Bitcoin DeFi presents a host of opportunities for users who want autonomy and control of their finances. Ultimately, Bitcoin DeFi platforms give users more to do with their tokens beyond sending and receiving BTC.
Although Ethereum was initially the hub for DeFi applications, Bitcoin has been gaining ground since the advent of several prominent Bitcoin layers. This has created development opportunities for builders and potential for users. As DeFi use cases on Bitcoin become more and more prevalent, many people will come to see the potential it holds for revolutionizing the financial world.
What is Bitcoin DeFi?
Decentralized finance is a method of performing smart contract based financial transactions on the blockchain that doesn’t require an intermediary. In a traditional, centralized financial system, you need a third-party to ensure the transaction is executed. DeFi replaces that middleman with smart contracts, meaning you need nothing more than a crypto wallet and an internet connection to conduct a transaction.
Bitcoin DeFi, specifically, refers to DeFi platforms and DeFi-oriented decentralized applications (dApps) that are built on the Bitcoin blockchain. In this case, Bitcoin serves as the base layer upon which Bitcoin DeFi platforms and protocols settle, though many protocols also run on Bitcoin layers and sidechains like Stacks and Rootstock (RSK).
Why is DeFi Important?
DeFi creates more opportunities for speed, accessibility and transparency. One of the biggest benefits is keeping custody of your money. In the centralized system, conducting a transaction requires you to relinquish control of your assets. But with DeFi, you never have to.
You don’t need to rely on a bank’s opening hours or have to put your assets in another’s hands. Beyond internet capability, there are virtually no limitations on geography. This accessibility is particularly valuable for those in underbanked regions.
Cutting out the middle step makes DeFi transactions faster than their centralized counterparts. The lengthy processes that slow down traditional financial transactions do not apply, and smart contracts allow for seamless, 24/7 action. But their real appeal is transparency. Since DeFi applications are built on the blockchain, they can be audited by anyone, reducing the risk of fraudulent transactions.
What are the Benefits of DeFi?
Open: There's no need to apply for anything or create an account; simply set up a wallet to gain access.
Pseudonymous: You can use the platform without revealing your name, email, or any personal details.
Flexible: You can move your assets freely at any time, without needing permission, waiting for lengthy transfers, or incurring high fees.
Fast: Interest rates and rewards can change rapidly—sometimes as often as every 15 seconds—and they often outperform traditional Wall Street options.
Transparent: All participants can view the complete transaction history, offering a level of transparency rarely seen in private corporations.
How to Get Started with Bitcoin DeFi
There are numerous types of Bitcoin wallets, which store your crypto assets and ensure that only those who have the private key are able to access the funds inside them. These can be either software applications or hardware devices, but users should put some thought into which wallet they use. While the decentralized nature of blockchain optimizes security, your bitcoin is only as secure as the wallet you’re using.
Leather, which is a self-custodied, open-source and audited Bitcoin wallet, is one of the most popular options on the market. It allows users to link their accounts to an array of Web3 applications, integrating with everything from NFT markets to DeFi protocols like ALEX and Velar. It also allows users to swap assets between the Bitcoin L1 and L2 seamlessly. With a Leather wallet, users can access emerging Bitcoin layers (like the Lightning Network and Stacks). DeFi wallets are designed to give users full control over their assets within the DeFi ecosystem, and they’re an integral part of the process.
Examples for Bitcoin DeFi
Asset Management - When you’re carrying out transactions through a DeFi system, you keep custody of your digital assets. This isn’t just about the currency – it also includes your account details. Instead of sharing your private information with a third-party, only you can access it. Assets can be easily moved with an internet connection and a crypto wallet.
DEXs - A DEX – or decentralized exchange – is a type of peer-to-peer marketplace. These exchanges operate through smart contracts, which allow them to operate autonomously. Bitcoin DEXs must be built on a layer, due to the nature of the complex smart contracts that conduct these transactions.
DAOs - Decentralized autonomous organizations, known as DAOs, are groups without any centralized authority. Instead, they are led by their community members who vote on management and protocol updates through various governance systems. DAOs and DeFi already intersect in various ways – most notably with the use of smart contracts – but there are likely to be further opportunities for interoperability, especially when it comes to governance.
Borrowing and Lending - These applications are dependent on smart contracts to run, so they need to be built on Bitcoin layers, such as Stacks. Through DeFi borrowing applications, users can acquire a cryptocurrency loan without any intermediaries. Generally, these loans are used for arbitrage or to conduct other trades. When it comes to lending, users can make passive income through yield on deposited assets. This allows users to earn interest on their BTC, though rates depend on the protocol, loan term and total amount.
Atomic Swaps - An atomic swap lets parties trade cryptocurrencies from different blockchains. They make use of hash timelock contract technology (HTCL) and liquidity pools to conduct secure cross-chain transactions. In short, a provider creates the necessary environment for a seamless swap by taking on the risk of providing necessary liquidity – often in exchange for rewards or interest.
Payments - Making peer-to-peer payments is hardly unique to Bitcoin or DeFi, but it’s a great application. These DeFi payments are the trifecta: faster, cheaper and with better security than their competition. They’re also highly accessible; all you need is a crypto wallet and the internet.
Trading - Trading is a comprehensive term for an array of activities on Bitcoin, ranging from margin trading to swaps. When you’re conducting a CeFi trade, users need to trust another business to execute their transactions. DeFi trading removes that additional step by implementing smart contracts to conduct the trades. This results in lower fees and faster transaction times than CeFi alternatives.
Stablecoins - Stablecoins exist to counter the volatility that many cryptocurrencies share. With a stablecoin, the value is tied to that of another currency – often the U.S. dollar. This stability makes them a viable form of payment for many goods or services and allows users to keep their digital assets on-chain without considering the volatility.
Derivatives - The use of derivatives allows a buyer and a seller to create an agreement between one another to sell an underlying asset. Some of the most popular derivative types include futures, options and perpetual contracts.
The Future of DeFi on Bitcoin
As demand grows, so too will opportunities. The more DeFi applications that are built on Bitcoin, the more utility it will have in the eyes of potential users. This will drive further development and help expand decentralization – and even, potentially, mass adoption.