Decentralized finance, or DeFi, is a term to describe applications and infrastructure that use blockchain technology to enable financial activity without the need for intermediaries. Financial applications run autonomously through codes and protocols on the blockchain in DeFi. It does not require a central entity to facilitate transactions and thus has several advantages over centralized finance, as listed below.
Most DeFi protocols are built on Smart contract platforms such as the Ethereum blockchain, but many crypto users who own Bitcoin also want to participate in DeFi. This has led to the emergence of many DeFi applications on Bitcoin.
The Bitcoin base layer enables it to become the most secure and decentralized blockchain on the crypto market. However, this layer is simple, it lacks functionality compared to other layer-1 blockchains. The base layer does not have Smart contract programming, which is critical for building DeFi applications. Smart contracts enable users to exchange value without intermediaries to ensure each transaction is legitimate and transparent. Smart contracts are published on the blockchain when they are executed, so anyone can review the record of completed transactions.
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This lack of smart contract functionality does not mean that Bitcoin can never support DeFi applications. Its strong fundamentals help it position itself as a reliable final settlement layer for smart contracts. There has been a lot of research and development to build applications and infrastructure on top of the Bitcoin blockchain. Layers help Bitcoin enable various DeFi applications. They are protocols that increase the scalability and functionality of Bitcoin. Different types of layers help enable DeFi applications on the Bitcoin network. Each layer is unique and brings various utilities to the Bitcoin network.
The lightning network is a layer-2 scaling solution to enable quick, cheap, and secure peer-to-peer transactions. It creates channels between users through which transactions can be processed off-chain. It significantly reduces the strain on Bitcoin’s base layer and helps improve the scalability of BTC transactions.
Stacks is a Smart contract platform for Bitcoin, and it automatically settles transactions at every block through its proof-of-transfer consensus mechanism. Its Smart contracts can analyze and react to Bitcoin transactions, thus connecting the two crypto platforms. It has numerous DeFi protocols, such as lending, atomic swaps, stablecoins, asset management, and decentralized exchanges.
RSK, or rootstock, is an EVM (Ethereum virtual machine)-compatible Bitcoin sidechain. It seamlessly integrates Ethereum applications with the Bitcoin blockchain. RSK simultaneously mines Bitcoin and RSK blocks using the merged mining process. Funds are transferred through Powpeg, a bridge that converts BTC to RSK’s native coin known as smartBTC (RBTC). It offers many DeFi services, including wallets, lending protocols, bridges, asset swaps, trading platforms, and more.
DeFi on the Bitcoin network is an exciting development for the most trusted and popular blockchain. Bitcoin has a huge potential to support DeFi applications through its vast amounts of capital and unparalleled security. Bitcoin users can invest their funds in various DeFi protocols and do much more with their funds through Bitcoin layers while remaining within its ecosystem. DeFi applications on Bitcoin can also help increase its adoption and make it more mainstream.
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