The Rise of BTCFi: Bitcoin's New Role in Decentralized Finance

Bitcoin's position in the DeFi field is undergoing significant changes. From its initial role as a peer-to-peer transfer tool, Bitcoin has now become an important force in the DeFi ecosystem, beginning 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 only a technological transformation but may also trigger a fundamental shift in Bitcoin's role within DeFi. This shift could redefine the entire landscape of the DeFi sector.

The Rise of BTCFi

In 2008, Satoshi Nakamoto created Bitcoin, originally designed as a peer-to-peer electronic cash system. Although this architecture has revolutionary significance in the field of crypto assets, it has obvious limitations in more complex financial applications such as Decentralized Finance (.

The Original Design of Bitcoin and Its Limitations in Decentralized Finance

Core design elements and limitations of Bitcoin:

1. UTXO model: Bitcoin uses unspent transaction output ) UTXO ( model, which is very effective in handling simple transfers but lacks the flexibility needed to support complex smart contracts.

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

3. Lack of Turing completeness: Unlike Ethereum, Bitcoin's scripting 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: Bitcoin's 1MB block size limit and 10-minute block generation time result in its transaction processing speed being far lower than other blockchains focused on Decentralized Finance.

These design choices, while enhancing the security and decentralization of Bitcoin, have also posed obstacles to the direct implementation of DeFi functions 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 this is not true Decentralized Finance, it laid the foundation 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 )Since 2015 (: 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 initial Decentralized Finance applications.

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

5. Liquid Network ) Since 2018 (: This is a sidechain-based settlement network developed to support 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 Abstract Syntax 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 it easier and more efficient to execute complex transactions, laying the groundwork for the future development of Decentralized Finance.

These early developments laid the groundwork for Bitcoin's functionality 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.

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Key Innovations: Implementing Smart Contracts on Bitcoin

In recent years, multiple protocols have emerged in the Bitcoin ecosystem aimed at introducing smart contracts and Decentralized Finance features for this world’s first cryptocurrency. These innovations are changing the use of Bitcoin, making it not just a store of value or a medium of exchange. Here are some of the key 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 of 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 mainnet launch in 2018, Rootstock's on-chain activities have steadily increased, indicating that it has established a stable and scalable solution position within the Bitcoin ecosystem.

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

Core stands out with 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 two network dedicated to unlocking the DeFi potential of Bitcoin, and it is attracting increasing attention. It integrates ZK-Rollup technology, decentralized oracles, and on-chain anti-fraud modules, providing a complete set of DeFi functionalities for Bitcoin holders. The M-BTC launched by Merlin is a wrapped Bitcoin asset that earns staking rewards, opening up 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 second-layer network for Bitcoin, BEVM uses Bitcoin as fuel, allowing for the seamless deployment of Ethereum's decentralized applications )DApps( on Bitcoin. BEVM is supported by mining giants and has pioneered the concept of "computational power RWA", which could 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 just copying Ethereum's DeFi strategies on Bitcoin, but are opening 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 offered by Merlin and the computational RWA innovations of BEVM, the BTCFi sector is rapidly evolving.

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

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

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The Current Status of Bitcoin DeFi

With the continuous development of the Bitcoin Decentralized Finance ecosystem, some key projects have emerged as important participants, driving innovation and user adoption. These projects rely on Bitcoin's Layer 2 solutions and sidechains to provide various DeFi services:

) main BTCFi projects

1. 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 can earn rewards by staking Bitcoin or liquid staking derivatives )LSD(, while decentralized operators are responsible for running validation nodes to ensure the security of the network. Pell offers a range of active validation services, such as oracles, cross-chain bridges, and data availability, supporting a broader Bitcoin layer-two ecosystem. With its robust infrastructure, Pell aims to become a key player in providing liquidity and safeguarding the security of the crypto economy, driving sustainable growth of the Bitcoin economy.

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2. 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 in 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 uses the ES Token model to incentivize liquidity provision and protocol usage.

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3. Colend Protocol)Core(

Colend Protocol is a decentralized lending platform built on the Core blockchain, allowing users to securely lend and borrow 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.

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4. MoneyOnChain)Rootstock(

MoneyOnChain is a comprehensive DeFi protocol built on Rootstock that allows Bitcoin holders to enhance asset yields while maintaining complete control over their private keys. 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 keep their Bitcoin holding value pegged to the US dollar. Additionally, MoneyOnChain offers Token BPRO, enabling users to gain leveraged exposure to Bitcoin, thereby achieving passive income.

The architecture of the protocol is based on a risk-sharing mechanism and employs proprietary financial models to cope with extreme market fluctuations. Same