The Rise of Bitcoin DeFi: Current Status and Outlook of the BTCFi Ecosystem

Bitcoin is undergoing a significant transformation in the field of Decentralized Finance ( DeFi ). From its initial simple peer-to-peer transfers, this world's first cryptocurrency is now gradually becoming an important force in the DeFi space, starting to challenge Ethereum's dominance.

By analyzing on-chain data, we can clearly see that the combination of BTCFi( Bitcoin and Decentralized Finance is not just a technical transformation, but may also trigger a paradigm shift in Bitcoin's role within DeFi. This transformation could redefine the landscape of the entire DeFi sector.

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The Rise of BTCFi

In 2008, Satoshi Nakamoto created Bitcoin, initially designed as a peer-to-peer electronic cash system. Although this architecture is revolutionary in the field of crypto assets, there are significant limitations in more complex financial applications such as Decentralized Finance.

The Original Design of Bitcoin and Its Limitations in Decentralized Finance

The core design elements and limitations of Bitcoin include:

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 restricts support for complex Decentralized Finance applications.

3. Lack of Turing completeness: Difficult to implement complex smart contracts that rely on state.

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

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

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Early Attempts and Development of Introducing DeFi on Bitcoin

Despite facing limitations, the security and widespread application of Bitcoin prompt developers to seek innovative solutions:

1. Colored coin )2012-2013(: early attempts to expand Bitcoin functionality.

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

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

4. Discrete Log Contracts ) DLC ( ) Since 2017 (: A new way to realize complex financial contracts.

5. Liquid Network ) Since 2018 (: A sidechain that supports the issuance of crypto assets and complex transactions.

6. Taproot upgrade )2021(: Enhanced the smart contract capabilities of Bitcoin.

These early developments laid the foundation for the expansion of Bitcoin's functionality, showcasing the potential of the Bitcoin ecosystem in the Decentralized Finance field.

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Key Innovations: Implementing Smart Contracts on Bitcoin

In recent years, multiple protocols have been dedicated to introducing smart contracts and Decentralized Finance features for Bitcoin:

1. Rootstock: The pioneer of Bitcoin smart contracts and the longest-running Bitcoin sidechain.

2. Core: An EVM-compatible blockchain closely integrated with Bitcoin, featuring an innovative dual-staking model.

3. Merlin Chain: A Bitcoin Layer 2 network integrated with ZK-Rollup technology.

4. BEVM: The first fully decentralized and EVM-compatible Bitcoin Layer 2 network.

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 rapidly.

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The Current State of Bitcoin Decentralized Finance

) Main BTCFi projects

1. Pell Network: Cross-Chain Re-Staking Protocol

2. Avalon Finance: Multi-chain DeFi platform

3. Colend Protocol: Decentralized lending platform

4. MoneyOnChain: Comprehensive Decentralized Finance Protocol

5. Sovryn: A feature-rich Decentralized Finance platform

6. Solv Protocol: Cutting-edge project for NFT financialization

These projects showcase the diversity and rapid development in the Bitcoin DeFi space. Core leads in the number of projects, accounting for 25.2% of active projects.

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) key narratives in major BTCFi projects

• Security and decentralization first
• Bitcoin as a programmable Token
• Interoperability with Ethereum
• Unlocking the capital of Bitcoin

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Comparison and Analysis of ) with Ethereum Decentralized Finance

As of September 8, the amount of BTC locked in Ethereum Decentralized Finance protocols is ###15.34 thousand (, far exceeding the native Bitcoin DeFi ecosystem which stands at )0.897 thousand (. The scale of native Bitcoin DeFi projects is relatively small, but they operate within Bitcoin's own security framework, avoiding many cross-chain risks.

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Insights from the Development of Ethereum for Bitcoin and Vice Versa

Bitcoin can learn from Ethereum:

• Product Diversity
• Cultivate an active developer ecosystem
• Enhance interoperability

Ethereum can learn from Bitcoin:

• Emphasis on security and decentralization
• Simplicity and robustness
• Focus on value storage

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Challenges and Opportunities

Technical barriers:

• Scalability issues
• Interoperability Challenges

Regulatory concerns:

• Expected regulatory scrutiny intensifies
• Compliance Complexity

Future Opportunities:

• Improvements in Layer 2 solutions
• The advancement of privacy protection technology
• Growth of yield-generating products, DEX, and cross-chain liquidity pools
• DeFi products tailored for institutional needs

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Conclusion

The Bitcoin DeFi ecosystem is expected to continue expanding driven by technological advancements and institutional interest. Developing more scalable Layer 2 solutions, enhancing interoperability, and launching more complex financial products are crucial for its development. Despite facing regulatory and technical challenges, the future of Bitcoin DeFi remains hopeful, with the potential to have a profound impact on the entire DeFi ecosystem, making Bitcoin a core participant in DeFi.

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