BTCFi is developing rapidly, and the role of Bitcoin in the Decentralized Finance field is undergoing a transformation.

Bitcoin is undergoing a significant transformation in its position within Decentralized Finance ( DeFi ). Originally used only for peer-to-peer transactions, this world's first cryptocurrency is gradually becoming an important force in the DeFi space, beginning to challenge Ethereum's long-standing dominance.

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

The Rise of BTCFi

In 2008, when Satoshi Nakamoto launched Bitcoin, his original intention was to serve as a peer-to-peer electronic cash system. Although this architecture is revolutionary in the field of crypto assets, it has limitations in complex financial applications such as Decentralized Finance.

The Original Design of Bitcoin and Its Limitations

Core design elements and limitations of Bitcoin:

1. UTXO model: efficiently handles simple transfers, but lacks the flexibility to support complex smart contracts.

2. Limited scripting language: Restricted to avoid security vulnerabilities, hindering support for complex DeFi applications.

3. Lack of Turing completeness: It is difficult to implement complex smart contracts that depend on state.

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

These designs, while enhancing security and decentralization, have also posed obstacles to the direct implementation of Decentralized Finance functions on the Bitcoin blockchain.

Early Attempts and Development

Despite facing limitations, developers are still seeking innovative solutions:

1. Colored Coin (2012-2013): Early attempts to extend Bitcoin's functionality.

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

3. Lightning Network (2015 to date ): Layer 2 protocol, enhancing transaction scalability.

4. Discrete Log Contracts ( DLC ) (: Implement complex financial contracts.

5. Liquid Network ) 2018 to present (: A settlement network based on sidechains that supports more complex transactions.

6. Taproot Upgrade )2021(: Enhances smart contract capabilities, reduces costs, and decreases memory usage.

These developments lay the foundation for the expansion of Bitcoin's functionalities and pave the way for subsequent innovations.

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Key Innovation: Achieving Smart Contracts

In recent years, multiple protocols have aimed to introduce smart contracts and Decentralized Finance features for Bitcoin:

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

2. Core: A blockchain closely integrated with Bitcoin and compatible with EVM.

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

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

The key innovations of these protocols include:

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

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As of September 8, 2024, the total locked value of Bitcoin layer two solutions and sidechains is )TVL(, reaching 1.07 billion USD, which is a 5.7 times increase since January 1, 2024, and an 18.4 times increase since January 1, 2023.

Core leads with 27.6% of the TVL, followed by Bitlayer)25.6%(, Rootstock)13.8%(, and Merlin Chain)11.0%(.

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The Current State of Bitcoin DeFi

Some key BTCFi projects are driving innovation and user adoption:

1. Pell Network: Cross-chain re-staking protocol to enhance the security of the Bitcoin ecosystem.

2. Avalon Finance: A multi-chain DeFi platform across Bitlayer, Core, and Merlin Chain.

3. Colend Protocol: A decentralized lending platform built on Core.

4. MoneyOnChain: A comprehensive DeFi protocol built on Rootstock.

5. Sovryn: A feature-rich Decentralized Finance platform spanning BOB and Rootstock.

6. Solv Protocol: A cutting-edge project in NFT finance, based on Merlin Chain.

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As of September 8, 2024, Core holds a leading position in the Bitcoin DeFi space, accounting for 25.2% of the projects. Rootstock and Bitlayer each account for 13.0%, while Merlin Chain accounts for 9.9%.

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Pell Network has become a leading DeFi project with a TVL of $260.8 million, while Avalon Finance and Colend Protocol have TVLs of $206.2 million and $115.5 million, respectively.

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BTCFi Key Narrative

1. Security and Decentralization First
2. Bitcoin as a Programmable Token
3. Interoperability with Ethereum
4. Unlock Bitcoin Capital

Comparison with Ethereum Decentralized Finance

Bitcoin operates in the Ethereum DeFi ecosystem through wrapped assets like wBTC. As of September 8, the amount of BTC locked in Ethereum DeFi protocols is 115.34 thousand, far exceeding the Bitcoin native DeFi ecosystem's 10.897 thousand.

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Future Outlook

In terms of technological advancements, improving Layer 2 solutions and developing frameworks with greater scalability and interoperability will enhance Bitcoin's DeFi capabilities.

The future growth areas are expected to include:

• Income-generating products
• DEX and cross-chain liquidity pools
• Institutional DeFi products

The Bitcoin DeFi ecosystem is expected to continue expanding driven by technological advancements and institutional interest. However, changes in the regulatory environment, scalability, and security challenges need to be addressed. Overall, the future of Bitcoin DeFi is promising and has the potential to have a profound impact on the entire DeFi ecosystem.

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