CoinDesk has made extremely optimistic predictions about the future of the Bitcoin DeFi ecosystem, believing that the Bitcoin DeFi ecosystem is expected to create more than $1 trillion in value in the next 5 to 10 years.
Source: PANews
There are many speculations about this summer, the most topical of which are SocialFi Summer and OnChain Summer. As the Bitcoin staking protocol Babylon announced the completion of $70 million in financing, the discussion about BitcoinFi Summer has become more heated.
Although the recent update of the Crypto Kitchen official account has been a bit slow, we have not been idle, but have had in-depth exchanges with infrastructure builders in the Bitcoin ecosystem. They come from all over the world, some from the East and the West. There are senior players who started in the Bitcoin ecosystem, and there are also cutting-edge players who have transferred from other public chains.
Without exception, Paradigm's huge investment in Babylon has brought significant linkage effects and injected market confidence - these builders believe that this financing not only heralds the future prosperity of infrastructure construction around Babylon, but also symbolizes The prospects for the BitcoinFi track are quite promising.
Source: PANews
Ethereum has long dominated the DeFi market, attracting a large number of developers and projects with its powerful smart contract capabilities and flexibility. In contrast, Bitcoin is mainly used for value storage due to its simple design of the base layer, lack of complete smart contract programming capabilities, and extremely slow transaction speed - this is consistent with Satoshi Nakamoto's definition in the white paper The original intention of "peer-to-peer electronic cash system" seems to be somewhat deviated.
However, during this cycle, Bitcoin began to show new potential. In addition to the approval of the Bitcoin ETF to attract capital inflows from large asset management companies, the out-of-circle effect of the Ordinals protocol has also attracted a large number of individual investors—some from the Ethereum ecosystem, and others new to the crypto market.
The popularity of Bitcoin assets has allowed builders to see the feasibility and reliability of building assets around Bitcoin, and they may help Bitcoin no longer be limited to value storage, return to a "peer-to-peer electronic cash system", and become a decentralized Financial finance, or even bigger, becomes an important part of dApp.
So next, we will take stock of recent exchange projects and some feelings for you.
Shell Finance
Shell Finance is a trustless lending and stablecoin protocol built on Bitcoin Layer 1, aiming to solve the needs of decentralized finance on the Bitcoin network.
Source: PANews
In terms of business model, it is similar to MakerDAO. Users can pledge assets within the platform and borrow synthetic assets $bitUSD, while Shell Finance acts as an intermediary in the lending process. This model can meet the $bitUSD lending needs of a wide range of users and achieve efficient liquidity from individuals to fund pools in the UTXO model.
On the development path, Shell Finance draws on AAVE's approach and hopes to open up the market by building a bottom-up community centered on user needs. Compared with Compound, a mainstream decentralized lending platform that only supports limited asset types, AAVE supports a variety of mortgage assets, increasing the flexibility and diversity of asset utilization. Therefore, AAVE has a better community foundation and can serve more users. By.
Shell Finance also hopes to reach more users than just Bitcoin holders by supporting a variety of Bitcoin assets, including Ordinals NFTs, BRC-20, ARC-20, and Runes.
Unlike other Bitcoin stablecoin projects, all functions and contracts of Shell Finance run on Bitcoin’s Layer1. Founder Tim Hsieh said this is mainly due to two considerations:
The Layer1 architecture makes the protocol itself highly secure and decentralized, reducing potential risks and attack surfaces.
With tens of millions of Bitcoins and the most active, OG, and key players on Layer1, Shell Finance has access to the widest market and the greatest liquidity.
On a technical level, Shell Finance uses a special technology called Discreet Log Contract (DLC) to make its lending system secure and automated.
DLC, a technology proposed by Lightning Network co-creator Tadge Dryja, aims to enable more complex financial contracts on the Bitcoin blockchain while maintaining privacy and security. DLC uses encryption technology to ensure that contract details remain private before execution, and relevant information is only disclosed when specific conditions are met.
With the help of DLC technology, the lending process goes roughly as follows:
Users can lend a certain amount of $bitUSD by pledging $ORDI.
The oracle monitors the market value of $ORDI, and if its value falls below a set threshold, the oracle issues a sell signal and $ORDI is liquidated to repay the $bitUSD loan.
During the entire process, $ORDI does not need to be transferred to the borrower, but is placed in a place similar to a "smart safe". This "safe" can automatically handle related operations including liquidation to ensure that everything is safe and fair.
In June of this year, Shell Finance issued its own Ordinals NFT - Darkman, with a supply of 5,000 pieces and a free mint approach. Tim told us that the issuance of NFT can help Shell Finance find early and core users, and users who hold NFT are equivalent to members of the agreement and can enjoy discounts on lending services.
Source: PANews
Before starting his own business, Tim had been working in the traditional financial industry and was well aware of the operating methods of traditional finance and the pain points in payment and settlement. These experiences led Tim to choose BCH (Bitcoin Cash) as a solution to increase Bitcoin TPS (transactions per second) and enable fast payments when he first entered the crypto world. However, this venture was not ideal.
With the development of technology, BCH's method of increasing TPS by increasing block size has exposed many problems, such as limited scalability functionality, inability to solve fundamental problems, leading to centralization trends and reduced security, and lack of community support. In comparison, technologies such as Lightning Network and Roll-up technology provide better scalable functionality solutions, making them seem outdated.
In 2023, the explosion of Ordinals and BRC-20 token Sats made Tim realize the strong consensus on the assets on the Bitcoin chain. He said: "Sats has been minted 21 million times. This is like a social experiment that has achieved unexpected results, which means that there are opportunities here to provide services around these people." This is his original intention when he founded Shell Finance . After chatting with Shell Finance, we happened upon another company using DLC technology – DLC.Link.
Headquartered in New York, DLC.Link was founded by serial entrepreneur Aki Balogh. Aki co-founded MarketMuse, an AI-driven marketing company in Boston in 2013 that successfully raised $10 million. In 2023, with his love for Bitcoin and his pursuit of high decentralization and high security, Aki started a new entrepreneurial journey and naturally invested in the construction of the Bitcoin ecosystem.
Source: PANews
This time, Aki and the team aim to launch a more secure method of wrapping Bitcoin to allow users to participate in cross-chain DeFi transactions, namely dlcBTC, thereby replacing wBTC (Wrapped Bitcoin).
wBTC is an ERC-20 token based on Ethereum, which represents the value of Bitcoin on the Ethereum network, allowing Bitcoin to participate in DeFi applications on Ethereum. In the wBTC ecosystem, BitGo plays the role of "custodian" and is responsible for storing crypto assets. When a user converts Bitcoin to wBTC, the Bitcoin is deposited into BitGo’s escrow wallet, and BitGo ensures that each wBTC is backed 1:1 by Bitcoin.
Founded in Silicon Valley in 2013, BitGo is the first qualified custodian dedicated to storing digital assets. It secures approximately 20% of on-chain Bitcoin transactions (by value) and supports over 700 digital assets within its platform. Although BitGo is a well-known and compliant cryptocurrency custody service provider, there are still trust risks associated with this centralized custody model. If it is attacked or has a security breach, users may risk losing their custodial bitcoins.
Therefore, the Aki team hopes to allow users to self-custody Bitcoin (without any third party) to participate in DeFi.
dlcBTC is based on DLC technology, allowing users to lock Bitcoins in multi-signature wallet contracts and maintain full control of their assets. Even if the system is hacked, the locked Bitcoins can only be transferred back to the original depositor and cannot be stolen.
On the other hand, dlcBTC supports multiple chains. Currently, users can use dlcBTC in the Ethereum and Arbitrum ecosystems. In the future, DLC.Link plans to further expand its functionality to more blockchains such as Solana.
How do oracles play a role in Bitcoin DeFi?
As individual cryptocurrency traders or holders, we may not see oracles in our daily lives, but they play a key role in every transaction.
DeFi relies on smart contracts to operate because smart contracts can provide automated, intermediary-free, transparent, efficient, low-cost and flexible financial operations. Since the smart contract itself cannot directly access off-chain data, an oracle is needed as a bridge to obtain data from external data sources and transmit it to the blockchain, so that the smart contract can make decisions and execute based on these external data.
We have repeatedly mentioned that the Bitcoin blockchain itself does not support smart contracts, so how does the oracle function?
This requires relying on Layer2 solutions - which are built on top of the Bitcoin blockchain to enhance its scalable functionality, speed and functionality without changing the base layer. Layer 2 solves the limitations of Bitcoin’s slow transaction times and high fees by offloading some of the transaction processing to a secondary layer.
APRO Oracle is an oracle system built on Bitcoin Layer 2. It aims to build a safe and trustworthy computing platform by combining off-chain computing and on-chain verification, expand functional data access and computing capabilities, and provide DeFi applications Provide customized computing logic services.
Source: PANews
Its oracle system consists of two layers of networks:
OCMP network (off chain message protocol): the oracle network itself, composed of network nodes. The nodes in the first layer monitor each other. Once a large-scale abnormality occurs, they can be reported to the backup layer, and the nodes in the backup layer will make a judgment. For example, a DeFi platform requires real-time market price data to determine lending and borrowing rates. The oracle nodes of the OCMP network can obtain current price data from multiple exchanges and verify the accuracy of these data through the consensus mechanism. Finally, the verified data will be transmitted to the smart contract on the blockchain to automatically adjust the lending rate.
Source: PANews
Eigenlayer network as a fallback layer: This means oracles can achieve a higher level of security through EigenLayer. In the case of APRO Oracle specifically, if there is a dispute over its layer 1 OCMP network, Eigenlayer will verify and adjudicate. EigenLayer's social consensus mechanism is designed to complement Ethereum's objective consensus mechanism, not replace it. It is mainly used to deal with special situations that require human judgment.
This two-layer structure increases security and reduces the risk of nodes being bribed or attacked.
APRO Oracle tells us that it is the first decentralized oracle designed specifically for the Bitcoin ecosystem and has been instrumental in supporting layer 2 projects such as Merlin and Bitlayer.
Building a Data Availability (DA) Layer for Bitcoin DeFi with Ordinals
Source: PANews
In the DeFi ecosystem, the data availability (DA) layer significantly improves the transaction throughput of the blockchain and reduces transaction costs by transferring some data storage and processing off-chain.
For example, on a blockchain network, every transaction requires a miner fee. When the network is busy, transaction fees can rise dramatically. However, if users submit large batches of transaction data through the DA layer, they only need to pay a small portion of the main chain fees, thereby achieving lower-cost transactions and operations.
The DA layer is responsible for ensuring data integrity and availability so that critical transaction records and operations are always accessible and secure. Although some blockchain main chains do not support complex smart contract functions, the DA layer can handle complex calculations and logical operations to provide support for DeFi applications.
There are usually several mainstream ways to build a DA layer on the Bitcoin blockchain:
1. Using OP_Return Outputs
OP_Return is a Bitcoin script opcode used to store arbitrary data in transactions. Each OP_Return output can store up to 80 bytes of data. Although limited in capacity, it provides a simple and straightforward approach in terms of data availability.
Image source: PANewsChatGPT shows what OP_Return is
Advantages: Data is stored on the Bitcoin blockchain, ensuring data tamper-proof and high security; any node or user can easily access and read the stored data without additional infrastructure.
Disadvantages: Each OP_Return output can only store 80 bytes of data, which is a big limitation for applications that need to store large amounts of data; frequent use of OP_Return to store data will increase the size of the blockchain, making nodes More data needs to be stored, thereby increasing the burden on the nodes.
2. Build on the side chain
Sidechains are independent blockchains that interoperate with the Bitcoin main chain, allowing for more experimentation and innovation without affecting the performance and security of the main chain.
Advantages: Side chains can usually process and store more data, providing greater data availability capacity; they can be customized according to the needs of specific applications, providing more functionality and flexibility.
Disadvantages: Building and maintaining side chains requires additional development and operation resources, including nodes, consensus mechanisms, and security protocols; the security of side chains relies on its own consensus mechanism and node network, and it is necessary to ensure that the security of side chains is not low. to the main chain, otherwise it may bring risks.
The more well-known sidechain solutions include Liquid, RSK (Rootstock) and Stacks.
3. Layer2 solution
Advantages: Layer 2 solutions can significantly improve transaction processing speed and throughput, and solve the expansion functionality problem of the Bitcoin main chain; by moving most transaction processing off-chain, Layer 2 reduces the burden on the main chain, making the blockchain more efficient. Lightweight and efficient.
Disadvantages: Layer 2 solutions are often complex to design and implement, requiring additional protocols and technology stacks; some Layer 2 solutions may introduce a degree of centralization, especially around settlement and data availability. Well-known Layer2 solutions include BitLayer, BitVM, Merlin Chain and Botanix, etc.
MultiAdaptive, which we recently talked to, takes a unique approach by leveraging Ordinals in the Bitcoin protocol to publish data.
Source: PANews
This process allows users to engrave unique data on satoshis, the smallest unit of Bitcoin, so that each transaction can contain specific data content. Users first send NFT-like Ordinal transactions to MultiAdaptive nodes for verification. These nodes are responsible for off-chain data availability support to ensure data integrity and legality.
The verified data is then sent to the Bitcoin network for storage and broadcast, with the Bitcoin network acting as a "witness" in the process.
By leveraging Bitcoin, the most secure and decentralized blockchain, MultiAdaptive ensures the immutability and long-term storage of data. This approach avoids the complexity of bridging between chains, simplifies system architecture, and reduces potential security risks.
In addition, the off-chain data availability support provided by MultiAdaptive nodes improves the verification and processing speed of data, while still relying on Bitcoin for final storage and witness, ensuring high availability and reliability of data.
However, using the Bitcoin network for data storage and broadcasting may incur higher transaction fees, especially when the network is congested, and this cost issue needs to be handled carefully.
MultiAdaptive started as a data availability network for Ethereum and quickly added support for the Bitcoin blockchain after seeing the growth of the Bitcoin DeFi ecosystem.
at last
CoinDesk pointed out in the article "Bitcoin DeFi Opportunity Over $1 Trillion" that the value creation of the Bitcoin DeFi ecosystem is driven by three key needs:
Preference for the Bitcoin blockchain as a base layer for other tokenized assets
The need for a financial system that reflects Bitcoin’s decentralized principles
Source: PANews
The rise of the Ordinals protocol is a reflection of the first need. Since launching on the Bitcoin mainnet in January 2023, Ordinals has grown from less than $100 million in total value to over $1.5 billion in less than six months, demonstrating Bitcoin’s role as a tokenized asset base layer huge potential.
The biggest opportunity lies in the second need: increasing the productivity of Bitcoin assets through yield tools and decentralized financial systems. Compared with other blockchains such as Ethereum and Solana, the value of fungible tokens (FTs) on Bitcoin is still in its infancy.
However, with the development of sidechains, Layer 2, and other emerging technologies, Bitcoin’s functionality is improving significantly. In the first quarter of 2024, the total value locked (TVL) in the Bitcoin ecosystem soared from $492 million to more than $2.9 billion, a more than six-fold increase, which shows the huge expansion of Bitcoin’s DeFi potential - payments , lending, decentralized exchanges (DEX), game finance (GameFi) and social finance (SocialFi) and many other application scenarios are under construction.
CoinDesk has made extremely optimistic predictions about the future of the Bitcoin DeFi ecosystem, believing that the Bitcoin DeFi ecosystem is expected to create more than $1 trillion in value in the next 5 to 10 years.
last of the last
Tim from Shell Finance once mentioned in a conversation with Crypto Kitchen:
"Bitcoin has shown different trends at different stages of development - from the initial "peer-to-peer digital cash" to the later "digital gold", and will even return to its original intention in the future, because history always reincarnates. However, these title changes are not the most important. The key lies in the actions we take at each stage, the wind direction and needs of the industry. The core point of the current Bitcoin halving cycle is that we need to find a new growth point at this stage to maintain the security of the entire Bitcoin network. Building a decentralized finance (DeFi) ecosystem around Bitcoin may be a feasible path. "
The security and decentralization characteristics of Bitcoin provide a solid foundation for DeFi, and the advancement of various related technologies makes it possible to implement more complex financial applications on the Bitcoin network.
By introducing DeFi into the Bitcoin ecosystem, we can not only improve the productivity of Bitcoin, but also expand its application scenarios to achieve faster payments, lending, decentralized exchanges (DEX), game finance (GameFi) and social networking Finance (SocialFi) and other functions.
This is not only in line with the current trend of industrial development, but also the key to maximizing the value of Bitcoin. Through continuous technological innovation and ecosystem expansion, perhaps Bitcoin is expected to lead the trend of cryptocurrency and decentralized finance, competing with Ethereum.
Source: PANews
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
This article is reproduced with permission from: "PANews"
Original author: Encrypted Kitchen
