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DeFi on Bitcoin – Three Projects Working to Make it a Reality

Last Updated January 15, 2024 12:56 PM
James Morales
Last Updated January 15, 2024 12:56 PM

Key Takeaways

  • Bitcoin has not witnessed the same DeFi boom other blockchains have.
  • However, a burgeoning field of decentralized exchanges has emerged that use Bitcoin sidechains to facilitate trading.
  • Meanwhile, peer-to-peer platforms like Bisq take an alternative approach to decentralization.

Since the development of Uniswap (UNI), the first automated market maker (AMM) protocol on Ethereum (ETH), the concept has been deployed across the crypto ecosystem. Today, decentralized exchanges (DeXs) can be found on almost every popular smart contract platform.

Bitcoin, however, has often been ignored by the DeFi movement. Because it wasn’t initially designed to support complex smart contracts, the OG blockchain doesn’t immediately lend itself to AMMs. But thanks to an increasingly sophisticated scaffolding of sidechains and layer 2 networks, DeFi on Bitcoin is now becoming a reality. 

Bitcoin Sidechains Support DeFi Innovation

Although Bitcoin was initially designed as a peer-to-peer payment, these days it is also home to an array of memecoins and NFTs, made possible by Ordinals inscriptions. But while BTC can easily move between network participants, trading multiple tokens with varying prices requires additional infrastructure. 

One solution has been to bridge Bitcoin-based tokens to sidechains like Rootstock or Liquid Network. These borrow Bitcoin’s currency and value system, but support a greater range of smart contracts.

In December 2023, GFX Labs successfully deployed Uniswap v3 on Rootstock, taking advantage of the sidechain’s Ethereum-compatible execution environment to launch a new implementation of the Oku Trade DeX.

Meanwhile, with the goal of moving Ordinals activity away from the Bitcoin mainnet, Bitfinity has developed an Ethereum Virtual Machine (EVM) that functions as a Bitcoin sidechain. 

An EVM for Bitcoin Ordinals

Using the Internet Computer Protocol to transfer assets from Bitcoin without relying on traditional intermediary bridges, the Bitfinity EVM will be able to run Ethereum smart contracts that can interact with BTC and various Ordinals tokens. 

In a press release shared with CCN, Bitfinity said that ICP “has made BTC accessible in the DeFi space for the first time.”

Thanks to its native Bitcoin integration, ICP already supports a burgeoning ecosystem of decentralized apps. These include DeFi exchanges and  NFT marketplaces facilitating the trade of BRC-20 tokens on the Bitcoin sidechain. This opens up the emerging market for Ordinals-based tokens to more sophisticated DeFi service. But it also promises to significantly increase the efficiency of Ordinals swaps, potentially reducing the network congestion created by surging Ordinals trading activity.

Decentralizing Bitcoin–Fiat Swaps

AMM-powered DeFi exchanges remove the need for centralized intermediaries in crypto-to-crypto transactions. However, most people still rely on traditional exchanges to move value between the cryptosphere and the traditional financial system.

The prevalence of centralized fiat on- and off-ramps jars with the vision of Bitcoin as a peer-to-peer payment system. This, in turn,  contrasts with the way the technology’s earliest adopters bought and sold BTC. 

Bisq operates as a peer-to-peer trade network where users can swap BTC for fiat currencies. This follows the tradition of the early crypto traders who exchanged Bitcoin with each other directly,

For each trade on Bisq, a multi-signature escrow account holds crypto. The money moves after the seller confirms that they have got their crypto. Supported payment methods include bank transfer, cash deposit and Western Union, among others.

Traders are free to set their own conditions to protect themselves from fraud. Restrictions on new accounts ensure only users who have successfully completed a certain number of transactions can engage in higher value trades. When disputes arise, Bisq assigns independent mediators and arbitrators to review evidence from counterparties and propose a solution.

Bisq is governed by a decentralized autonomous organization (DAO) that uses a type of “colored ” Bitcoin – BSQ – as its governance token. Alongside voting on protocol upgrades, the Bisq DAO also decides how to spend treasury funds generated by trading fees.

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