Can Bitcoin Become The Beating Heart Of DeFi?

Bitcoin has given birth to a lot of innovations in recent years, with some of the biggest being non-fungible tokens (NFTs) and decentralized finance. 

These innovations have caught the imagination of the crypto community in a big way. NFTs are “one-of-a-kind” assets in the digital world that can be bought and sold like any other piece of property, but which have no tangible form of their own. These digital tokens can be thought of as certificates of ownership for virtual or physical assets, and they have big potential, especially in areas such as art and music. 

Meanwhile, DeFi is an alternative financial system that provides unrestricted access to services such as lending, borrowing, and high-interest saving schemes, without any traditional intermediary such as a bank. Because of this, DeFi is accessible to anyone and comes with lower costs and transaction fees. 

These innovations live primarily on Ethereum and other emerging blockchains such as Avalanche, Fantom, Binance Chain, Algorand, Tezos, and so on. But they barely merit a mention in the Bitcoin ecosystem. Despite giving birth to these new concepts, Bitcoin is unable to support either NFTs or DeFi due to its lack of smart contract functionality. 

Smart contracts were a later innovation first popularized by the Ethereum blockchain. Ethereum was designed to be more versatile than Bitcoin and support new use cases, beyond simply facilitating transactions. Smart contracts are similar to traditional contracts in that they’re used to facilitate an agreement between two or more parties. However, they’re self-executing, programmed to do so only when certain conditions have been met. These transactions are executed on a decentralized ledger that’s not only transparent but also completely irreversible. In this way, smart contracts can be executed without the need for a centralized authority or external enforcement mechanism, such as the courts. 

It’s these smart contracts that enable things like NFTs and DeFi to exist on blockchains such as Ethereum. It’s this capability that explains why the vast majority of the total value locked in NFTs and DeFi today exists on Ethereum and other blockchains and is virtually non-existent on Bitcoin itself. 

That’s just the way things have been set up but it has since become apparent to developers and the wider crypto community that there’s a big opportunity to be had if someone is able to bring Bitcoin into the DeFi and NFT party. After all, Bitcoin remains the world’s number one cryptocurrency with by far and away the largest market capitalization and vastly more liquidity than any other virtual token. At the time of writing, the total amount of all Bitcoin in circulation was valued at $474.9 billion – almost double Ethereum’s $241.4 billion market cap. 

What it means is that there’s a vast amount of cryptocurrency value in Bitcoin that is, to all intents and purposes, sitting idle. It’s not generating any yield or interest – all it’s doing is being “hodled”, sitting in the user’s wallets, and waiting to be spent or sold at some point in the future. 

Making Bitcoin Better

Bitcoin’s lack of programmability has traditionally meant that there was never any way for developers to tap into its vast amount of liquidity, but that has changed in recent years with the launch of innovative protocols like Rootstock, which enables BTC to be “wrapped” and moved to alternative blockchains. In this way, it becomes possible to lock up BTC, create wBTC in its place on Ethereum, and use it in DeFi applications where it can generate yield, interest, and more. 

Taking this to the next level is Stacks and Trust Machines, which are two sister projects that aim to make Bitcoin more functional and ensure its unrivaled liquidity can be used to power the next generation of NFTs and DeFi. 

Stacks is often said to be a sidechain or a layer-2 scaling solution for Bitcoin, but in fact, it is a layer-1 blockchain itself. However, it’s tied to Bitcoin through its unique Proof of Transfer consensus algorithm. 

The PoX mechanism ensures that Stacks’ blockchain runs in parallel to the Bitcoin blockchain, with the history of all of its blocks resolving on the latter. With Stacks, a maximum of one block is mined for each Bitcoin block. Block producers on Stacks are required to send an amount of BTC to a list of preset addresses specified by STX token holders. Each block is created by a single miner, and those miners can choose any existing block as their parent block. 

This mechanism enables Stacks to bring smart contract functionality to Bitcoin, making it possible to create “Bitcoin NFTs” that share Bitcoin’s security and are bought and sold using BTC. It also enables Bitcoin-based DeFi applications, meaning that it becomes possible for DeFi users to borrow, lend, and more using native BTC. 

Stacks is a blockchain that’s backed by the security and trust of the Bitcoin blockchain through its PoX consensus mechanism, enabling new capabilities for BTC. Building on this work, Trust Machines is an emerging startup that intends to build an entire ecosystem of applications using Stack’s infrastructure, with the intention of giving BTC holders a way to put their savings to use instead of just “hodling” and hoping its value one-day increases. 

Trust Machines has chosen Bitcoin because it’s a firm believer in “the decentralization of trust”. It explains that Bitcoin was the first entity to truly transform the idea of trust, in the same way, that the internet transformed communications and access. It’s important because trust is key to almost all human activity, be it money, transactions, identity, or governance. Before, trust has always been assured by centralized intermediaries such as banks and governments. With Bitcoin, it becomes possible to decentralize trust using its underlying blockchain technology. Trust Machines believes this has massive implications for finance, business, governance, and security, enabling a new generation of applications that are more trusted, secure, efficient, and democratic. 

As the most decentralized and valuable of all cryptocurrencies, it’s only logical that Bitcoin is the technology that powers this new generation of applications. In other words, the work of Stacks and Trust Machines is incredibly important. Together, they’re building the very foundations of an entirely new financial system that can finally deliver on Satoshi Nakamoto’s vision of a decentralized digital economy that’s fairer and more accessible to everyone.