Bitcoin's (BTC) role in the decentralized finance (DeFi) ecosystem
Using Bitcoin in DeFi applications
Decentralized financial applications (dApps) offer various capabilities, including lending, staking, liquidity provisioning, and derivatives. At the heart of most DeFi applications are smart contracts — self-executing programs on the blockchain. However, the main problem is that the Bitcoin blockchain does not support smart contracts at a level similar to Ethereum and other second-generation blockchains. Bridges and tokenized versions of BTC have been developed to solve this problem.
Tokenized versions of BTC
To integrate Bitcoin into the DeFi ecosystem, tokenized versions of BTC were created on blockchains that support smart contracts. These tokens are BTC value-linked assets that can be used in DeFi applications. The best-known of these are:
- Wrapped Bitcoin (WBTC) is an ERC-20 token on the Ethereum blockchain fully backed by bitcoins at a 1:1 ratio. Users deposit (deposit) BTC through centralized or semi-centralized custodians to receive WBTC. This token is actively used in DeFi to provide liquidity, lending, and trading.
- RenBTC is a decentralized alternative to WBTC, created by the Ren project. It allows users to deposit BTC through the RenVM bridge, which is managed by a decentralized network. RenVM is a virtual machine that uses a cryptographically secured mechanism to enable the transfer of BTC to other blockchains without the involvement of central custodians. The process is fully automated and accomplished through the interaction of multiple networked nodes using a data "obfuscation" protocol to protect user privacy. One of the main advantages of RenBTC is its full compatibility with decentralized principles, as control over assets remains solely with users, minimizing the risks associated with centralized custody.
- tBTC is a project created by Keep Network that provides a decentralized and secure process for tokenizing BTC. tBTC operates based on protocols that use cryptographic guarantees to keep users' assets safe. At the heart of tBTC is a mechanism for depositing BTC into a special smart contract, where an equivalent amount of tBTC backs each deposited BTC. One of the key features of tBTC is the use of multi-signature technology, which provides secure asset management without central custodians. Users can be assured of transparency as all transactions in the system are verified and recorded on the blockchain. tBTC enables the secure use of BTC in decentralized applications such as lending, trading and liquidity provision.
Bridges and cross-chain solutions
Bridges (cross-chain bridges) allow users to move BTC between different blockchains. This enables the benefits of Bitcoin's liquidity and security benefits to be utilized in ecosystems of other blockchains such as Ethereum, Binance Smart Chain, or Solana. Key bridges for BTC:
- Lightning Network — While Lightning Network primarily speeds up transactions and reduces costs, it also supports integration with some DeFi applications. For example, users can make instant payments in applications related to commerce and lending.
- THORChain is a cross-chain liquidity protocol that allows users to exchange BTC for other cryptocurrencies without needing tokenized versions. THORChain supports direct integration of Bitcoin with DeFi solutions.
- Portal is a decentralized bridge built on atomic swap technology. Portal allows users to move BTC between different blockchains without relying on centralized intermediaries. The technology provides a high degree of security and transparency.
- Badger Bridge is a bridge integrated into the BadgerDAO ecosystem that facilitates the movement of BTC and tokenized versions, such as WBTC and RenBTC, between different DeFi applications. It provides users with a simple interface for bridging and asset management.
- Synapse is a cross-network protocol that supports the transfer of BTC and other assets between popular blockchains. Synapse provides high transaction speeds and low fees, making it attractive to DeFi users.
Popular projects using Bitcoin in DeFi
Bitcoin has become the basis for various innovative projects in decentralized finance, providing opportunities for integration into DeFi through multiple mechanisms. For example, MakerDAO, one of the most significant DeFi projects, allows tokenized versions of BTC, such as WBTC, to create a DAI stablecoin. This opens up the possibility of using Bitcoin as collateral, increasing its utility.
Another prime example is Aave. This lending protocol allows users to lend tokenized BTC as liquidity and be rewarded for it. Borrowers can use WBTC or RenBTC as collateral to borrow from other cryptocurrencies, which adds to their flexibility.
Decentralized exchanges like Uniswap and SushiSwap also play a significant role. Here, tokenized versions of BTC are used to trade and provide liquidity, allowing BTC holders to earn commissions using their assets.
BadgerDAO stands out for its specialization in integrating Bitcoin into DeFi. It provides tools and solutions for using BTC as the underlying asset in decentralized applications. BadgerDAO's protocols, such as Sett Vaults, allow users to earn a yield on tokenized BTC.
Curve Finance specializes in exchanging stablecoins and tokenized versions of BTC with minimal fees. This protocol provides high liquidity for WBTC, RenBTC, and other assets, making it an essential link in the DeFi ecosystem.
Conclusion
Bitcoin's role in decentralized finance continues to grow rapidly. According to Messari's 2023 report, tokenized BTC in DeFi applications has surpassed 1.5 million BTC, representing over 7% of the total supply. This indicates a growing demand for BTC integration into decentralized ecosystems. For example, a DeFi Pulse analyst notes: "Bitcoin is becoming a bridge between the traditional and decentralized economies; its liquidity and time-tested stability make it a key element of DeFi."