Unlocking Bitcoin’s DeFi Potential
There is no doubt that Bitcoin is the reigning king of crypto. However, despite Bitcoin’s success as digital gold, in its current state it is only used for holding.
Fortunately there are now an increasing number of ways users can do more with their Bitcoin, such as putting them to work in DeFi protocols on other blockchains. These protocols provide a way for crypto users to utilize their Bitcoin to borrow, lend, provision liquidity and more. As an example, DeFi users are locking up their Bitcoin in Ethereum smart contracts, receiving a tokenized form of Bitcoin that represents its value, and then using those tokens to participate in various Ethereum-based protocols to earn yield. Ethereum has been the dominant blockchain for BTC use in DeFi because of its relatively high transaction speeds, smart contract capabilities, and vast developer community. Without these synthetic bitcoins operating across various blockchains, BTC would not be able to generate its owners the same passive income it can today.
Bitcoin in CeFi
Centralized finance (CeFi) companies such as BlockFi allow users to deposit their Bitcoin for use as borrowing collateral or as a simple savings vehicle. Most new users prefer using an established centralized institution for financial services as opposed to a decentralized protocol due to customer service needs and general familiarity. There are, however, an increasing number of people who are forgoing these centralized options in favor of DeFi protocols that are non-custodial, permissionless, and more transparent. Protocols like Compound and Aave allow users to use synthetic BTC as collateral for borrowing or a deposit for lending. Protocols like Uniswap allow users to pair their synthetic BTC with other assets to provide liquidity to a decentralized exchange.
Up until a little less than a year ago, Bitcoin was unable to be used in most DeFi protocols due to its lack of interoperability with other blockchains. However, with clear demand to use Bitcoin across DeFi, solutions have followed and there are now many ways to get Bitcoin on other blockchains.
