Bitcoin’s DeFi Revolution Is Ushering In A New Era For Crypto

Over the last 15 years, Bitcoin has come to be known as “digital gold”, earning a thoroughly deserved reputation as an alternative store of value. But its potential goes well beyond that, and developments over the last few years have ignited a new wave of innovation around the world’s oldest cryptocurrency.

The DeFi revolution, which first emerged thanks to Ethereum’s smart contracts, is finally coming to Bitcoin, where it can leverage over $1.2 trillion in largely idle capital and the unrivaled security of the original blockchain. These two advantages alone make Bitcoin DeFi a no-brainer, and it is already making its mark on the crypto world with the birth of hundreds of exciting new projects, including Bitcoin-based DEXs like Velar Dharma, Bitcoin-focused lending protocols such as Sovryn and native Bitcoin wallets like Xverse.

Bitcoin’s Transformation

Until recently, DeFi on Bitcoin simply wasn’t possible. The infrastructure required to build decentralized financial applications atop of Bitcoin’s blockchain just wasn’t there. That’s why DeFi flourished on Ethereum and later, other blockchains like Solana and Avalanche. The idea of creating a similar ecosystem on Bitcoin was largely dismissed, as its blockchain was seen as too rigid and, crucially, it wasn’t able to support the smart contracts needed to facilitate the wide-ranging functionality of DeFi applications.

But the Bitcoin of old is no longer the Bitcoin of today. Starting with the introduction of Segregated Witness in 2017, it has evolved into a very different beast. SegWit did two key things: it helped to mitigate some of Bitcoin’s data limitations, and more importantly, it enabled the creation of so-called “Layer-2 networks”, such as Stacks, Rootstock and the Lightning Network. With L2s, Bitcoin users are able to process transactions off-chain, increasing speed and reducing costs before ultimately settling them on the super-secure Bitcoin blockchain.

The next important milestone in Bitcoin’s evolution was the Taproot upgrade. Rolled out in November 2021, it paved the way for Bitcoin to support more complicated transactions and later, the creation of Bitcoin-native smart contracts and dApps. In a 2024 study, Coinmarketcap (CMC) Research and Footprint Analytics discussed how Taproot transforms Bitcoin into something far more powerful.

“Through Merklized Alternative Script Trees (MAST), Taproot condenses complex transactions into a single hash, reducing transaction fees and minimizing memory usage,” it says in the report. “While not a DeFi solution itself, the Taproot upgrade improved Bitcoin’s smart contract capabilities, making it easier and more efficient to implement complex transactions and laying a foundation for future DeFi developments.”

It was because of Taproot that the Bitcoin developer Casey Rodamor was able to create the Ordinals and Runes protocols that revolutionized the utility of Bitcoin. Introduced in 2023, Ordinals makes it possible to “inscribe” data such as an image or document onto a single satoshi, the smallest unit of Bitcoin, effectively transforming them into non-fungible tokens or NFTs that live on the Bitcoin network.

Meanwhile, Runes enabled the creation of fungible tokens, equivalent to the ERC-20 tokens that live on Ethereum, giving rise to alternative, Bitcoin-based cryptocurrencies such as the Pepe memecoin and the Liquid Tether (L-USDT) and Sovryn Dollar (DLLR) stablecoins. Rodarmor’s efforts were quickly followed by the introduction of the BRC-20 standard, introduced by an anonymous developer called Domo, in March 2023.

Bitcoin DeFi Takes Off

The above developments unleashed a wave of innovation on the Bitcoin network, and the resulting DeFi ecosystem has become one of the fastest-growing segments in the crypto market, with over $560 million in total value locked as of October 2024. Developers are striving to recreate the same kind of ecosystem that exists on Ethereum, driven by the desire to tap into the enormous value locked in Bitcoin, which accounts for more than 54% of the total capital in the crypto industry.

With the existence of a framework to follow in the shape of Ethereum’s DeFi space, developers have largely skipped the experimentation phase. Already, hundreds of Bitcoin-native dApps have launched, spanning everything from DEXs, stablecoins and NFTs, to lending and borrowing markets and “real-world assets”.

Velar itself has emerged as one of the biggest players in Bitcoin’s ecosystem. It has built a comprehensive decentralized exchange platform that enables seamless, low-cost swaps of Bitcoin-based tokens. Notably, it pioneered the very first perpetual DEX platform on Bitcoin, and provides a way for BTC holders to put their capital to work, providing liquidity in return for a share of the platform’s transaction fees. In September alone, Velar claimed the title for the highest number of active users (28%) on the Stacks ecosystem. Finally, Bitcoin users can do more than just “hodl” their assets.

Peter Watson, Chief Marketing Officer of Velar, believes that their commitment to the community is how they are able to create real value and claim the position as the number one protocol on the Stacks Network. He says “what sets us apart is that our core team comes from the community itself. We’ve been in their shoes, understand their challenges, and share the same vision for the ecosystem. This unique perspective drives us to build with purpose and precision. Everything we create is for the long-term benefit of the community, making sure that the ecosystem not only thrives but evolves in ways that matter.”

Other well-known dApps in the Bitcoin ecosystem include Sovryn, a DeFi protocol hosted on Rootstock that enables token swaps, lending, borrowing and staking, and Gamma, which has emerged as the largest marketplace for Ordinals and Bitcoin-based NFTs issued on the Stacks network.

In addition, the Bitcoin ecosystem now boasts innovative wallets such as Xverse, which is designed to provide a user-friendly interface for interacting with Bitcoin’s nascent ecosystem. It gives users the ability to swap digital assets directly within the wallet, so they can buy meme coins, Ordinals and NFTs, stake their tokens and more.

Accelerating DeFi Adoption

The above dApps all look and feel much like their Ethereum-based counterparts and their fast-growing popularity shows how Bitcoin DeFi is primed for success. They also help to explain the sudden surge of institutional interest in Bitcoin, which helped to drive massive gains in BTC’s value earlier this year.

Although some Bitcoin maximalists and degens are still less than enthusiastic about the idea of traditional financial institutions getting involved in crypto, the enormous capital within TradFi will do much to accelerate Bitcoin’s mainstream adoption.

Bitcoin DeFi opens the floodgates to a word of opportunity, but it still faces many of the same challenges that have limited its adoption on Ethereum and other blockchains. One of the major ones is the user experience. For instance, onboarding into crypto, and especially DeFi, remains a daunting experience for many new investors. Fortunately, Bitcoin developers are starting to focus their energies on accessibility, breaking down the barriers to adoption.

For instance, the recent partnership between Velar Dharma and Xverse provides a more seamless way for users to explore the Bitcoin ecosystem. With Xverse, users can now swap their BTC for numerous Bitcoin assets, directly within the wallet, including stablecoins, meme coins and utility tokens, with more than 60 trading pairs available at launch. The wallet utilizes Dharma’s multi-hop technology to enable swaps instantaneously, in close to real-time. So anyone holding BTC has an easy way to access Bitcoin’s growing stable of digital assets.

More Than Digital Gold

As more capital is sucked into the Bitcoin DeFi ecosystem, it’s giving entrepreneurs greater runway to fund and explore their innovative ideas. One of the most eagerly anticipated changes is the Nakamoto upgrade on Stacks, which is designed to increase transaction throughput with enhanced finality guarantees, and should further cement Bitcoin’s status as a reliable DeFi protocol.

“The expansion of the Bitcoin ecosystem proves that Bitcoin can be so much more than just digital gold and a store of value,” Thakore stated. “Bitcoin can power DeFi, it can power NFTs and it can serve as the cornerstone of many other emerging decentralized applications.

Bitcoin’s evolution will naturally have major implications for the wider DeFi industry too. If DeFi is to achieve its goal of widespread adoption, it needs to be built on a strong foundation. And there’s nothing that can compare to the industry-leading security, the vast liquidity and the mainstream appeal that Bitcoin already has.