The Rise and Development of the Bitcoin DeFi Ecosystem

Bitcoin is playing an increasingly important role in the Decentralized Finance (DeFi) space, evolving from simple peer-to-peer transfers to becoming a powerful force within DeFi, challenging Ethereum's dominance. By analyzing on-chain data, we can clearly see that the combination of BTCFi( Bitcoin and DeFi) is triggering a fundamental shift in Bitcoin's role within DeFi, which could redefine the entire DeFi landscape.

The Rise of BTCFi

When Bitcoin was born in 2008, its design goal was to serve as a peer-to-peer electronic cash system. Although this architecture is revolutionary in significance, it has limitations in supporting complex Decentralized Finance applications.

The Original Design of Bitcoin and Its Limitations

Core design elements of Bitcoin and its limitations:

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

2. Limited scripting language: Designed to avoid security vulnerabilities, but hinders support for complex Decentralized Finance applications.

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

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

These designs, although enhancing security and decentralization, have also posed obstacles to directly implementing DeFi functions on the Bitcoin blockchain.

Early Attempts to Introduce DeFi on Bitcoin

Despite facing limitations, developers are still looking for innovative solutions:

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

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

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

4. Discrete Log Contracts ( DLC ) ( Since 2017: Implementing complex financial contracts.

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

6. Taproot upgrade )2021(: enhances smart contract capabilities.

These early developments laid the foundation for the expansion of Bitcoin's functionalities, showcasing the potential of the Bitcoin ecosystem.

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Key Innovations: Implementing Smart Contracts on Bitcoin

In recent years, multiple protocols aimed at introducing smart contract and Decentralized Finance functionalities have emerged:

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

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

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

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

As of September 8, 2024, the total locked value of Bitcoin's second-layer solutions and sidechains is ) TVL (, reaching 1.07 billion USD, growing 5.7 times since January 1, 2024, and 18.4 times 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 Decentralized Finance

Some key projects have become important players:

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

2. Avalon Finance: Multi-chain Decentralized Finance platform

3. Colend Protocol: Decentralized Lending Platform

4. MoneyOnChain: Comprehensive Decentralized Finance Protocol

5. Sovryn: A feature-rich Decentralized Finance platform

6. Solv Protocol: NFT Financialization Project

These projects highlight the rapid development of Bitcoin in the DeFi space. Core occupies a leading position in the Bitcoin DeFi space, with its number of projects accounting for 25.2% of active projects. Rootstock and Bitlayer each support 13.0% of the projects.

Pell Network has become a leading DeFi project with a TVL of $260.8 million, followed by Avalon Finance ) at $206.2 million ( and Colend Protocol ) at $115.5 million (.

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Key Narratives in Major BTCFi Projects

1. Security and Decentralization First

2. Bitcoin as a Programmable Token

3. Interoperability with Ethereum

4. Unlocking the capital of Bitcoin

Ethereum Decentralized Finance VS Bitcoin and Native Bitcoin DeFi

As of September 8, the amount of BTC locked in Ethereum DeFi protocols is 153,400, far exceeding the 8,970 in the native Bitcoin DeFi ecosystem.

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The Development of Ethereum and Its Insights for Bitcoin and Vice Versa

Bitcoin can learn from Ethereum:

1. Product Diversity
2. Developer Ecosystem
3. Interoperability

Ethereum can learn from Bitcoin:

1. Security and Decentralization
2. Simplicity and Robustness
3. Focus on Value Storage

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Challenges and Opportunities

Technical barriers:

1. Scalability
2. Interoperability

Regulatory concerns:

1. Stricter regulations
2. AML and KYC compliance

Future Opportunities:

1. Technological Advancements: Improving Layer 2 solutions and developing more scalable frameworks.
2. Future growth areas: revenue-generating products, DEX, cross-chain liquidity pools, and DeFi products tailored for institutional needs.

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Conclusion

The Bitcoin DeFi ecosystem will continue to expand driven by technological advancements and institutional interest. Developing more scalable solutions, enhancing interoperability, and launching more sophisticated financial products are crucial. Yield-generating products, DEXs, and institutional-focused DeFi services are expected to attract significant attention.

However, this growth will also face regulatory and technical challenges. Addressing these issues is crucial for maintaining the growth momentum and long-term success of Bitcoin DeFi.

In summary, the future of Bitcoin Decentralized Finance is promising, with abundant innovation and growth opportunities. It has the potential to have a profound impact on the entire DeFi ecosystem, making Bitcoin a core participant in DeFi.