DeFi has been the absolute darling of the crypto sector this summer. As billions have poured into decentralized protocols, even established centralized players are seeking to get in on the action. Binance unveiled its Binance Smart Chain, attracting multiple copycats of Ethereum-based DeFi equivalents. Bithumb has announced plans to build a DeFi platform based on the Polkadot network. Elsewhere, Pantera Capital confirmed that it plans to allocate part of its Digital Asset Fund to DeFi-based assets.
However, despite these developments, it’s fair to say that Ethereum-based protocols have dominated the DeFi sector. And while Ethereum may be the world’s most popular smart contract platform, it’s not the most popular crypto-asset. Bitcoin retains that crown. So, as DeFi looks set to expand beyond Ethereum, how are developers working to inject some of Bitcoin’s value into the DeFi ecosystem? Here are a few examples.
RSK, RIF and Money on Chain
Perhaps the most comprehensive Bitcoin-based DeFi project in development right now, RSK offers a smart contract platform as a side chain of the Bitcoin blockchain. Since 2018, RSK has been owned and operated by IOV Labs, which has also developed the RSK Infrastructure Framework (RIF), an operating system based on RSK. Both RSK and RIF have their own tokens - RBTC and RIF, respectively.
Over the last year, RSK has made inroads into the DeFi ecosystem in several ways. Money on Chain chose the platform as a home for the first Bitcoin-backed stablecoin, Dollar on Chain (DOC). It works in a similar way to Maker’s DAI stablecoin, in that it's pegged to the value of the US dollar and is created using cryptocurrency – BTC in this case – as collateral.
Money on Chain followed up with a similar stablecoin based on RIF. Called the RIF Dollar on Chain (RDOC), it uses the RIF token as collateral. Both DOC and RDOC use a monetary system whereby an accompanying token, BPRO or RIFP, absorbs the volatility of the crypto asset used as collateral.
In February 2020, RSK also launched an interoperability bridge, allowing Ethereum-based assets to interact with the RSK ecosystem and vice-versa. More recently, the bridge has enabled RSK to integrate Maker’s DAI stablecoin to the RSK ecosystem. This includes creating liquidity pools for RIF-DAI and RBTC-DAI on its Rskswap decentralized exchange, a fork of Uniswap.
The Lightning Network is perhaps one of the original DeFi initiatives, first proposed in a white paper in 2016 by developers Joseph Poon and Thaddeus Dryja. Several development teams picked up the project and implemented it as a second layer on the Bitcoin blockchain.
The overall idea is to overcome Bitcoin’s inability to handle high throughput to make it more user-friendly as a medium of exchange. It takes ten minutes to mine a block, and most people transacting in BTC prefer to wait for at least a few blocks for the transaction to be considered final.
Lightning Network aims to overcome this challenge by enabling instant payments between two parties. The project uses state channels, effectively a joint multi-signature wallet, where two individuals can transact BTC between themselves with virtual real-time settlement. Once they close the channel, the user’s new account balances are committed on the Bitcoin blockchain.
The Lightning Network has been in operation since 2018, gaining adoption by the Bitfinex exchange and, most notably, Twitter. Users can install the Tippin.me extension on Google Chrome to send Satoshis to their favorite tweeters.
DG Labs/Crypto Garage
DG Labs is a Japanese conglomerate comprising a well-funded investment branch and a software development company. It has work going on in various technology sectors, including AI, security and biohealth. However, the fund has put significant investment into its venture Crypto Garage to develop several innovations based on Bitcoin. These include a Bitcoin plug-and-play device that works as a Bitcoin/Lightning full node and allows users to send and receive Bitcoin directly.
Perhaps even more intriguingly, Crypto Garage has also developed a P2P Derivatives application which makes use of Discreet Log Contracts based on Bitcoin. Currently in beta, P2P derivatives turn BTC into programmable money that can be traded as derivatives on the Bitcoin blockchain.
Discreet Log Contracts (DLCs) enable any two parties to agree on the conditions of a monetary contract for the redistribution of funds on a blockchain without revealing any details of the conditions to others in the blockchain network. They were originally proposed by Thaddeus Dryja, one of the original authors of the Lightning Network paper, and developer Gert-Jaap Glasbergen.
Bitcoin-settled forward contracts would enable hedging, so parties could transact in Bitcoin while overcoming the volatility risks, creating a promising opportunity for a Bitcoin-based economy.
Bitcoin DeFi is still very much in its infancy. However, given the scale of investment and excitement surrounding DeFi this year, it seems inevitable that platforms and assets beyond Ethereum stand to benefit. As the oldest and most valuable cryptocurrency in existence, it seems only fair that the Bitcoin ecosystem and community should prosper as a result.