ZoneBitcoin EditorialAh, bitcoin in DeFi? This may surprise more than one person. This is normal, Bitcoin in its initial structure does not allow decentralized finance. In general, we let our bitcoins “sleep” in our wallets. However, today is different! There are solutions to make our bitcoins work on DeFi.
It was especially in 2020 that the explosion in the use of DeFi literally exploded. Thus, we focused on Ethereum apps and other blockchains like Solana or Avalanche (in 2021) while somewhat forgetting Bitcoin.
We were able to see the volumes of T reaching records during the bull run year of 2021. It was the start of the DeFi wild ride.
During this time, Bitcoin has been somewhat neglected. Even if a few infrastructure projects have made it possible to introduce it into DeFi, they are not very well known to the general public.
Therefore, few people know that you can also put your BTC to work in decentralized finance. If this interests you, then this ultimate guide is for you.
What is decentralized finance?
Before embarking on this adventure that is “Bitcoin in DeFi”, we must still remember the basics. It is indeed necessary to understand what decentralized finance is before anything else. Decentralized Finance is the French translation of the expression “Decentralized Finance”. It is referred to by the acronym DeFi for reasons of simplicity.
As the name suggests, decentralized finance refers to financial services that are built on the blockchain and are therefore decentralized. In other words, these are financial services such as borrowing, lending, trading of derivative assets, etc. which are available on decentralized applications.
DeFi has even innovated in this sector with the creation of new services such as Yield farming for example.
In December 2021, the T reached more than 180 billion dollars. This shows the level of enthusiasm of the community for decentralized financial services.
This enthusiasm can be explained by the joint appearance of numerous so-called “Ethereum killer” blockchains and ever stronger incentives. The community was discovering double-digit APYs (see 3 in DeFi 2.0) and tokens were being created with all their might. The magic money was there, and it literally exploded the use of DeFi.
Why is Bitcoin a separate player in DeFi?
Now you may wonder why we don't talk about Bitcoin in DeFi. Well, the reason is very simple. Bitcoin is a very first generation blockchain. It is a type of blockchain that does not allow applications to be created on the network. Bitcoin is only used for money transfers and does not allow the creation of applications managed by smart contracts. This also means that bitcoin can only operate on its own network.
Indeed, not all blockchains are platforms designed to create smart contracts. It was Ethereum which made this possible and this is how the EVM (Ethereum Virtual Machine) completely disrupted the sector. Ethereum is a so-called 2nd generation blockchain which allows the creation of smart contracts (and therefore the creation of decentralized applications –Dapps).
This consists of a platform on which decentralized applications and other tokens can be built. On Ethereum for example, we can create tokens with specific standards (the ERC-20 tokens among others) which can be exchanged and moved freely within the network. It is this composability that we call “lego money” and which allows us to exchange tokens, create apps, manage services, etc.
So this is all that Bitcoin cannot “do”. However, there is no lack of desire, you will tell me.
Some people have therefore looked into this point and are creating solutions to bring Bitcoin into DeFi.
Solutions for bringing Bitcoin into DeFi
The challenge of bringing Bitcoin into DeFi was being able to do so without altering the main network. The idea was therefore to create additional layers on the network. These layers will then be able to rely on the Bitcoin network and benefit from its robustness without modifying it.
This type of solution has been used in particular to resolve other problems such as those of scalability of bitcoin For example. This is typically the case of Lightning Network, which is a layer 2 solution (called in English layer2:) built on top of the Bitcoin network. Today, it is the most popular solution for paying in BTC at a lower cost. However, the lightning network can only be used mainly for this.
To be able to perform other more advanced services such as borrowing, lending and other services, solutions are needed that offer the ability to create smart contracts on top of Bitcoin. Some solutions have been put in place.
Today, Bitcoin has its own DeFi ecosystem even if it still remains marginal compared to other blockchains.
Let's see the different options we have for using Bitcoin in DeFi.
1/ Use Wrapped Bitcoin (WBTC) on Ethereum
To use Bitcoin on DeFi, let's start with the most important and popular blockchain in this area. Let's see how to use bitcoin on Ethereum, because yes, it is possible.
The first and most well-known way to do this is certainly that of Wrapped Bitcoin (WBTC). The word “wrapped” means “wrapped” or “wrapped”. We use the term for wrapped gifts for example (wrapped gift).
Thus, wrapped bitcoin (and this is valid for all other wrapped tokens) is a 1:1 representation of bitcoin that can be used on other compatible blockchains. We must understand that being wrapped amounts to being wrapped in another standard, another token standard. In the case of WBTC, it is therefore bitcoin which is enveloped in the infrastructure of the ERC2-20 standard. The result is that we then have perfectly compatible WBTC tokens on Ethereum. However, this is not indexing. To create a WBTC, you must deposit a real BTC and to find a BTC, it amounts to burning a WBTC.
You should know that the concept of WBTC was originally launched by the exchange BitGo, Ren and Kyber. Today, the WBTC is managed by WBTC DAO in order to ensure its control by the community. In 2022, almost $9 billion worth of Bitcoin was locked in Wrapped Bitcoin (WBTC). This clearly shows the enthusiasm of bitcoiners for this new horizon of possibilities.
Learn more about the process of creating Wrapped Bitcoin (WBTC).
Finally, it is not only bitcoin that can be wrapped, ETH can also be wrapped with its WETH token. The Rende VM platform allows other cryptocurrencies to be wrapped and sent to other blockchains via a bridge (RenBridge).
The use cases for WBTC are numerous and here is an example:
- You can then first convert your bitcoins into WBTC.
- Now we can use a loan protocol like MakerDAO and deposit WBTC to borrow stablecoins.
- It is then possible to use your stablecoins in other protocols to make them grow.
Please note, this is just an example use case. It is also possible to lose your WBTC if the collateral is liquidated.
2/ The Stacks method.
We already told you about Stacks when we talked about the project MiamiCoin built on Citycoin. This token is in fact built on Stacks. Let's see what it's all about.
Stacks is a layer 1 blockchain that is independent but linked to the Bitcoin network. The Stacks blockchain has its own token (STX) for network fees, its own engines and its own consensus mechanism. In fact, the two networks (Stacks and Bitcoin) are connected via a consensus mechanism called “Proof-of-Transfer” (PoX). It is the first blockchain to do this.
PoX allows two separate blockchains to be connected. This then makes it possible to improve the potential of the Bitcoin network without modifying it in any way. To mine Stacks, miners must send btc to the bitcoin network.
A very wide range of financial applications including bitcoin is then permitted, thanks to Stacks.
💰 How to earn bitcoins with Stacks?
What is very interesting about Stacks is that you can earn bitcoins by stacking STX. Currently, the APY is around 8%.
To be able to earn bitcoins thanks to Stacks, nothing could be simpler. You have several ways to do this. Also, you can download the official Stacks wallet namely Hiro wallet.
It is also possible to buy STX crypto on several exchange platforms such as Binance, Kucoin or any other platform. However, the platform that allows you to earn bitcoins thanks to your stacks is the OkCoin exchange platform. It is on this platform that you can stack STX and generate bitcoins for example.
Likewise, you can also stake other cryptocurrencies, such as ADA, ATOM, DOT and many others.
Bitcoin in DeFi built on Rootstock (RSK):
Rootstock (called RSK) operates smart contracts and is EVM compatible. It functions as a sidechain (parallel chain) to Bitcoin and supporting other DeFi protocols. The RSK sidechain benefits from the security and robustness of the Bitcoin network. RSK has its own utility token, namely RBTC. The latter is used to pay network fees for smart contracts operated on RSK. RBTC is then the equivalent of ETH on the Ethereum blockchain, for example.
What's interesting is that RBTC is pegged 1:1 to the price of Bitcoin (BTC). They can be exchanged for the same price. Being a sidechain of Bitcoin, there is a two-way link between RBTC and BTC.
Thus, a user can exchange their BTC for RBTC and can use it in other protocols on Ethereum, in particular. On the RSK platform, be aware that this process is somewhat slow. It can take up to a day for certain BTC–>RBTC conversion type operations or vice versa.
For immediate purchase, you can obtain RBTC on several platforms such as Bitfinex, Bisq and transfer it to your wallet metamask for example.
One of the newest applications of bitcoin in DeFi most used on RSK is sovryn. You can test it in alpha version currently. To be able to use RSK, please note that you will need to add the RSK EVM chain to your wallet.
To add it, you can go to the site chainlist.org to search and add the network you want.
How to make your RSK grow?
Once your RBTC is ready on RSK, you can head to the Sovryn application for example. It is certainly the best known and most used application. This is an ideal dapp for those who want to put their bitcoins to work in a sophisticated way. You can do borrowing, lending, margin trading, staking, etc.
Final word on Bitcoin in DeFi?
We are coming to the end of this guide. If you were a bitcoin holder and didn't know what to do with it other than use it on lending sites, we hope to have shown you the way to other possibilities.
Some in fact prefer to do DeFi with bitcoin because they prefer and want to make money on bitcoin crypto and not on other cryptos.
We have seen in this guide “Bitcoin in DeFi”, the most popular applications. You should know that this ecosystem continues to grow with other solutions and protocols.
Among those which do not appear in this guide and which we could have mentioned:
- BadgerDAO : It is possible to use Bitcoin on this platform. However, in 2021, BadgerDAO was hacked for over $120 million. This scared away some users...However, it remains a very interesting dapp for bitcoiners who want to use bitcoin in DeFi.
- DeFichain : It is a blockchain operating on proof-of-stake. It is a fork of Bitcoin and allows you to create decentralized applications.
- Liquid Network : The Liquid Network is a layer 2 solution that allows faster and more confidential transactions. We can use stablecoins and tokens on this layer; This is a very interesting path for those who wish to invest in a more “conventional” way.
- Bifi Finance: One of the first protocols where you can put your real bitcoins to work (not pleged versions). You can lend and borrow on the platform.
What are the alternatives?
In fact, and to summarize, there are 3 ways to put your bitcoins to work:
- the decentralized method: which we discussed in this article. This is the one we favor even if it requires a certain amount of practice and expertise.
- the centralized method: This is the one we use the most in general because it remains simpler. For example, sites like Youhodler are platforms that allow you to generate more than 5% APY on bitcoin each year and in compound interest.
- Finally, the CeDeFi method: It is a mix between the two previous methods. The most popular sites to do this is CakeDeFi.
Does Bitcoin Need DeFi?
To finish this guide, we could open the question of whether bitcoin really needs DeFi. It’s certain that bitcoin maximalists may find this unnecessary. For moderate maximalists, this remains an excellent option to use your bitcoins in a decentralized way.
What's interesting is that we don't touch Bitcoin. We then use the different layers of protocols, sidechains and applications without modifying Bitcoin and taking advantage of the power of its decentralized network. It's a feat to be able to do that.
It's like making it possible to transform a small car into a Ferrari, without even having to change the engine or key parts of the car.
Thus, new solutions like Lightning Network, RSK or Stacks are very useful for expanding the area of use of Bitcoin. This allows BTC not to remain frozen in its own ecosystem and to avoid necrosis. Although it is still early days, it remains very promising.
Read other related articles:
- DeFi Beginner's Guide: Making Money
- DeFi: The Ultimate Beginner's Guide (Part 1/The Basics)
- The 3 risks of losing money on DeFi and how to avoid them
- The 10 DeFi terms to know
Note: No financial advice is given in this or any other article on zonebitcoin. This is information of which you are the sole judge and master. Be responsible with your investments and only invest as much as you are willing to lose.
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