Bitcoin
Decentralized finance is poised to transform Bitcoin
Since its creation in 2009, bitcoin (Bitcoin) has gained steady adoption and now has a market capitalization of over US$1.3 trillion. It is designed to be a decentralized currency and real-time gross settlement system. The decentralized, protocol-based approach allows holders to shift trust from a centralized actor to a decentralized, code-enforced protocol.
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Despite bitcoin being the original cryptocurrency and corresponding blockchain, its functionality has been extremely limited to date relative to smart contracts and decentralized finance (DeFi) functionality offered by Ethereum, Solana, and other blockchains. However, this dynamic is expected to change with the emergence of Bitcoin Layers, the metaprotocols, sidechains, layer 2s and other technologies currently being built on the Bitcoin blockchain. These layers will enable faster payments as well as lending, enhanced functionality of fungible and non-fungible tokens, decentralized exchanges, GameFi, SocialFi and many other use cases. Bitcoin holders will soon be able to increase the productivity of their assets through a protocol-based decentralized financial system. The main differentiator between DeFi on Bitcoin and DeFi on other chains is the underlying asset (native token). While Ethereum, Solana, and next-generation blockchains compete based on the merits of their respective technologies, DeFi on Bitcoin is purely focused on increasing bitcoin’s productivity, putting the Bitcoin DeFi ecosystem in a league of its own.
The case for creating value through a Bitcoin-based decentralized financial system is driven by three assumptions:
We are already seeing strong signs of demand for the Bitcoin blockchain as a base layer for other tokenized assets. The non-fungible token market in Bitcoin, called Ordinalsgrew from less than $100 million to more than $1.5 billion in less than six months.
However, the biggest opportunity is yet to come. Most of the market value of Bitcoin’s decentralized financial system will appear in the value of fungible tokens in Bitcoin. Fungible tokens will drive greater productivity of bitcoin (the asset) through yield-generating instruments and decentralized financial systems through protocols and layer 2. Relative to Ethereum, Solana and other chains, the value of fungible tokens in Bitcoin is still is tiny, in large part because we are at the beginning of programmable functionality on this blockchain.
Bitcoin’s main non-fungible token protocol, Ordinals, was not launched until January 2023. BRC20s and Runes, Bitcoin’s main fungible token protocols, were launched in March 2023 and April 2024, respectively. Even with these recent releases, additional functionality is needed for a robust decentralized finance ecosystem to exist on Bitcoin.
Additional functionality is being introduced to Bitcoin in two ways:
As mentioned previously, the Bitcoin decentralized finance ecosystem is still in the early stages of its lifecycle. However, strong indicators of future growth can be seen through the growing developer and DeFi activity in the space. In 2023, 40% of Bitcoin open source developers were focused on Bitcoin L2s and scaling solutions. Then, in the first quarter of 2024, the total value locked (TVL) of the Bitcoin ecosystem grew more than sixfold, from $492 million to more than $2.9 billion. Given these early indicators, along with what we’ve seen happening in other ecosystems, we believe that more than $1 trillion in value could be created in the Bitcoin DeFi ecosystem over the next five to 10 years.
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