merlin Chain, known for providing comprehensive lending and trading services within the BTC DeFi ecosystem. Avalon’s main services include over-collateralized lending for major assets and lower liquidity assets, with dedicated isolation pools. The platform also integrates derivatives trading, enhancing the functionality of its lending services. Furthermore, Avalon has introduced an algorithmic stablecoin aimed at optimizing capital efficiency, making it a versatile and secure DeFi solution within the Bitcoin ecosystem. Its governance token AVAF adopts the ES Token model, incentivizing liquidity provision and protocol usage.
Colend Protocol is a decentralized lending platform built on the Core blockchain, allowing users to securely borrow and lend Bitcoin and other assets. By leveraging Core's dual staking model, Colend seamlessly integrates with the broader Decentralized Finance ecosystem, enhancing the utility of Bitcoin in DeFi. Its main features include decentralized and immutable transactions, liquidity pools with various dynamic interest rates, and a flexible collateral system.
MoneyOnChain is a comprehensive DeFi protocol built on Rootstock that allows Bitcoin holders to enhance their asset yield while retaining full control of their private keys. The core of the protocol is the issuance of a stablecoin called Dollar on Chain)DoC(, which is a stablecoin fully backed by Bitcoin, specifically designed for users who wish to maintain the value of their Bitcoin holdings pegged to the US dollar. Additionally, MoneyOnChain offers Token BPRO, enabling users to gain leveraged exposure to Bitcoin, thereby achieving passive income.
The architecture of the protocol is based on a risk-sharing mechanism, utilizing proprietary financial models to cope with extreme market fluctuations. At the same time, it also includes a decentralized Token trading platform )TEX(, a decentralized oracle )OMoC(, and a governance Token )MoC(, enabling users to participate in protocol decision-making, stake, and earn rewards.
Sovryn is a DEX and one of the most feature-rich DeFi platforms built on Bitcoin, aimed at enabling users to trade, lend, and earn yields using Bitcoin. Sovryn spans across the BOB and Rootstock platforms, offering a variety of DeFi services, including trading, swapping, liquidity provision, staking, and lending. The platform focuses on creating a permissionless financial layer for Bitcoin and integrates with other blockchains, making it a unique multi-chain platform within the Bitcoin DeFi ecosystem.
The governance token SOV of Sovryn plays a key role in managing decentralized protocols through the Bitocracy system.