In this article, we address an analysis of the current limitations that DeFi on Bitcoin must face in order to grow significantly and compete with Ethereum and other established networks in the sector.
Despite the recent implementations of Ordinals, Runes, and BRC-20 tokens, Bitcoin remains a decentralized environment that is not very fluid and not very efficient for users who intend to seek a native yield.
Different protocols, including SolvBTC, Master Yield Market, and MetaID, aim to solve these problems through their own analyses and advanced approaches.
Let’s see everything in detail below.
The factors that limit the growth of DeFi on Bitcoin: the latest analyses
According to reports in the analyses of some experts in the crypto space, the development of DeFi on Bitcoin could be hindered by some fundamental factors that make the chain less appealing for users.
In the last year, the native implementations of Ordinals, Runes, and BRC-20 have systematically changed the way Bitcoin is viewed by the world of decentralized finance, thanks to the introduction of features considered technically impossible until recently.
In any case, this is still not enough to reach the same popularity and the same on-chain metrics as other more experienced networks in DeFi like Ethereum, Arbitrum, Solana, etc.
From the analyses of Ryan Chow, founder of SolvBTC, it emerges that the current biggest limit is represented by the lack of an efficient native yield that can justify the transition from non-custodial wallet or CeFi to DeFi protocols.
In fact, users prefer to forgo a less significant yield and avoid risks of hacking and exploits, or rather they still prefer to enjoy lower yields but on more user-friendly platforms such as centralized ones.
The result is that a large portion of the Bitcoin supply remains unused, setting aside essential economic resources so that a flourishing ecosystem can be created.
Below is Chow’s comment on this topic during a recent interview:
“Currently, there are two key factors limiting the development of BTCFi, the lack of basic yield and the fragmentation of liquidity. These factors have led to a significant amount of inactive Bitcoin, unable to actively participate in the ecosystem”
The reduction of cryptographic activities on Runes, Ordinals and BRC-20 with a low usage of currency used within the Bitcoin Defi is highlighted by the recent reduction of active wallets in the network.
From September 2023 onwards, smart investors preferred to buy satoshi before the price increase at the beginning of the year, and then wait for better times to move their stash again.
The lack of secure decentralized places to obtain a yield on one’s BTC positions and the excessive fragmentation of liquidity, have led to a situation where the metric of active wallets has reached its lowest value since 2015 with just over 5 million active entities monthly.
The approach of SolVBTC, Master Yield Market and MetaID: analysis based on yield efficiency and scalability
To solve these problems that afflict the growth of DeFi on Bitcoin, some industry experts as well as owners of innovative cryptographic protocols, share their analyses and the approaches considered to be resolving.
Ryan Chow, founder of the SolvBTC platform, explains how within his protocol depositors can obtain significant income by committing their stake by doing liquid staking on the Ethereum blockchain.
In this way, the problem of liquidity fragmentation is solved by being able to rely on liquidity environments such as EVM, as well as offering a return worthy of the risk being taken.
➤ Why SolvBTC?
Fragmented liquidity is a major obstacle to the growth of BTCFi.
And it’s more prominent in BTC ecosystem.
SolvBTC tackles this problem by serving as a gateway to BTCFi on various chains. pic.twitter.com/SKMtLLp9pB
— Eli5DeFi (@eli5_defi) June 14, 2024
The recent partnership between SolvBTC and Ethena Vault has allowed the protocol to achieve a net APY of 15%.
The operation of this integration is as follows: users deposit native BTC within SolvBTC which are used as collateral to take stablecoins, which are then used in turn to mint USDe of Ethena and capture the yield from arbitrage on interest rates in the futures markets.
Here is what emerged from Chow’s analyses:
“I would like to take SolvBTC Ethena Vault as an example to explain how Solv brings a stable base yield and rich earning opportunities to Bitcoin users. Both Solv and Ethena provide bonus token incentives for this Vault, potentially increasing the overall yield even more.”
SolvProtocol has grown significantly since the beginning of the year, reaching a total TVL of 1.3 billion dollars among 292,000 users. The SolvBTC section alone captures 874 million dollars.
Another protocol that helps DeFi on Bitcoin to emerge is Master Yield Market, where users can directly purchase and sources of Bitcoin yield resources from native blockchain DeFi protocols using Tether, Ethereum, and wrapped Bitcoin (WBTC).
This approach simplifies the experience of yield searching within the chain, offering a solution that is easy and low-effort.
In the meantime, other developers are focusing on increasing the underlying capacity of the Bitcoin blockchain to improve DeFi performance.
The developer Sunny Fung of MetaID believes that Bitcoin needs to improve in terms of scalability and network congestion, in view of a potential future growth of the DeFi sector.
From his analysis, it emerges that it is possible to mitigate the problem by grouping individual transactions into a single layer-2 application to save time and effort.
“MetaID introduces the concepts of Unified UTXO Chain and Unified Bitcoin Address, which effectively solves the problem of Bitcoin congestion and fully unleashes the potential of level 2 networks homogeneous with Bitcoin. As long as it is a Bitcoin sidechain, layer 2, or even BCH homogeneous with Bitcoin, MetaID can theoretically support it seamlessly.”
Fung argues that although Bitcoin was designed as a layer for the simple exchange of money, it could soon become the “best carrier for web3 applications” thanks to some key features of the chain such as high consensus, security, efficient on-chain data storage ( inscription on satoshi) and decentralization.
We remind you that all these approaches mentioned in the article involve operational risks that should not be excluded in the evaluations, especially regarding exposure to the USDe Vaults of Ethena (use of algorithmic stablecoin) and the use of second-layer networks that are less secure than the main Bitcoin network.