Bitcoin DeFi Ecosystem Evolution: From Simple Transfers to Integrated Financial Services

Bitcoin is gradually becoming a significant force in the DeFi space, starting to challenge Ethereum's dominance. By analyzing the on-chain data, we can clearly see BTCFi( combination of Bitcoin and DeFi is triggering a major shift in Bitcoin's role in DeFi ) potentially redefining the entire DeFi landscape.

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Bitcoin's original design and its limitations

Originally designed as a peer-to-peer electronic cash system, Bitcoin has limitations in terms of DeFi applications:

1. The UTXO model lacks the flexibility to support complex smart contracts
2. The scripting language design is limited, and the number of opcodes executed is limited
3. Lack of Turing completeness, making it difficult to implement complex smart contracts that depend on state
4. The 1MB block size and 10-minute block time limit the transaction processing speed

While these designs enhance security and decentralization, they also limit the ability to implement DeFi functionality directly on Bitcoin.

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An early attempt to introduce DeFi on Bitcoin

Despite the limitations, developers are constantly trying to extend Bitcoin's capabilities:

1. Color coin (2012-2013): Represents real assets by "coloring" bitcoins
2. Counterparty(2014): Introducing the ability to create and trade custom assets
3. Lightning Network (2015 ) so far: Layer 2 protocol improves transaction scalability
4. Discrete journal contracts (DLC)(2017 ) to date: the implementation of complex financial contracts
5. The Liquid Network (2018 ) to date: sidechains support asset issuance and complex transactions
6. Taproot upgrade (2021): improve smart contract capabilities

These innovations laid the foundation for Bitcoin to expand, paving the way for layer-2 solutions, sidechains, and DeFi innovations.

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Key Innovation: Implementing Smart Contracts on Bitcoin

Several protocols have emerged in recent years to introduce smart contracts and DeFi functionality to Bitcoin:

1. Rootstock: The earliest Bitcoin sidechain that supports EVM-compatible smart contracts
2. Core: An EVM-compatible blockchain closely integrated with Bitcoin, with an innovative dual-staking model
3. Merlin Chain: A Bitcoin layer 2 network that integrates ZK-Rollup and other technologies
4. BEVM: The first fully decentralized and EVM-compatible Bitcoin layer 2 network

Key innovations in these protocols include:

• Tokenize Bitcoin assets
• Smart contract and EVM compatibility
• Bitcoin with yields
• Scalability and privacy enhancements

As of September 8, 2024, the total value locked in Bitcoin's layer 2 solutions and sidechains (TVL) $1.07 billion, an increase of 18.4x since January 1, 2023. Core leads with 27.6% of TVL.

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The current state of Bitcoin DeFi

Some key projects are driving innovation and user adoption:

1. Pell Network: A cross-chain restaking protocol
2. Avalon Finance: A multi-chain DeFi platform that provides lending and trading services
3. Colend Protocol: A decentralized lending platform on Core
4. MoneyOnChain: A comprehensive DeFi protocol on Rootstock
5. Sovryn: Feature-rich Bitcoin DeFi platform
6. Solv Protocol: A cutting-edge project for NFT financialization

Core holds a leading position in the Bitcoin DeFi space, backing 25.2% of active projects. Pell Network emerged as the leading DeFi project with $260.8 million in TVL.

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The core narrative of Bitcoin DeFi

1. Security and decentralization first
2. Bitcoin as a programmable token
3. Interoperability with Ethereum
4. Unlock Bitcoin Capital

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Comparison with Ethereum DeFi

As of September 8, the amount of BTC locked in the Ethereum DeFi protocol is (1534 ) far exceeding the Bitcoin native DeFi ecosystem (0897 ) million. Native Bitcoin DeFi is smaller, but it operates within Bitcoin's own security framework, avoiding many of the cross-chain risks.

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Future Opportunities and Challenges

Technical challenges include scalability and interoperability. Regulatory scrutiny is likely to intensify, particularly with regard to AML and KYC.

Future opportunities include:

1. Improve Layer 2 solutions
2. Develop frameworks that are more scalable and interoperable
3. Advances in privacy-preserving technology

Revenue-generating products, DEXs, and institutional-oriented DeFi services are expected to attract a lot of attention and funding.

The future of Bitcoin DeFi is promising, with the potential to have a profound impact on the entire DeFi ecosystem, making Bitcoin a core player in DeFi.

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