Defi on Bitcoin
With the rise of crypto, new Dapps and trends come along. In the last few years, Defi has been one of these trends that have established itself as one of the key drivers of blockchain adoption around the world.
If you never heard of Defi before. It stands for Decentralized Finance. This means that you can do all sorts of specific financial transactions in a decentralized manner. So on a blockchain. Because (most) blockchains are decentralized by nature. Because Defi runs on top of permissionless blockchains, no one can stop you from participating in these financial actions. This can be for simple things like trading/swapping tokens. But also for lending & borrowing money, becoming a liquidity provider, or staking coins.
So far this Defi ecosystem has been mostly built on Ethereum. But has in recent times also spread a lot to other layers-1 networks that have more scalability. As using Defi on Ethereum becomes more expensive.
This has led to the whole multi-chain system we currently find ourselves in. With an enormous Defi ecosystem spread out between all sorts of layer-1 and layer-2 blockchains. But not yet to Bitcoin. This is because Bitcoin has certain limitations on its base layer. Because the network chooses security above functionality first. However, that does not mean Bitcoin can not run any Defi protocols. No, on the second layer level Bitcoin also has the power to run more complicated Defi Dapps. Without losing the security of the Bitcoin base layer.
Defi Sidechains for Bitcoin
Like I said before Bitcoin’s base layer does not provide enough functionality for complicated Defi applications. But its sidechains do have the potential to host these Dapps with the backing of the main network.
These * sidechains already bring Defi capabilities to Bitcoin and could grow the whole Bitcoin decentralized ecosystem in the future.
We start with DefiChain, a bit lesser known BTC sidechain as they do not find themself in the top 100 on Coingecko (yet). Defichain does exactly as the name says. It brings Defi to Bitcoin with a Bitcoin anchored sidechain, that has the possibility for more complicated smart contracts.
This spurs trading on the blockchain as it is all protected with some of the security of Bitcoin. Making it feel safer to trade upon than some of the other layer 1 & 2 blockchains out there.
The network, like many others, does still work on its development and will probably extend its Defi capabilities in the future. While also turning their focus to other on-chain applications.
Stacks is one of the Bitcoin sidechains that has been growing a lot since its launch not too long ago. The network brings many functions to BTC that BSC and Ethereum also have. But with supposedly more security. Stacks does have its own token that can be staked on the network to earn BTC rewards due to its consensus algorithm connected to Bitcoin.
You can find the stats for the network here.
The Stacks blockchain has found itself in the top 100 coins on Coinmarketcap and seems to become a very popular place for BTC NFT collectors. As the network produces and trades in large volumes of NFTs on a daily basis. Not only can NFTs on Bitcoin be fun. But they will most likely also spur the trading/financial applications around them on the sidechain.
The Lightning Network is well known as the most popular Bitcoin sidechain. And has many daily users. Especially after the country of El Salvador adopted it and has put the country on a Bitcoin standard. Although Defi on Lightning is not yet a big thing, it is possible. With several teams around the world working on many things for the network to give it as many financial options as possible.
We hope to see stable coins come to lightning in the near future. And with the option to send easy and cheap stable transactions over Bitcoin. We also expect a form of a DEX. So people can trade their stable coins for Bitcoin.
Currently, we do not have that many Defi protocols running on lightning yet. But some Dapps do already exist, like Lightning Pool. Where people can supply their BTC as liquidity for lightning network service providers.
Known as one of the first Bitcoin sidechains, RSK brings all that Ethereum offers to Bitcoin. But with a merged mining algorithm. So that RSK can enjoy the same security as the whole Bitcoin network. When it comes to the layer-2’s for Bitcoin, many of them have their own token for transaction fees, etc. This is however not the case for RSK as all transactions are paid in RBTC.
The network currently already hosts many Bitcoin Defi protocols and can also be added to many EVM wallets. The network has been a long-standing one and is still being worked on by their team. This could see the layer-2 scale in the coming years. And thus bring much more financial functionality to Bitcoin.
The Liquid Network by Blockstream is very well known as a transaction layer ideal for exchanges. Because the network can host cheap transactions from one party to another. However, the network also allows for the creation of security tokens and much more. This way the Liquid Network brings some extra financial functions to the Bitcoin network. Especially as companies and countries issue bonds, stocks, and other securities on the sidechain network
Defi wallets for Bitcoin
To start using Defi on Bitcoin, you will need a proper Bitcoin wallet first. You can find all the Bitcoin wallets in our wallet finder. But the wallet you choose should also be able to connect to the sidechain you want. If you want a DefiChain wallet you should go for that and if you want a Lightning wallet of that, etc.
But if you are not ready yet for using the whole ecosystem and just want to hold BTC. Till the BTC ecosystem is more developed. You can also just get a BTC wallet and keep your BTC there till you are ready to use it.
If you already hold BTC on another wallet. But that wallet does not support the sidechain you want. Then you can always send your BTC from one to another wallet. Or import the private key into another wallet. But please be careful that no one else sees your private key.
Using Bitcoin for Defi
Of course, if you want to use your BTC for Defi applications, you do not need to do so on a blockchain connected to Bitcoin. You can also just bridge or wrap your BTC. So you can use it on other blockchains like Solana, Avalanche, and many more.
Currently, this is one of the most common ways how people earn interest on their BTC in a decentralized fashion. If this is what you are after you can see if you can get your hands on some WBTC or BTCB. You can do this by swapping one for another on a crypto exchange or by using the Ren bridge. for RBTC.
This way you can bring your BTC to Ethereum, Polygon, etc. And start using interest on it on Dapps like PancakesSwap, Aave, Compound, and many more.
But you should keep in mind that when you keep your BTC on another blockchain you are at the mercy of either that blockchain or the custodian that holds the BTC for you (in exchange for a wrapped token).
Investing in the Bitcoin Defi ecosystem
If you believe that the Bitcoin Defi ecosystem is the Defi ecosystem of the future. Then you might want to invest in it. Btw this is not financial advice, okay! If you do so you can go 2 ways in doing so.
The first is maybe the most obvious and that is by investing in the tokens behind the Bitcoin sidechains and the tokens of the Defi protocols. Although this is the easiest way, you will also have to pick the winners, which can be difficult. If this is your way to go. You could just go to a crypto exchange that has the token listed and buy it there. You would not even have to hold it yourself. But this does come with more risk and less freedom. If you keep it on the exchange that is.
The most simple and easy way to invest in the Bitcoin Defi ecosystem is not by buying the tokens. But really buy just buying and holding BTC. As Bitcoin Defi heavily relies on Bitcoin. Its main token will also benefit from the systems built on top of it. Mostly because they will need it for security and to settle the main transactions on the Bitcoin blockchain.
I hope this article thought you more about Defi on top of Bitcoin. If you want to learn more about crypto feel free to check out our other articles. And do not forget to give us a follow on our social channels. So that you stay up to date with all we do!