DeFi on Bitcoin: Breakthrough or Bubble?

After Taproot, BTC Holders No Longer Need wBTC for DeFi

DeFi is more dominant on the Ethereum network, the leading smart contract platform and the second-largest blockchain by market capitalization. Ethereum has benefited from a first-mover advantage in this field, being the first public network to support decentralized apps since 2015.

However, it is becoming more and more challenged by newly developed blockchains such as Solana, Avalanche, Cardano, and Polkadot. Bitcoin, the flagship blockchain network designed to enable peer-to-peer online transactions, must be more frequently noticed in this discussion.

However, Bitcoin network developers have recently discovered ways to expand the network’s capabilities beyond payments, and it is now possible to launch DeFi applications native to the Bitcoin ecosystem.

DeFi on Bitcoin was introduced in November 2021 due to the successful implementation of the Taproot upgrade, which enabled greater functionality in complex scripting.

🔍 What is DeFi on Bitcoin?

Thanks to Taproot, Bitcoin could now support decentralized apps, making it a viable alternative to Ethereum for developers looking to launch dApps.

BTC holders could convert their holdings into wrapped versions on other blockchains before the launch of DeFi apps on the Bitcoin network. The most popular asset on the Ethereum network (ERC-20 token) was the wrapped BTC (wBTC) asset.

wBTC allowed BTC holders to participate in Ethereum-based DeFi protocols by locking their assets in a smart contract and receiving an equal amount (i.e., 1:1 ratio) in the derivative asset. Users could then use yield farming to save, lend, and earn passive income on these platforms.

However, since the launch of Bitcoin-based DeFi platforms, conversions to other assets have become obsolete, and investors can now use BTC coins natively on these Bitcoin-based DeFi platforms.

💼 How DeFi on Bitcoin work?

The most common way DeFi interacts with Bitcoin is through using a wrapped version of BTC on a non-Bitcoin blockchain. With wBTC, an investor sends BTC coins to a custodian, who stores them and returns wBTC at the same ratio.

For example, if you send one BTC, you will receive one wBTC in return. Wrapped tokens can be used with Ethereum-based DeFi protocols like Curve, Balancer, or AAVE.

You send back your wBTC tokens to redeem your BTC, and the custodian (smart contract) will refund your coins to you.

With the release of the Bitcoin Taproot upgrade, DeFi is now possible on Bitcoin, but with one exception. Smart contracts are not supported by the native Bitcoin blockchain, which continues to use the limited Script programming language. Taproot introduced advanced capabilities only possible with layer-2 scaling solutions and sidechains.

Side chains and layer-2 protocols host dApps in various markets, such as DeFi, non-fungible tokens, and gamefi ecosystems.

🏢 Top 3 Notable Companies Building DeFi on Bitcoin Solutions

1. Bitcoin DeFi built on Stacks.

Stacks, like Bitcoin, is a layer-1 independent blockchain. The Stacks and Bitcoin networks are linked by a process known as Proof-of-Transfer. Miners must send Bitcoin to the Bitcoin network to mine Stacks. Multiple Stacks of network transactions can correspond to a single Bitcoin network transaction.

On the Stacks blockchain, various DeFi applications are possible, ranging from “stacking” the Stacks token to earn Bitcoin rewards to exploring decentralized applications that offer familiar DeFi strategies like staking and yield farming.

2. Bitcoin DeFi built on Rootstock.

The RSK blockchain operates as a sidechain to the Bitcoin blockchain, and its utility token is Smart Bitcoin (RBTC). On the RSK blockchain, RBTC is used to pay smart contract fees, just as ETH is used to pay fees on the Ethereum blockchain.

The price of RBTC is pegged at 1:1 with the cost of Bitcoin. Because the RSK blockchain is a sidechain of Bitcoin, there is a two-way peg between RBTC and BTC, and the two assets can be transferred back and forth between the two blockchain networks interchangeably.

3. Bitcoin DeFi is built on Mintlayer.

Mintlayer is a layer-2 scalability solution for Bitcoin that supports smart contracts such as DeFi, NFT, and DEXs. Consider it an Ethereum competitor with Bitcoin’s security.

It is intended to provide a long-term infrastructure for DeFi development and deployment on Bitcoin and Lightning Networks. This is a layer-2 payment protocol that aims to enable micropayments on the flagship blockchain.

Mintlayer, like Ethereum, is a platform where developers can launch their dApps, unlocking and extending Bitcoin’s full potential. This solves all three problems that DeFi faces on Bitcoin.

💰 WBTC Token

Wrapped Bitcoin was announced on October 26, 2018, and went live on January 31, 2019.

The Wrapped Tokens project, of which WBTC is a part, was created collaboratively by three organizations: BitGo, Kyber Network, and Ren.

Wrapped Bitcoin is a tokenized Bitcoin that operates on the Ethereum blockchain.

WBTC complies with ERC-20, the Ethereum blockchain’s basic compatibility standard. It enables it to fully integrate into the ecosystem of the latter’s decentralized exchanges, crypto lending services, prediction markets, and other ERC-20-enabled DeFi applications.

💹 Benefits of WBTC

Faster Transaction Speed

Wrapped Bitcoins don’t run on the Bitcoin network. Therefore, their block speed and network speed are based on the Ethereum blockchain and not on that of Bitcoin. Ethereum takes considerably less time to validate blocks to be added to the blockchain, so transactions on the network are faster.

In this way, WBTC helps its holders carry out their transactions faster than real Bitcoin.

Lower Fees

Transaction fees with Ethereum are lower than those of Bitcoin to encourage the network’s use by developers. WBTC holders can thus carry out transactions at cheaper rates than those who hold BTC.

For example, if a user intends to make multiple funds transfers, they would prefer to use WBTC because of the fees they would pay per transaction. The fee discrepancy is due to the congestion level on Bitcoin. Transactions on the Bitcoin network get clogged, leading to higher charges for the blocks to be cleared, while Ethereum has a faster clearance rate.


WBTC offers the chance to move one’s crypto holdings between blockchains quickly. The interoperability problem has been a formidable recurring issue for crypto users, especially those in the DeFi space.

However, wrapped cryptocurrencies, including WBTC, are viable solutions to this problem via their interoperability. This feature means users don’t have to sell parts of their Bitcoin holdings to access DeFi services on Ethereum. At any time, when they wish, they can get back their coins, even after “changing” them into Ethereum tokens.

🤝 What Makes Bitcoin and DeFi Different?

The difference between Bitcoin and DeFi is best explained by drawing parallels between email and the internet.

When the internet was first made available to the public, it only allowed for email. People thought the internet was all about interacting with each other using this lightning-fast technology.

However, as internet technology evolved and spread over the next few years, everyone realized it wasn’t limited to just emails but an entirely new world with limitless possibilities.

Likewise, it was fantastic when the blockchain world was solely focused on Bitcoin. It was well received. It enabled them to make anonymous money in P2P transfers on their own. However, we discovered the true potential of this technology in less than a decade.

It wasn’t just one feature that made blockchain payments faster and cheaper. It was a complete system where you could do anything that required money. It freed people from the clutches of banks and financial institutions.

⚡What Keeps Bitcoin and DeFi Together?

The underlying technology, blockchain, connects Bitcoin and DeFi. Despite their differences, it is essential to remember that Bitcoin differs from DeFi. It should be considered an integral component of the more extensive decentralized financial system.

People can only use real-world money to carry out some of the special operations that DeFi enables.

Because paper money or fiat currencies, such as USD or Euro, involve banks and centralized organizations, they directly contradict DeFi principles. As a result, Bitcoin and other crypto tokens – digital stores of value – can be used as governance currencies in the DeFi world.

🤔 Why Do We Need DeFi on Bitcoin?

The flagship cryptocurrency has primarily been used as a store of value and, to a lesser extent, as a payment method. By allowing DeFi, Bitcoin increases its utility while appealing to a broader audience of users.

Decentralized finance, however, requires the security and assurance that Bitcoin has and that most DeFi investors and users value. Occasionally, a DeFi protocol loses user funds to hackers, resulting in a loss of trust.

DeFi on Bitcoin addresses these issues while increasing the trustworthiness of various solutions, making them more appealing to potential developers and investors.

🚧 Challenges Facing DeFi on Bitcoin

DeFi on Bitcoin faces three main challenges, which are:

  • Scalability
  • Compatibility
  • Security

Bitcoin is currently one of the slowest blockchains on the market, processing about 7 TPS. Ethereum can handle approximately 12-15 TPS, whereas Cardano and Polkadot can handle up to 1,000 TPS. Scalability is a significant consideration for developers looking for a host network for their DeFi platform, and Bitcoin’s figures need to compare better.

Due to a limited scripting language, Bitcoin’s current implementation could be more extensible. In contrast, its competitors, such as Ethereum, were built from the ground up to be composable.

As a result, DeFi developers tend to favor Bitcoin’s competitors as their preferred protocols for launching their apps. These protocols make development much easier because they have access to a wide range of easily compatible assets, are free to use and adhere to various internal coding standards.

Even though these second-layer blockchains rely on Bitcoin’s proven security infrastructure, they pose a security risk similar to that faced by other dApps and dApp platforms on Bitcoin’s rival networks. The vulnerability of smart contracts is a significant risk that every investor and developer must consider before interacting with one.

Most DeFi platforms and apps on the Bitcoin network are new, which means they have yet to be thoroughly tested, iterated and improved upon to ensure the security of assets under management.

🌟 Bitcoin Layer 2

It all began with the Ordinals. Ordinals are a way to place NFTs on Bitcoin. This story started a few weeks ago, with Bitcoin punks dominating.

Many funds are attempting to gain exposure to it, and this trend is expected to continue. Yuga Labs has also announced the release of an Ordinal collection.

Because STX intends to be a layer on top of Bitcoin and is regulated, the BTC layer narrative was born.

Badger has announced the launch of an LSD-backed Bitcoin. The Bitcoin backed by LSD will be known as eBTC. It is backed by liquid-staked ETH and denominated in BTC, similar to how DAI is backed by many assets but denominated in USD.

🚀 Outstanding Potential Projects

Alongside Ordinals and LSD-backed Bitcoin, there are several projects worth mentioning, such as:

The Bitcoin Network and Ren

Ren Protocol (formerly Republic Protocol) was created in 2017 to focus on trustless OTC trades. OTC brothers can understand P2P transactions and do not affect the market price of the traded token.

However, Ren Protocol rebranded and got the name it has today. The goal is to focus on developing Interoperability, a platform that allows you to trade tokens between different blockchains securely. Untrustworthy and decentralized.

The project launched the Mainnet in May 2020, allowing BTC, Bitcoin Cash, and Zcash to be converted to the ERC 20 network via the Wrapped and Ren Virtual Machine mechanism.


ZeroDAO is a messaging protocol that connects assets such as Bitcoin/Zcash and Ethereum.

To integrate the Ethereum ecosystem with the Bitcoin layer, you’ll need a reliable way to transfer assets from Bitcoin to Ethereum. ZeroDAO was previously based on Ren technology.

Now that Ren has discontinued their service, ZeroDAO is developing from the ground up and will go live soon (layer zero networks).

There are no tokens in ZeroDAO. There will be a way to obtain characters in their Discord, providing incentives on ZeroDAO. You can introduce them to the BTC-Fi narrative by assisting them with community service.

Overall, BTC-Fi is being used to build a variety of things. Whether you like it or not, it’s happening. If we pay attention, this can lead to new opportunities.

🎯 Conclusion

Innovation is constantly required to overcome obstacles or challenges that disrupt its path to widespread adoption. One of these innovations is wrapped cryptocurrency.

Bitcoin is the safest open network and one of the most well-known and trusted. As a result, it is becoming increasingly appealing to DeFi developers and investors.

However, as the Bitcoin DeFi space grows, whether it will become popular enough to displace Ethereum as the go-to dApp deployment platform remains to be seen.

Overall, BTCFi is being used to build a variety of things. Whether you like it or not, it’s happening. If we pay attention to these projects, this could lead to new opportunities.