Over the past 15 years, Bitcoin has become known as “digital gold,” earning it a well-deserved reputation as an alternative store of value. But its potential goes far beyond, and developments in recent years have sparked a new wave of innovation around the world’s oldest cryptocurrency.
The DeFi revolution, which first emerged through Ethereum’s smart contracts, is finally coming to Bitcoin, where it can leverage over $1.2 trillion in largely unused capital and the unparalleled security of the original blockchain . These two advantages alone make Bitcoin DeFi a no-brainer, and it is already making its mark on the crypto world with the birth of hundreds of exciting new projects, including Bitcoin-based DEXs like Velar Dharma, lending protocols focused on Bitcoin such as Sovryn. and native Bitcoin wallets like Xverse.
The transformation of Bitcoin
Until recently, DeFi on Bitcoin was simply not possible. The infrastructure required to build decentralized financial applications on top of Bitcoin’s blockchain simply wasn’t there. This is why DeFi thrived on Ethereum and later, other blockchains like Solana and Avalanche. The idea of creating a similar ecosystem on Bitcoin was widely rejected, as its blockchain was considered too rigid and, importantly, it was not able to support the smart contracts needed to facilitate the extensive functionality of DeFi applications .
But the Bitcoin of yesteryear is no longer the Bitcoin of today. Since the introduction of Segregated Witness in 2017, it has become a very different beast. SegWit did two key things: it helped alleviate some of Bitcoin’s data limitations and, more importantly, it enabled the creation of so-called “layer 2 networks”, such as Stacks, Rootstock and Lightning Network. With L2s, Bitcoin users are able to process transactions off-chain, increasing speed and reducing costs before ultimately settling them on the ultra-secure Bitcoin blockchain.
The next big step in the evolution of Bitcoin was the Taproot upgrade. Launched in November 2021, it paved the way for Bitcoin to support more complex transactions and, later, the creation of smart contracts and Bitcoin-native dApps. In a 2024 study, Coinmarketcap (CMC) Research and Footprint Analytics explained how Taproot is transforming Bitcoin into something much more powerful.
“Using merklized alternative script trees (MAST), Taproot condenses complex transactions into a single hash, reducing transaction fees and minimizing memory usage,” the report said. “While not a DeFi solution per se, the Taproot upgrade has improved the capabilities of Bitcoin’s smart contracts, making it easier and more efficient to implement complex transactions and throwing away the foundations for future DeFi developments.”
It was thanks to Taproot that Bitcoin developer Casey Rodamor was able to create the Ordinals and Runes protocols that revolutionized the utility of Bitcoin. Introduced in 2023, Ordinals allows data such as an image or document to be “written” onto a single satoshi, the smallest unit of Bitcoin, effectively transforming them into non-fungible tokens or NFTs that live on the Bitcoin network.
Meanwhile, Runes enabled the creation of fungible tokens, equivalent to the ERC-20 tokens that live on Ethereum, giving rise to alternative Bitcoin-based cryptocurrencies such as Pepe memecoin and Liquid Tether (L-USDT) and the Sovryn Dollar (DLLR). ) stable coins. Rodarmor’s efforts were quickly followed by the introduction of the BRC-20 standard, introduced by an anonymous developer called Domo, in March 2023.
Bitcoin DeFi takes off
The above developments have sparked a wave of innovation on the Bitcoin network, and the resulting DeFi ecosystem has become one of the fastest growing segments of the crypto market, with a total value locked of more than $560 million in October 2024. Developers are working to recreate the same type of ecosystem that exists on Ethereum, driven by the desire to exploit the enormous value locked in Bitcoin, which represents more than 54% of the total capital of the crypto industry.
With the existence of a framework to follow in the form of Ethereum’s DeFi space, developers have largely ignored the experimentation phase. Already, hundreds of Bitcoin-native dApps have been launched, ranging from DEXs, stablecoins and NFTs to lending and borrowing marketplaces and “real-world assets”.
Velar itself has become one of the biggest players in the Bitcoin ecosystem. It has built a comprehensive decentralized exchange platform that enables transparent, low-cost trading of Bitcoin-based tokens. Notably, it pioneered the first-ever perpetual DEX platform on Bitcoin and offers BTC holders a way to grow their capital, providing liquidity in exchange for a share of the platform’s transaction fees. In September alone, Velar took the title for the most active users (28%) on the Stacks ecosystem. Finally, Bitcoin users can do more than just “hold” their assets.
Velar CMO Peter Watson believes that their commitment to the community is how they are able to create real value and claim the position of number one protocol on the Stacks network. According to him, “what sets us apart is that our core team comes from the community itself. We have been in their shoes, understand their challenges and share the same vision of the ecosystem. This unique perspective pushes us to build with determination and precision. Everything we create is for the long-term benefit of the community, ensuring that the ecosystem not only thrives but evolves in ways that matter.
Other well-known dApps in the Bitcoin ecosystem include Sovryn, a DeFi protocol hosted on Rootstock that enables token swaps, lending, borrowing, and staking, and Gamma, which has become the largest marketplace for ordinals. and Bitcoin-based NFTs issued on Stacks. network.
Additionally, the Bitcoin ecosystem now has innovative wallets such as Xverse, designed to provide a user-friendly interface for interacting with the nascent Bitcoin ecosystem. It gives users the ability to trade digital assets directly in the wallet, so they can buy meme coins, ordinals and NFTs, stake their tokens and much more.
Accelerating DeFi Adoption
The dApps above all closely resemble their Ethereum-based counterparts and their growing popularity shows just how poised Bitcoin DeFi is to succeed. They also help explain the sudden surge of institutional interest in Bitcoin, which helped drive massive gains in value for BTC earlier this year.
Although some maximalists and Bitcoin degenerates are still unenthusiastic about traditional financial institutions getting involved in crypto, TradFi’s enormous capital will do much to accelerate the widespread adoption of Bitcoin.
Bitcoin DeFi opens the floodgates to a multitude of opportunities, but it still faces the same challenges that have limited its adoption on Ethereum and other blockchains. One of the main ones is user experience. For example, getting into crypto, and particularly DeFi, remains a daunting experience for many new investors. Fortunately, Bitcoin developers are beginning to focus their energies on accessibility, removing barriers to adoption.
For example, the recent partnership between Velar Dharma and Xverse offers users a more seamless way to explore the Bitcoin ecosystem. With Xverse, users can now trade their BTC for many Bitcoin assets, directly in the wallet, including stablecoins, meme coins and utility tokens, with over 60 trading pairs available at launch. The wallet uses Dharma’s multi-hop technology to enable trading instantly, in near real-time. So anyone holding BTC has an easy way to access the growing stability of Bitcoin’s digital assets.
More than digital gold
As more capital is sucked into the Bitcoin DeFi ecosystem, it gives entrepreneurs more room to fund and explore their innovative ideas. One of the most anticipated changes is the Nakamoto upgrade to Stacks, designed to increase transaction throughput with improved finality guarantees, and is expected to further cement Bitcoin’s status as a trusted DeFi protocol.
“The expansion of the Bitcoin ecosystem proves that Bitcoin can be much more than just digital gold and a store of value,” Thakore said. “Bitcoin can power DeFi, it can power NFTs, and it can serve as a cornerstone for many other emerging decentralized applications.
The evolution of Bitcoin will naturally also have major implications for the entire DeFi sector. If DeFi is to achieve its goal of widespread adoption, it must be built on solid foundations. And there’s nothing like the industry-leading security, immense liquidity, and mainstream appeal that Bitcoin already has.
DisClamier: This content is informational and should not be considered financial advice. The opinions expressed in this article may include the personal opinions of the author and do not reflect the opinions of The Crypto Basic. Readers are encouraged to conduct thorough research before making any investment decisions. Crypto Basic is not responsible for any financial losses.