The Rise of BTCFi: The Role of Bitcoin in the DeFi Field is Undergoing Significant Transformation

Bitcoin is undergoing a significant transformation in its position within the decentralized finance ( DeFi ) space. Originally just a peer-to-peer transfer tool, this world's first cryptocurrency is now gradually becoming an important force in the DeFi sector, starting to challenge Ethereum's long-standing dominance.

By analyzing on-chain data, we can clearly see the current status and growth trajectory of the Bitcoin ecosystem: BTCFi( the combination of Bitcoin and Decentralized Finance) is not only a technological innovation but may also trigger a paradigm shift in Bitcoin's role within DeFi. This shift could redefine the entire DeFi landscape.

The Rise of BTCFi

In 2008, Satoshi Nakamoto created Bitcoin, initially with the purpose of establishing a peer-to-peer electronic cash system. Although this framework is revolutionary in the field of crypto assets, it has obvious limitations in more complex financial applications like Decentralized Finance (.

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The Original Design of Bitcoin and Its Limitations in Decentralized Finance

Core Design Elements and Limitations:

1. UTXO Model: Bitcoin uses the Unspent Transaction Output ) UTXO ( model. While this method effectively handles simple transfers, it lacks the flexibility to support complex smart contracts.

2. Limited scripting language: Bitcoin's scripting language is designed with limitations, primarily to avoid security vulnerabilities. However, this limitation also hinders its support for complex Decentralized Finance applications, as the number of executable opcodes is limited.

3. Lack of Turing completeness: Unlike Ethereum, Bitcoin's script is not Turing complete, which makes it difficult to implement complex smart contracts that rely on state, and these smart contracts are crucial for many Decentralized Finance protocols.

4. Block size and transaction speed: The 1MB block size limit and 10-minute block generation time of Bitcoin result in a transaction processing speed that is far lower than other blockchains focused on Decentralized Finance.

These design choices, while enhancing the security and decentralization of Bitcoin, also create obstacles for directly implementing DeFi functionalities on the Bitcoin blockchain. The lack of native support for features such as loops, complex conditions, and state storage makes it very difficult to build applications like DEXs, lending platforms, or liquidity mining protocols on Bitcoin.

Early Attempts and Development of Introducing DeFi on Bitcoin

Despite these limitations, Bitcoin's strong security and widespread application have prompted developers to seek innovative solutions:

1. Colored coins )2012-2013(: This is one of the early attempts to extend the functionality of Bitcoin. Colored coins represent and transfer real-world assets by "coloring" specific Bitcoins and attaching unique metadata. Although not considered true Decentralized Finance, it laid the groundwork for developing more complex financial applications on Bitcoin.

2. Counterparty)2014(: This protocol introduces the ability to create and trade custom assets on the Bitcoin blockchain, including the first NFT. Counterparty demonstrates the potential for developing more complex financial instruments on Bitcoin.

3. Lightning Network )2015 to present (: The Lightning Network is a second-layer protocol aimed at enhancing transaction scalability. It opens up possibilities for more complex financial interactions by introducing payment channels, including some preliminary Decentralized Finance applications.

4. Discrete Log Contracts ) DLC ( ) Since 2017: Proposed by Tadge Dryja, DLCs allow for complex financial contracts to be implemented without altering the Bitcoin base layer, providing new possibilities for derivatives and other Decentralized Finance tools.

5. Liquid Network ( 2018 to present ): This is a sidechain-based settlement network developed by Blockstream that supports the issuance of crypto assets and more complex Bitcoin transactions, paving the way for applications similar to Decentralized Finance.

6. Taproot Upgrade ( 2021): By introducing Merkleized Alternative Script Trees ( MAST ), Taproot compresses complex transactions into a single hash, reducing transaction fees and memory usage. Although it is not a DeFi solution itself, it enhances Bitcoin's smart contract capabilities, making complex transactions simpler and more efficient, laying the foundation for the future development of DeFi.

These early developments laid the foundation for Bitcoin's functions to expand from simple transfers to more applications. Although introducing DeFi on Bitcoin faces challenges, these innovations also demonstrate the potential of the Bitcoin ecosystem. These foundations paved the way for a wave of innovations in layer two solutions, sidechains, and Bitcoin DeFi.

Key Innovations: Implementing Smart Contracts on Bitcoin

In recent years, multiple protocols have emerged within the Bitcoin ecosystem, aimed at introducing smart contract and Decentralized Finance features for this first global cryptocurrency. These innovations are transforming the use of Bitcoin, making it more than just a value storage or exchange medium. Here are some of the main protocols driving Bitcoin to achieve smart contracts:

1. Rootstock: As a pioneer of Bitcoin smart contracts, Rootstock is the longest-running Bitcoin sidechain and has become an important foundation for the BTCFi ecosystem.

It utilizes 60% of Bitcoin's computing power, supports dual mining, and is compatible with the Ethereum Virtual Machine (EVM), allowing Ethereum's smart contracts to run on Bitcoin. Rootstock's unique Powpeg mechanism ensures seamless conversion between Bitcoin (BTC) and Rootstock Bitcoin (RBTC), and its "depth defense" security model emphasizes simplicity and robustness.

Since the launch of the mainnet in 2018, the on-chain activity of Rootstock has steadily grown, establishing a stable and scalable solution within the Bitcoin ecosystem.

2. Core: Core is a blockchain based on Bitcoin, which is closely integrated with Bitcoin and compatible with the Ethereum Virtual Machine ( EVM ).

Core stands out for its innovative dual-staking model, which combines Bitcoin and Core. Through non-custodial Bitcoin staking, Core establishes a risk-free yield for Bitcoin, effectively transforming Bitcoin into a yield-bearing asset. Core reports that 55% of Bitcoin mining power is delegated to its network, which helps enhance its security in Decentralized Finance applications.

3. Merlin Chain: Merlin Chain is a relatively new Bitcoin Layer 2 network focused on unlocking the DeFi potential of Bitcoin and is gaining increasing attention. It integrates ZK-Rollup technology, decentralized oracles, and on-chain anti-fraud modules, providing a complete set of DeFi features for Bitcoin holders. The M-BTC launched by Merlin is a wrapped Bitcoin asset that can earn staking rewards, opening new avenues for yield generation and participation in DeFi.

4. BEVM: BEVM represents an important advancement in directly bringing Ethereum's extensive Decentralized Finance ecosystem to Bitcoin. As the first fully decentralized and EVM-compatible Bitcoin Layer 2 network, BEVM uses Bitcoin as fuel, allowing for the seamless deployment of Ethereum's decentralized applications (DApps) on Bitcoin. BEVM is supported by a major mining giant, pioneering the concept of "computational power RWA," which may unlock new dimensions of value for the Bitcoin ecosystem.

Key Innovations of Bitcoin Layer 2 Networks and Sidechains:

• Tokenized Bitcoin assets
• Smart contracts and EVM compatibility
• Yield-bearing Bitcoin
• Scalability and privacy enhancement

These protocols are not merely replicating Ethereum's DeFi strategies on Bitcoin, but are forging new directions by leveraging Bitcoin's unique characteristics. From Rootstock's deep defense mechanisms, to Core's dual staking model, to the comprehensive DeFi solutions provided by Merlin and the computational RWA innovations of BEVM, the BTCFi space is rapidly evolving.

As of September 8, 2024, the total locked value of Bitcoin's layer 2 solutions and sidechains (TVL) has reached 1.07 billion USD, growing 5.7 times since January 1, 2024, and growing 18.4 times since January 1, 2023.

Core leads with a total locked value of 27.6% (TVL), followed by Bitlayer at 25.6%; Rootstock at 13.8%; and Merlin Chain at 11.0%.

The Current State of Bitcoin Decentralized Finance

With the continuous development of the Bitcoin DeFi ecosystem, several key projects have emerged as important participants, driving innovation and user adoption. These projects rely on Bitcoin's layer two solutions and sidechains to offer various DeFi services:

( main BTCFi project

Pell Network) multi-chain###

Pell Network is a cross-chain re-staking protocol aimed at enhancing the security of the Bitcoin ecosystem and optimizing yields. Users earn rewards by staking Bitcoin or liquid staking derivatives (LSD), while decentralized operators are responsible for running validation nodes to ensure the network's security. Pell offers a range of active validation services, such as oracles, cross-chain bridges, and data availability, supporting a broader Bitcoin Layer 2 ecosystem. With its robust infrastructure, Pell aims to be a key player in providing liquidity and safeguarding the security of the crypto economy, driving the sustainable growth of the Bitcoin economy.

Avalon Finance( multi-chain)

Avalon Finance is a multi-chain DeFi platform that spans Bitlayer, Core, and Merlin Chain, known for providing comprehensive lending and trading services within the BTC DeFi ecosystem. Avalon’s main services include over-collateralized lending for major assets and those with lower liquidity, along with dedicated isolation pools. The platform also integrates derivatives trading, enhancing the functionality of its lending services. Additionally, Avalon has launched an algorithmic stablecoin aimed at optimizing capital efficiency, making it a versatile and secure DeFi solution within the Bitcoin ecosystem. Its governance token AVAF adopts the ES Token model, incentivizing liquidity provision and protocol usage.

Colend Protocol(Core)

Colend Protocol is a decentralized lending platform built on the Core blockchain, allowing users to securely borrow and lend Bitcoin and other assets. By utilizing Core's dual staking model, Colend seamlessly integrates with the broader Decentralized Finance ecosystem, enhancing the utility of Bitcoin in DeFi. Its main features include decentralized and immutable transactions, liquidity pools with various dynamic interest rates, and a flexible collateral system.

MoneyOnChain(Rootstock)

MoneyOnChain is a comprehensive DeFi protocol built on Rootstock that allows Bitcoin holders to enhance asset yields while retaining full control of their private keys. At the core of the protocol is the issuance of a stablecoin called Dollar on Chain(DoC), which is a stablecoin fully backed by Bitcoin, designed for users who wish to maintain the value of their Bitcoin holdings pegged to the US dollar. Additionally, MoneyOnChain offers Token BPRO, enabling users to gain leveraged exposure to Bitcoin, resulting in passive income.

The architecture of this protocol is based on a risk-sharing mechanism, utilizing a proprietary financial model to address extreme market volatility. At the same time, it includes a decentralized token trading platform (TEX), a decentralized oracle (OMoC), and a governance token (MoC), enabling users to participate in protocol decision-making, stake, and earn rewards.