Bitcoin DeFi: Lending, Borrowing, Staking and More

Bitcoin DeFi

TLDR: While older Layer 2s on Bitcoin such as the Lightning Network allow for faster and cheaper payments, the new generation of L2s brings smart contract functionality. They make more complex use cases possible, such as lending and borrowing, staking, and other advanced financial tooling. Things are heating up in the Bitcoin DeFi space.

This may come as a surprise, to me at least: the total value locked (TVL) in the Bitcoin DeFi ecosystem ranks 9th of all blockchains, at 1.2 billion dollars. Comparing this to Ethereum’s 60 billion, it’s a blip. Still, Bitcoin tvl is higher than reputable chains such as Avalanche and Polygon. That was not the case a few years ago. What has happened?

Bitcoin DeFi: Lending, Borrowing, Staking and More - - 2024
Bitcoin TVL. Source: DefiLlama

As you can see, TVL on Bitcoin is an order of magnitude higher than the 2021 bull market top. The TVL on Bitcoin is catching up compared to that of Ethereum Layer 2s, most of which still are not close to their previous TVL tops.

Bitcoin Versus Ethereum DeFi

Basic smart contracts already existed on Bitcoin. But, mostly for simplicity’s sake, they were limited to fundamental operations like multi-signature transactions and payment channels such as in the Lightning Network. These are very cool basic tools but can’t compare to what Ethereum-based smart contracts can pull off, for example, the complex automated market makers of dexes and functionality such as borrowing and lending.

But Bitcoin is getting there. Even though it’s not as easy for developers to build on Bitcoin – since the Taproot upgrade of 2021, there is a crack in the wall. And so, developers will… find a way. 

Bitcoin DeFi: Lending, Borrowing, Staking and More - - 2024

It’s just a trade-off. Building a dapp on a flashy new Layer 1 might be easier and faster than on Bitcoin. In the same way that, Bitcoin DeFi Proponents would argue, building a sandcastle might be quicker than building one on solid rocks. But the second is more secure. And Bitcoin obviously has a large network effect.

Not everyone agrees, by the way. Blockchain expert Andreas Antonopoulos thinks blockchains operate best in their own niches. Just as Ethereum was in his view a bit foolish to compete with Bitcoin in the sound money department (the ‘ultrasound money’ meme) – Bitcoin in his view has no business competing in the smart contract design space. Antonopoulos: ‘If you want to make small circular holes in wood, don’t use a hammer. ‘But what about if we use a wheel with a thousand hammers that hit a drill-bit repeatedly?’ You’ve made a very wasteful hammer.’

Older and Newer Generations L2s

The Bitcoin DeFi ecosystem is in its early stages. Bitcoin is still much less developed than Ethereum. 

How did it all start? The first second layer on Bitcoin that saw large-scale adoption and that support (light) DeFi functions is of course the Lightning Network, based on channels that connect with the Bitcoin main chain on opening and closing of such a channel. Slightly less known is Liquid Network, which settles on BTC. Both increase the throughput and transaction speed on their own layer. A use case of Lightning is fast micropayments.

But we have moved beyond these. The newer generation layer 2s bring smart contract functionality and thus go beyond simple payment pure and simple. As mentioned, there are now applications that allow you to lend, borrow, stake and more. Let’s discuss a few prominent ones.

Stacks: a Programmable Base Layer

Stacks (STX), originally named Blockstack, is an open-source network of decentralized applications and smart contracts, all developed on Bitcoin. Stacks enhances Bitcoin’s capabilities, turning it into a programmable base layer. By interfacing directly with Bitcoin, Stacks adds programmability, allowing the creation of apps, smart contracts, and digital assets that leverage Bitcoin’s security, capital, and network. Applications on Stacks execute their operations on a blockchain governed by code rather than corporate entities, making them widely accessible and enabling decentralized applications to perform functions beyond the reach of conventional apps.

Bitcoin DeFi: Lending, Borrowing, Staking and More - - 2024
STX has recently taken out its all-time high of the previous cycle.

Build on Bitcoin: Combining Bitcoin and Ethereum’s Best Features

Build on Bitcoin (BOB) is the first Hybrid L2, combining Bitcoin and Ethereum security and liquidity. 

Highlights include the deployment of major Bitcoin DeFi projects like Sovryn (see below) and several Ethereum DeFi applications onto the Bob Network. This integration makes it possible to offer services like trading, lending, and perpetual swaps for Bitcoin.

Bob is also enhancing accessibility to features such as Ordinals and BRC-20 tokens for the Ethereum community

The immediate future for Bob holds the launch of peer-to-peer swaps, allowing users to exchange assets directly on the Bitcoin network without relying on third-party bridges. This approach supports a decentralized and user-driven trading experience.

Bitcoin DeFi: Lending, Borrowing, Staking and More - - 2024
Build on Bitcoin, fragment of visuals

RSK (Rootstock): Integrating Ethereum-based Apps

RSK (Rootstock) is a Bitcoin sidechain compatible with the Ethereum Virtual Machine, allowing Ethereum-based apps to integrate smoothly with Bitcoin. Like BOB, Rootstock is compatible with Ethereum smart contracts and the tools used to deploy and interact with them.

To access RSK, funds are moved using a bridge that converts BTC into RSK’s native asset, smartBTC (RBTC). The DeFi ecosystem on RSK includes lending protocols, swaps, trading platforms, stablecoins, and wallets. Below you’ll see a platform that is built on Rootstock.

BitVM: Complex Smart Contracts in the Works

BitVM is a proposal that will make it possible to create and run complex smart contracts that settle on the Bitcoin blockchain. In 2023, Robert Linus created BitVM to enhance Bitcoin’s functionalities, including smart contracts similar to Ethereum’s. BitVM incorporates Turing-complete contracts on Bitcoin. Wait what? Turing complete means: any computation that you can think of, no matter how complex, can run on it. That’s a big deal. BitVM enables off-chain computation with on-chain verification. It allows bridging BTC to other blockchain networks.

BitVM uses a concept similar to Ethereum’s optimistic rollups. Optimistic rollups operate on the assumption that all transactions are valid unless proven otherwise (which is different from the other approach, ZK-Rollups, which have the reverse assumption that all transactions are false until proven valid).

BitVM is still in its early stages. The team is still working to overcome the limitation that 

in its current state, BitVM is only a two-person model. This means it does not support large dapps with multiple parties.

Sovryn: Lending and Borrowing BTC

Sovryn is a non-custodial, permissionless platform for trading, lending, and borrowing Bitcoin. Users connect their hardware wallet, either a Trezor or a Ledger.

Operating on both the above-mentioned chains RSK and BOB, Sovryn is a Bitcoin layer 2 EVM smart contract blockchain. It features bridges where you can transfer assets between RSK, BSC, Bitcoin, and Ethereum chains. The SOV token can be staked for revenue.

Bitcoin DeFi: Lending, Borrowing, Staking and More - - 2024

Sovryn’s goal is to bring non-custodial, permissionless decentralized finance to Bitcoin. To accomplish this goal, it uses the above-mentioned RSK. Sovryn wants to leverage Ethereum’s broad developer and platform resources while benefiting from Bitcoin’s security.

Sovryn currently offers yield farming and trading for 11 different assets. It also offers lending and borrowingof 4 different assets. Sovryn’s lending pools can be used for leveraged trading (up to 5x) on the platform. Sovryn also features bridges for transferring assets between RSK, BSC, Bitcoin, and Ethereum chains.

The SOV token can be staked to the platform for governance and revenue sharing.

Sovryn volumes currently aren’t high: at the time of writing roughly 600 transactions per day. We’ll have to see if and when new developments (plans include perpetual swaps, limit orders, and a fiat off-ramp) can give this project a new punch. Until that time, it’s hard for the SOV coin to take out its previous all-time high. But things can heat up fast in a bull market.

Babylon Chain: Staking BTC

Babylon Chain will allow Bitcoin holders to stake their BTC without the need for third-party custody, bridging, or wrapping. Instead of rewards in BTC, Bitcoin stakers will receive their yield in the currency of the chain they secure. Babylon has raised $18 million in funding and is currently in its testnet phase. A new testnet is scheduled to be released any week now.

Bitcoin DeFi: Lending, Borrowing, Staking and More - - 2024

Conclusion

Bitcoin developers have uh… found a way. The first borrowing, lending and staking apps on Bitcoin are up and running. Thanks to Bitcoin DeFi, users can do tons of new stuff with their funds, with the comfort of remaining on the network’s ecosystem. From a trader’s perspective, it’s worth keeping an eye on Bitcoin DeFi projects as a potential leveraged Bitcoin trade. While picking your coin, look at the metrics. Is it actually being used at scale?

Bitcoin DeFi: Lending, Borrowing, Staking and More - - 2024

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By Lark Davis

Combining cutting edge insider insights and done-for-you market analysis to deliver crypto investors the best opportunities to grow their wealth, stay ahead of the curve, and avoid costly mistakes! We cover DeFi, NFTs, Altcoins, Technical Analysis and more!