The Rise of Bitcoin in the DeFi Field: Analysis of the Current Status of the BTCFi Ecosystem

Bitcoin is playing an increasingly important role in the DeFi field, evolving from initial peer-to-peer transfers to now challenging Ethereum's dominance. By analyzing on-chain data, we can see that the combination of BTCFi( Bitcoin and DeFi) is not only a technological innovation but may also redefine the entire DeFi landscape.

The Rise of BTCFi

When Satoshi Nakamoto launched Bitcoin in 2008, the initial design was intended as a peer-to-peer electronic cash system. Although this was revolutionary in the field of crypto assets, it has limitations in supporting complex Decentralized Finance applications.

The Original Design of Bitcoin and Its Limitations

Core design elements and limitations of Bitcoin:

1. UTXO model: lacks the flexibility to support complex smart contracts

2. Limited scripting language: The number of executable opcodes is limited.

3. Lack of Turing completeness: Difficulty in implementing complex state-related smart contracts.

4. Block size and transaction speed limits: Transaction processing speed is relatively slow.

These designs, while enhancing security and decentralization, have also posed obstacles to directly implementing DeFi functions on Bitcoin.

Early Attempts to Introduce DeFi on Bitcoin

Despite facing limitations, developers are still seeking innovative solutions:

• Colored coins (2012-2013): early attempts to extend Bitcoin functionality
• Counterparty(2014): Introduces the ability to create and trade custom assets
• Lightning Network (2015 to present ): A second-layer protocol for improving transaction scalability
• Discrete Log Contracts (2017 to date ): enabling the possibility of complex financial contracts
• Liquid Network (2018 to present ): Supports the issuance of crypto assets and complex transactions on a sidechain.
• Taproot upgrade (2021): Enhanced smart contract capabilities

These early developments laid the foundation for expanding more applications of Bitcoin, paving the way for a wave of innovations in layer two solutions, sidechains, and Bitcoin Decentralized Finance.

Key Innovation: Implementing Smart Contracts on Bitcoin

In recent years, several protocols aim to introduce smart contracts and Decentralized Finance features for Bitcoin:

1. Rootstock: The longest-running Bitcoin sidechain that supports EVM-compatible smart contracts.

2. Core: A blockchain closely integrated with Bitcoin and compatible with EVM, offering a dual staking model.

3. Merlin Chain: Bitcoin second-layer network integrated with ZK-Rollup technology

4. BEVM: The first fully decentralized and EVM-compatible Bitcoin Layer 2 network

The key innovations of these protocols include:

• Tokenized Bitcoin assets
• Smart contracts and EVM compatibility
• Yield-generating Bitcoin
• Scalability and privacy enhancement

As of September 8, 2024, the total locked value of Bitcoin second-layer solutions and sidechains reached $1.07 billion, an increase of 5.7 times compared to the beginning of 2024 and 18.4 times compared to the beginning of 2023. Core leads with 27.6% of the TVL.

The Current Status of Bitcoin Decentralized Finance

( Main BTCFi projects

• Pell Network: Cross-chain Re-staking Protocol
• Avalon Finance: Multi-chain Decentralized Finance platform, providing lending and trading services
• Colend Protocol: Decentralized lending platform
• MoneyOnChain: Comprehensive Decentralized Finance protocol, issuing stablecoin DoC
• Sovryn: A feature-rich Decentralized Finance platform that offers services like trading and lending.
• Solv Protocol: A protocol focused on the financialization of NFTs

Core occupies a leading position in the Bitcoin DeFi space, accounting for 25.2% of the project numbers. Pell Network has become the leading DeFi project with a TVL of $260.8 million.

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( key narratives in major BTCFi projects

• Security and decentralization first
• Bitcoin as a programmable Token
• Interoperability with Ethereum
• Unlock Bitcoin Capital

![How is the progress of BTCFi that the Bitcoin community has been thinking about?])https://img-cdn.gateio.im/webp-social/moments-c498f00f1ee0369cdc602ab3cd1436d4.webp###

( comparison analysis with Ethereum Decentralized Finance

The amount of BTC locked in Ethereum DeFi protocols is )15.34 million###, far exceeding the Bitcoin native DeFi ecosystem's (0.897 million). Native Bitcoin DeFi projects are relatively small but operate within Bitcoin's own security framework, avoiding many cross-chain risks.

The Development of Ethereum and Its Insights for Bitcoin and Vice Versa

Bitcoin can learn from Ethereum:

• Product Diversity
• Developer Ecosystem
• Interoperability

Ethereum can learn from Bitcoin:

• Security and Decentralization
• Simplicity and robustness
• Focus on value storage

Challenges and Opportunities

Technical barriers:

• Scalability limitations
• Interoperability challenges

Regulatory concerns:

• Expect increased regulatory scrutiny
• Compliance complexity

Future Opportunities:

• Layer 2 solutions improvement
• Advances in secret ledger contracts and privacy protection technology
• Revenue-generating products, DEX, and cross-chain liquidity pool development
• DeFi products catering to institutional needs

Conclusion

The Bitcoin DeFi ecosystem is expected to continue to expand driven by technological advancements and institutional interest. The key lies in developing scalable Layer 2 solutions, enhancing interoperability, and launching more complex financial products. Although facing regulatory and technical challenges, the future of Bitcoin DeFi remains promising and has the potential to have a profound impact on the entire DeFi ecosystem.