By early 2020, it was evident that DeFi was becoming a hot topic, but nobody could have guessed quite how spectacularly it would take off in the second half of the year. Applications including Uniswap, Yearn Finance, Compound and SushiSwap made headlines as they attracted billions in investment, bringing the total value locked above $16 billion by December.
And it's showing no signs of slowing down. In the first half of January alone, value locked in DeFi skyrocketed again along with the crypto markets, hitting a new high above $22.5 billion.
However, so far, Ethereum-based DeFi has captured the lion's share of the market. But this "walled garden" approach misses out on the vast amount of value sitting elsewhere in the cryptocurrency markets. Most notably, Bitcoin continues to dominate over two-thirds of the entire cryptocurrency markets' total market cap. DeFi has a significant opportunity to capture some of this value by extending beyond its Ethereum boundaries and into the Bitcoin ecosystem. Here are five projects blazing the trail.
1. Wrapped Bitcoin
Wrapped Bitcoin emerged in 2019 to bring the liquidity of the Bitcoin markets into the Ethereum ecosystem. However, it didn't really take off until DeFi started having a moment over the summer. Wrapped Bitcoin, or WBTC, is a synthetic version of Bitcoin. Users "wrap" their BTC holdings in an ERC-20 token so they can participate in the Ethereum ecosystem. Minting new WBTC can only be undertaken by approved merchants who can conduct a KYC check on users.
Wrapped Bitcoin emerged from a collaboration between three projects: custodial service BitGo, decentralized exchange Kyber Network and interoperability protocol Ren. However, it's now run as a decentralized autonomous organization called the WBTC DAO.
Sovryn launched late last year as a decentralized platform for trading and lending Bitcoin. It offers users various services, including margin trading and swaps, borrowing and lending, and liquidity pools. Unlike many DeFi projects that launch based on dubious code, Sovryn is built on audited smart contracts checked by multiple security firms. It also launched with decentralized governance based on a fork of Compound's governance protocol.
Sovryn is entirely decentralized, non-custodial, censorship-resistant and with zero counterparty risk. It launched with $2.1 million worth of backing from VC firms, including Greenfield One and Collider Ventures.
Sovryn is developed on the RSK platform, a side chain of the Bitcoin blockchain with smart contract capabilities. RSK operates a two-way bridge with the Ethereum blockchain, meaning that applications and tokens running on the network can also interact with Ethereum-based DeFi and other dApps.
3. Money on Chain
Money on Chain also runs on RSK and was the first DeFi application to set up home on the network. Money on Chain launched in late 2019 as the first-ever stablecoin to be collateralized by BTC. At the time of launch, Money on Chain operated three tokens.
Dollar on Chain (DOC) is a stablecoin pegged to the dollar but with Bitcoin as the underlying collateral. BPRO is a second token that absorbs BTC's volatility to keep the DOC peg stable. The Money on Chain token (MOC) is a governance token where holders can participate in decision-making regarding the Money on Chain project. It later also launched BTCx, a leveraged token.
In 2020, Money on Chain launched a new suite of tokens collateralized by the RIF token. RIF (RSK Infrastructure Framework) is a developer toolset for the RSK network. The newer RIF-based Money on Chain tokens are similar to the BTC-collateralized tokens but using RIF as the underlying asset.
Late last year, Money on Chain also launched the TEX, a decentralized exchange with an innovative trading mechanism based on the London Gold Pool.
4. Lightning Network
The original Bitcoin DeFi application, Lightning Network was first proposed by developers Joseph Poon and Thaddeus Dryja in a 2016 white paper. It launched in 2018 with the aim of overcoming Bitcoin's speed issues. With block confirmation times of ten minutes, Bitcoin will never be suitable for paying for a coffee. Therefore, Lightning Network uses a solution called state channels.
State channels use the concept of off-chain transactions that can be settled instantly without waiting for the next block to be confirmed. Two users agree that they want to exchange funds and set up a channel to exchange the funds they wish. Once they close the channel, account balances are updated on the main Bitcoin blockchain.
It's taken some time for Lightning Network to gain traction. However, it's now used by applications such as Tippin.me, which has also been incorporated into Twitter. Users can tip their favorite Tweeters with BTC using instant Lightning Network-enabled payments.
The pTokens project expands on the concept introduced by Wrapped Bitcoin, but with significantly expanded capabilities. A pToken can effectively be any asset wrapped and issued on another blockchain than its native one. Therefore, it's not even a pure Bitcoin DeFi project but one that aims to carry liquidity across the blockchain ecosystem.
However, on the subject of expanding the Bitcoin DeFi ecosystem, pTokens definitely deserves a mention. Currently, there are three BTC-based pTokens: pBTC-on-eth, pBTC-on-telos and pBTC on EOS. These allow users to unlock the value of their BTC holdings on Ethereum, Telos and EOS.
PTokens was launched by a project called Provable. However, in June 2020, it started a move toward decentralized governance with the launch of the pNetwork DAO.
Now that traders have a taste for Bitcoin's liquidity in the DeFi ecosystem, it seems likely that we can expect to see more projects joining this list in 2021 and beyond. Particularly if BTC continues its current epic bull run, there's still plenty of value to be captured for Bitcoin DeFi.