Can You Build DeFi on Bitcoin? What the Experts Say

The idea of a trustless, non-custodial system of money has led to the emerging industry of decentralized finance (DeFi).

Bitcoin, the granddaddy of all crypto assets, is not poised to take advantage of these ever-expanding decentralized systems. Nonetheless, some are betting that Bitcoin will join the DeFi craze, despite the many obstacles.

Winner Doesn’t Take All

Though Bitcoin gets the job done, at least in terms of retaining value, it’s not the shiniest cryptocurrency on the block. Alternatives like Nano work faster and cheaper. And Ethereum and its kin, Neo and EOS, allow for a more dynamic use of the blockchain with smart contracts.

But will the winner take all? Software engineer, Pascal Marco Caversaccio, asked this very question as the race for the dominant smart contract platform continues:

“is [it] a winner-takes-it-all game or a complementary co-existence that will prevail in the long run.”

Two years later and we still don’t have an answer. Yet, it begs the question: what might happen if Bitcoin, the biggest cryptocurrency by market cap, became a central player in the DeFi space?

With the recent meteoric rise of DeFi protocols, the ability to run its associated decentralized apps has brought trustless banking into the spotlight.

Not Easy, But Not Impossible Either

In a recent tweet, Ryan Sean Adams asked whether you can build DeFi on Bitcoin.

In short, it’s possible, but not easy. Guest posting on the latest Bankless article, Matthew Black of Atomic Loans outlays some of the potential options that BTC has. Atomic Loans lends out money on Bitcoin collateral in a non-custodial system.

Black, who is CTO of the firm, has found a way around the technical limitations, but it didn’t come without its headaches. The biggest obstacle to using BTC in DeFi is actually not a technical issue at all.

The loudest voices in Bitcoin tend to be maximalists who see BTC as a currency aimed squarely at bringing down the world banking system. Others just want it to become the world’s reserve currency.

Apple co-founder Steve Wozniak says that Bitcoin is the one true digital gold. In other words, when the most visible opinion has nothing to do with DeFi, it’s hard to gain momentum in that direction.

Blockchain Acrobatics

Moreover, if DeFi uses for Bitcoin become more generally accepted, users and software engineers might not flock to it. Programming for Bitcoin is hard, and when offering decentralized, non-custodial services, it’s even harder.

For non-custodial transactions, Bitcoin’s problem is that it isn’t simple. Users need to set up infrastructure. Unlike Ethereum, BTC requires wallet addresses before a contract is written for liquidity. A few clever tricks offer workarounds.

Perhaps the simplest workaround is Wrapped BTC (WBTC). This is an ERC-20 token that tracks the value of bitcoin 1:1. Other options include the use of side chains like Binance Chain and Atomic-Swap-based DeFi (like Liquality or Jelly Swap).

atomic loans user interface
Source: Bankless

It’s the Liquidity, Stupid

At the end of the day, average users want a sleek, simple interface, that just works.

Above all, it’s not convenient for users who need advanced knowledge, or serious programming chops to build a Bitcoin DeFi liquidity pool. And liquidity is key to successful DeFi platforms. Maybe if a BTC DeFi platform found a way to attract Liquidity Hunters, it could take off.

Similarly, a well-built and intuitive User Experience for DeFi on BTC could even improve the landscape. The general public already knows what Bitcoin is and BTC definitely has the best liquidity of any cryptocurrency. The more stable the ground, the more people will be willing to venture onto it.


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