Bitcoin could become the foundation for DeFi with a more one-sided liquidity pool

For years, Ethereum has dominated the decentralized finance (DeFi) landscape, and blockchain has served as the destination of choice for many of the most innovative projects offering decentralized finance initiatives. Recently, however, DeFi projects have begun to span multiple ecosystems, challenging Ethereum’s hegemony. And as we look to a future where the technical issues of interoperability are resolved, one of the unlikely candidates for the role of DeFi power player emerges: Bitcoin (BTC).

In that future, Bitcoin could play the most important role in DeFi, but not in a triumphalist or maximalist sense. Currencies can be complemented. The key is to connect everything so that Bitcoin can interact seamlessly with Ethereum in the same way that iOS and Android do today.

The arguments in favor of harmonizing Bitcoin and DeFi may come as a surprise. Commentators often compare the existing Bitcoin blockchain to its more agile and capable counterpart Ethereum. But the true “flip” is connecting DeFi to Bitcoin. In doing so, users can combine the dexterity of Ethereum with the purity of Bitcoin, enjoying the best of both worlds. The debate revolves around what a Bitcoin-enabled DeFi industry might look like, or whether it would be possible to achieve.

A hard road to interoperability

The Proof of Work (PoW) consensus mechanism underlying the Bitcoin network provides a solid foundation for a global payment network that is isolated from any state. The built-in computational guarantees are good enough to attract institutional money and prove good enough for traditional financial power players. Despite being designed to be the cash of the internet Instead, Bitcoin’s intrinsic properties have inspired less resource-intensive networks like Ethereum.

Despite the emergence of challengers, native Ethereum projects still dominate DeFi, which remains a fragmented ecosystem of smart contract-driven applications that foster an open, peer-to-peer financial system. A global network of developers is working tirelessly to unite the deployment of this decentralized application (DApps), but atomic swaps have emerged as one of the viable options, with little success. Is not … In general, suboptimal solutions like cross-chain bridges have proliferated, making DeFi users vulnerable to exploits, while other popular solutions like wrapped tokens have their own drawbacks of centralization. there is.

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At this time, no DeFi products have been introduced for on-chain Bitcoin transactions, as the Bitcoin protocol does not facilitate smart contracts. This is a result of Bitcoin’s design, built with a limited scripting language to optimize security of data storage and programming capacity. Remember, things like this are just as valuable as the degree of decentralization.

Permissionless multi-chain finance

As such, Bitcoin is incompatible with DeFi, and collateralized exposure to non-native chains via wrapped tokens like Wrapped Bitcoin (wBTC) is a step too far from the core ethos of the industry. While this might lead some to believe that interoperability between DeFi and Bitcoin networks is cause for despair, there are ways to do it. For many, Bitcoin was the first step in reconceptualizing what it means to access financial services and experience financial independence.

Self-custody requires financial literacy, and with over half of our users under the age of 35 using cryptocurrencies, I bet we are just the tip of the economic iceberg. As time goes on, the innovation eliminates DeFi-specific drawbacks such as slippage and temporary losses. More specifically, enabling DeFi and Bitcoin’s one-sided yield opens up new possibilities that could tip the scales in favor of mainstream adoption. One side is very secure as you have to deposit single tokens into the liquidity pool instead of pairs of tokens.

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Introducing one-sided yields to the Bitcoin-enabled DeFi ecosystem is when things start to get interesting, not just for maximalists, but for everyone familiar with the game. This is a true way to create value without compromising on decentralization. Risk is taken by protocols that allow one-sided yields. This means users can explore lending and borrowing options that are not currently available.

A byproduct of this development could be the integration of decentralized exchange (DEX) aggregators. When an aggregator becomes saturated, the available liquidity is split and correlates with increased transaction costs. In that regard, there are thousands of cryptocurrencies on the market, which means accounting for more assets, more chains, and more layers. Now is the time for the “less is more” counter-movement.

Unlocking a World of New Bitcoin Opportunities

Building such a seamless decentralized multi-chain financial system is no easy task. It reaches a level of complexity that is difficult to conceptualize. The integration allows us to narrow our focus sufficiently so that users can optimize for speed or security without losing access to the rest of blockchain-based finance.

Still, the impact these alternative financial technologies have had in such a short period of time is immeasurable. Bitcoin has been integral to the broader movement, much like when most people stepped into the world of cryptocurrencies. Perhaps Bitcoin could power the next DeFi revolution, return to cypherpunk culture, and open up new financial possibilities for all.

This article is for general information purposes and is not intended, and should not be construed as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author and do not necessarily reflect or represent the views or opinions of Cointelegraph.