For those who have invested in and delved into the world of crypto, DeFi, or decentralized finance, is likely a familiar term. DeFi, short for Decentralized Finance, is a blockchain-based financial service that operates without a central authority like banks or other financial institutions.

DeFi typically runs on blockchains using smart contract technology such as Ethereum and Binance Smart Chain. However, recently Bitcoin developers have also started creating DeFi within the Bitcoin network. Want to know more about what DeFi on Bitcoin looks like? Read on in this article.

Article Summary

🔗 Unlike Ethereum, which was the first blockchain to enable the development of DeFi, Bitcoin was not initially intended to be a platform for decentralized applications. The best approach was to launch a BTC version of DeFi wrapped in several other project networks and access DeFi from there.

💰 DeFi on Bitcoin exposes Bitcoin users to the same options and capabilities for generating investment rewards that Ethereum users have enjoyed for the past few years

How DeFi Works on Bitcoin

There are four ways to use Bitcoin in DeFi products.

Sumber: Pathways for DeFi on Bitcoin

Using Existing Features 

The first method is using existing features within Bitcoin such as P2SH, HTLC, or Atomic Swaps. P2SH (Pay to Script Hash) allows you to lock Bitcoin into a hash script, enabling you to create your own scripts within the Bitcoin blockchain and share them securely.

Using Sidechains 

The second method is using sidechains with their own tokens such as L-BTC or RSK. L-BTC or Liquid Bitcoin is a token separate from the main Bitcoin chain and runs on a separate network called the Liquid Network. Meanwhile, RSK is also a Bitcoin sidechain that can be used for DeFi.

Using Other Blockchains 

The third method is using a version of Bitcoin wrapped in another blockchain such as WBTC. WBTC is an ERC-20 token that is valued 1:1 with Bitcoin and runs on the Ethereum network. By using WBTC, this token uses Ethereum’s gas fees.

Using Bitcoin Upper Layers 

The fourth method, which is still being developed, involves DeFi Bitcoin built on the Bitcoin network such as discreet log contracts, the lightning network, and others.

What is a Discreet Log Contract?

A Discreet Log Contract (DLC) is a method to bridge information flow from external sources to the blockchain — popularly referred to as Oracle. DLC does not enable Turing-complete smart contracts like Ethereum on Bitcoin. DLC relies on the use of ‘Schnorr signatures’ (digital signatures known for their simplicity and security based on specific logarithms and hard to break).

Schnorr signatures are used to cover the details of the agreed contract from the Oracle, effectively allowing two parties to form a monetary contract to distribute their funds to each other, without revealing the details of these conditions on the blockchain. Therefore, the contract is confidential and no external party can learn of its existence or details from the public ledger or blockchain.

Example of DeFi on Bitcoin Using Sidechains

Rootstock (RSK)

Known as Bitcoin-powered smart contracts, Rootstock (RSK) is a platform that facilitates the execution of smart contracts but uses Bitcoin as its asset. The platform combines the advantages of Bitcoin as the world’s number one crypto with the benefits of decentralized applications or DApps. RSK is a Bitcoin sidechain, meaning it has its own network and blockchain. RSK essentially adds value for Bitcoin users, such as faster transactions and better scalability.

To allow Bitcoin to enter and exit RSK, RSK has a two-way peg to Bitcoin. When Bitcoin is transferred to the RSK blockchain, it becomes “Smart Bitcoin.” Smart Bitcoin, abbreviated as RBTC, is equivalent to Bitcoin living on the RSK blockchain and can be transferred back to the Bitcoin network at any time without additional costs, except for standard RSK and Bitcoin transaction fees.

RBTC is the native currency used on the RSK network and is pegged 1:1 with Bitcoin. RBTC is used as gas fees paid to miners for executing smart contracts just like ETH is used as gas fees on the Ethereum blockchain.

Stacks

Stacks is a layer-1 blockchain that uses a new and unique mining protocol called proof-of-transfer (PoX). PoX blockchain runs parallel to another blockchain (in this case, Bitcoin).

Meanwhile, STX is the native cryptocurrency of the Stacks network. STX is used to run smart contracts for Bitcoin, reward miners on the Stacks network, and allow its holders to earn Bitcoin through Stacking. Stacks provides a native connection to the status of the Bitcoin blockchain while allowing smart contract functionality for Bitcoin.

Benefits of Using DeFi on Bitcoin

Currently, DeFi development is still ongoing within the Bitcoin program. As we know, Bitcoin still dominates the crypto market and it is undeniable that many users are trying to gain more profits through lending programs offered by various DeFi products. The journey to build DeFi within Bitcoin is not as easy as building it within Ethereum, for example. This is because Bitcoin’s program has stricter limits compared to Ethereum, with the aim of maintaining Bitcoin’s security.

Through Bitcoin DeFi platforms, users can lend and borrow cryptocurrency in a non-custodial way: the borrower deposits Bitcoin as collateral, which is repaid after the loan is fully paid back.

Conclusion

The development of DeFi on Bitcoin is still in its early stages, but sidechains like RSK and Stacks are already expanding Bitcoin’s use cases. Over time, innovations in DLCs, the Lightning Network, and wrapped BTC solutions will make Bitcoin-powered DeFi more accessible and efficient.

As Bitcoin’s DeFi landscape grows, it will offer more financial tools while maintaining the security and decentralization that Bitcoin is known for.

Learn more knowledge of crypto through various articles on Safubit Academy. All articles on Safubit Academy are created for educational and informational purposes only and are not intended as financial advice.

Don’t forget to follow our social media:
X : https://x.com/safubit
Medium : https://medium.com/@safubit.exchange