Decentralized finance (DeFi) is one of the most popular cryptocurrency use cases bringing new users into the ecosystem today; however, until recently, the DeFi phenomenon was largely happening on the Ethereum network with no ability to use bitcoin in these new financial applications. Over the past year or so, a number of building blocks have been created to bridge the divide between bitcoin and DeFi, which has led to the creation of the two largest DeFi apps focused on bitcoin: Badger DAO and Sovryn. Additionally, there are plenty of other ways in which the financial system built around bitcoin can become increasingly decentralized over time in a manner that is somewhat similar to the DeFi applications of today.
Badger DAO and Sovryn
One of the problems with early DeFi projects on Ethereum was that users were forced to use ETH, stablecoins, or other ERC-20 tokens as money on the platforms rather than BTC. While there are some people who are bullish on the concept of ETH as money, BTC is still by far the more liquid and less volatile asset at this time. Throughout 2020, a number of ways of bringing BTC over to Ethereum were developed, and this allowed BTC to be used in various DeFi apps on Ethereum for the first time.
Near the end of 2020, a new DeFi application, known as Badger DAO, was launched, and it was entirely focused on being the home of bitcoin-focused DeFi. This project includes a platform called Sett Vaults, which enables bitcoin holders to earn high yields on their BTC holdings by making their funds available on platforms like SushiSwap, Uniswap, and Curve Financial. Badger DAO was able to quickly become one of the largest DeFi projects on Ethereum in terms of total value locked (TVL) through the use of a yield farming initiative for their Badger governance token. Yield farming rewards are now also paid out in Digg, which is Badger Dao’s own Ethereum-based token meant to track the price of bitcoin.
The main building blocks used by Badger DAO to build out their platform (in addition to integrations with other DeFi apps) were the various bitcoin-pegged tokens that have been issued on Ethereum. These tokens include WBTC, renBTC, sBTC, and tBTC. Each of these tokens have different tradeoffs when it comes to the level decentralization and trust surrounding the peg to BTC.
More recently, Badger DAO has expanded to Binance Smart Chain and the BTCB token. Binance Smart Chain is completely compatible with the Ethereum Virtual Machine (EVM), which makes it easy to copy and paste many of the DeFi building blocks that are already available on Ethereum. This diversification away from Ethereum for bitcoin-focused DeFi apps is likely to continue, as we recently explained in a piece regarding Ethereum’s network effects as a technology.
Another blockchain that is compatible with the EVM is the RSK Bitcoin sidechain, where the native token for paying for gas is pegged to BTC, meaning bitcoin users don’t need to worry about using separate assets for use as money and to pay for transactions on the network. It is on top of this sidechain that Sovryn was recently launched, which is taking many of the Ethereum DeFi building blocks and stuffing them all into a single application for bitcoin users who are interested in DeFi. Money On Chain is another DeFi application built on RSK that enables non-custodial, bitcoin-backed derivatives such as a U.S. dollar-pegged stablecoin (DOC) and a leveraged long bitcoin position (BTCX). Money On Chain is another DeFi application built on RSK that enables non-custodial, bitcoin-backed derivatives such as a U.S. dollar-pegged stablecoin (DOC) and a leveraged long bitcoin position (BTCX). There are also outright copies of Ethereum DeFi apps available on RSK, such as RSKSwap (a copy of Uniswap).
Many More Bitcoin DeFi Building Blocks on the Way
Of course, there are plenty of other bitcoin-focused DeFi building blocks outside of RSK and bitcoin-pegged tokens on Ethereum. Liquid is another Bitcoin sidechain that has a more limited scripting language, but decentralized exchange Bisq and non-custodial lending platform Hodl Hodl Lend are already building on top of the federated sidechain. Simplicity, which is seen as a more flexible scripting language that retains a high level of reliability and verifying ability in terms of the smart contracts that can be built with it, is also expected to come to Liquid in the near future.
Additionally, there’s the Lightning Network, which is a system of smart contracts built on the base Bitcoin blockchain that enables much faster and cheaper payments without making any large tradeoffs in terms of trust or custody. Discreet log contracts (DLCs) are also being built on top of the Lightning Network to enable many of the DeFi applications that necessitate the use of an oracle.
On top of tokens on Ethereum and Binance Smart Chain, bitcoin is also being added to other platforms focused on smart contracts and DeFi such as Stacks, Nomic, and Thorchain. At the end of the day, bitcoin is the preferred asset for use as money throughout the entire crypto ecosystem, so it is likely that every DeFi platform will find a way to bring BTC to it in one way or another. That said, there is a stark contrast between how bitcoin can be used as a trustless form of savings on its own and the number of new risks that are introduced when it is used in some of these early DeFi projects.