In that future, Bitcoin will likely play the most important role in DeFi — not in the sense of cap-and-trade victory. Alternatively, Bitcoin could complement the rest of the cryptocurrency as the cornerstone of multi-chain DeFi. The key to this is to tie it all together so that Bitcoin can interact with Ethereum seamlessly as iOS and Android do today.
The argument in favor of aligning Bitcoin with DeFi may come as a surprise. Commentators often pit the existing Bitcoin chain against its more flexible and functional counterpart, Ethereum. However, the real “volatility” is linking DeFi to Bitcoin. Doing so gives users the best of both worlds, combining the ingenuity of Ethereum with the purity of Bitcoin. The debate revolves around what a Bitcoin-enabled DeFi industry looks like or whether it can be achieved.
The rocky road to interoperability
The underlying Proof-of-Work (PoW) consensus mechanism of the Bitcoin network provides a solid foundation for a global payment network separate from any country. The embedded computer collateral is enough to attract institutional money, showing that it is good enough for the powerful players in traditional finance. Although designed to be the cash of the Internet, the intrinsic characteristics of Bitcoin have inspired less resource-intensive networks like Ethereum.
Despite the arrival of competitors, DeFi is still dominated by native Ethereum projects, which remain a fragmented ecosystem of smart contract-based applications that facilitate an open, peer-to-peer financial system. Global networks of developers have been working tirelessly to bring this order of decentralized applications (DApps) into coherence, largely without success, though atomic trade-offs have emerged as one viable option. In general, sub-optimal solutions such as cross-bridges proliferate, making DeFi users vulnerable to exploitation, while other popular solutions such as tokens have their downsides, namely centralization.
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So far, DeFi products have not been introduced into on-chain Bitcoin transactions, because the Bitcoin protocol does not facilitate smart contracts. This is a result of the design of Bitcoin, which was created using a limited scripting language to improve security over data storage and programming ability. Remember, these things are just as valuable as the degree to which they are decentralized.
Multi-series financing without permission
So, Bitcoin is not DeFi-compatible, and for some, guaranteed exposure to non-native chains through tokens like Wrapped Bitcoin (wBTC) is very far from the core ethos of the industry. While this may lead some to believe that interoperability between DeFi and the Bitcoin network is hopeless, there are ways it can be done. For many, Bitcoin was the first step to reimagining what it means to access financial services and experience financial independence.
Self-incubation requires financial literacy, and with over half of the users dealing with cryptocurrency under the age of 35, I bet we are only at the tip of the economic iceberg. Over time, innovation will filter out the drawbacks of the original DeFi such as slippage and non-permanent loss. More specifically, enabling unilateral return for DeFi and Bitcoin would open up new possibilities that could tip the scales in favor of mainstream adoption. The single side is significantly more secure, as it involves depositing a single token into a liquidity pool instead of a token pair.
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Offering a one-sided return to the Bitcoin-enabled DeFi ecosystem is when things start to get interesting, not just for purists but for anyone with skin in the game. This would be a real way to gain value without compromising on decentralization. The risk will be taken through the one-sided yield-enabled protocol, which means that users can explore lending and borrowing options that are not currently available.
A by-product of this development is likely to be the standardization of decentralized exchange (DEX) pools. Saturation of pools leads to a splitting of available liquidity, which is associated with an increase in transaction costs. On that note, there are thousands of cryptocurrencies on the market, which means more assets, more chains, and more layers to count. While modularity can be great for a major, it’s time for the “less is more” counter-movement.
Opening a new world of opportunities for Bitcoin
Building a seamless and distributed multi-chain financial system like this is not an easy task. It reaches a level of complexity that is hard to imagine. Standardization can narrow the focus enough that users can improve speed or security without losing access to the rest of blockchain-based finance.
However, the impact made by these alternative financial technologies in such