The Rise of BTCFi: Bitcoin's New Role in the Decentralized Finance Field

Bitcoin is playing an increasingly important role in the DeFi field, evolving from simple peer-to-peer transfers to becoming a powerful force within the DeFi ecosystem, 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 experiencing rapid growth. This is not only a technological transformation but may also trigger a fundamental change in Bitcoin's role in DeFi, redefining the landscape of the entire DeFi sector.

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The Rise of BTCFi

In 2008, Satoshi Nakamoto created Bitcoin, initially intended as a peer-to-peer electronic cash system. Although this has revolutionary significance in the crypto asset space, there are obvious limitations in more complex financial applications such as Decentralized Finance ).

The Original Design of Bitcoin and Its Limitations in Decentralized Finance

Core design elements of Bitcoin and its limitations:

1. UTXO model: Suitable for simple transfers, but lacks the flexibility to support complex smart contracts.

2. Limited scripting language: designed to avoid security vulnerabilities, but hinders support for complex Decentralized Finance applications.

3. Lack of Turing completeness: It is difficult to implement complex smart contracts that depend on state.

4. Block size and transaction speed limitations: The transaction processing speed is far lower than that of other blockchains focused on Decentralized Finance.

Although these designs enhance security and decentralization, they also pose obstacles to directly implementing DeFi functionalities on the Bitcoin blockchain.

Early Attempts and Development of Introducing DeFi on Bitcoin

Despite facing limitations, developers continue to seek innovative solutions:

1. Colored coin (2012-2013): An early attempt to extend the functionality of Bitcoin.

2. Counterparty(2014): Introduces the ability to create and trade custom assets.

3. Lightning Network ( From 2015 to present ): A second layer protocol to enhance transaction scalability.

4. Discrete Log Contract ( DLC ) ( Since 2017: The possibility of implementing complex financial contracts.

5. Liquid Network ) From 2018 to present (: A sidechain supporting the issuance of crypto assets and complex transactions.

6. Taproot Upgrade )2021(: Enhancing smart contract capabilities to lay the foundation for the future development of Decentralized Finance.

These early developments laid the foundation for the expansion of Bitcoin's functionality and demonstrated the potential of the Bitcoin ecosystem.

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Key Innovation: Implementing Smart Contracts on Bitcoin

In recent years, multiple protocols aim to introduce smart contracts and Decentralized Finance features for Bitcoin:

1. Rootstock: The pioneer of Bitcoin smart contracts, it is the longest-running Bitcoin sidechain.

2. Core: closely integrated with Bitcoin, compatible with the Ethereum Virtual Machine ) EVM ( blockchain.

3. Merlin Chain: A Layer 2 network integrating ZK-Rollup technology, decentralized oracles, and on-chain anti-fraud modules.

4. BEVM: The first fully decentralized Bitcoin Layer 2 network that is EVM compatible.

These protocols not only replicate Ethereum's Decentralized Finance strategies but also leverage Bitcoin's unique characteristics to explore new directions. As of September 8, 2024, the total locked value of Bitcoin's layer two solutions and sidechains )TVL( reached $1.07 billion, growing 5.7 times since January 1, 2024, and 18.4 times since January 1, 2023.

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The Current State of Bitcoin DeFi

Some key projects have become important players, driving innovation and user adoption:

1. Pell Network: A cross-chain re-staking protocol that enhances the security of the Bitcoin ecosystem and optimizes yields.

2. Avalon Finance: A multi-chain DeFi platform that provides comprehensive borrowing and trading services.

3. Colend Protocol: A decentralized lending platform built on the Core blockchain.

4. MoneyOnChain: A comprehensive DeFi protocol built on Rootstock.

5. Sovryn: A feature-rich Decentralized Finance platform that spans BOB and Rootstock.

6. Solv Protocol: A cutting-edge project in NFT finance, creating, trading, and managing on-chain certificates.

These projects highlight the dynamic development of Bitcoin in the DeFi space. Core holds a leading position in the Bitcoin DeFi space, accounting for 25.2% of the active projects.

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Key Narratives in Major BTCFi Projects

1. Security and decentralization first

2. Bitcoin as a programmable Token

3. Interoperability with Ethereum

4. Unlocking Bitcoin's Capital

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Ethereum DeFi VS Bitcoin and Native Bitcoin DeFi

Bitcoin and Ethereum's Decentralized Finance ecosystem mainly integrates wrapped assets ) such as wBTC and renBTC (. As of September 8, the amount of BTC locked in Ethereum's DeFi protocols ) is 153,400 (, far exceeding the Bitcoin native DeFi ecosystem ) of 108,970 (.

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The Development of Ethereum and Its Implications for Bitcoin and Vice Versa

Bitcoin can learn:

1. Product Diversity
2. Developer Ecosystem
3. Interoperability

Ethereum can learn:

1. Security and Decentralization
2. Simplicity and Robustness
3. Concerns of Value Storage

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Challenges and Opportunities

Technical barriers:

1. Scalability
2. Interoperability

Regulatory concerns: Governments and financial regulatory agencies may strengthen their oversight of Decentralized Finance services.

Future Opportunities:

1. Technological Advancement: Improve Layer 2 solutions and develop frameworks with greater scalability and interoperability.
2. Future growth areas: revenue-generating products, DEX, cross-chain liquidity pools, and DeFi products targeting institutional demand.

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Conclusion

The Bitcoin Decentralized Finance ecosystem will continue to expand driven by technological advancements and institutional interest. Developing more scalable Layer 2 solutions, enhancing interoperability, and launching complex financial products are crucial. Products that are expected to generate returns, DEXs, and institutional DeFi services will attract substantial attention and funding.

However, growth will also face regulatory and technical challenges. Addressing these issues is crucial for maintaining the growth momentum of Bitcoin DeFi and ensuring long-term success.

In conclusion, the future of Bitcoin DeFi is promising, with abundant opportunities for innovation and growth. It has the potential to have a profound impact on the entire DeFi ecosystem, making Bitcoin a core participant in DeFi.

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