Current Status and Future Prospects of the BTCFi Ecosystem Development

Bitcoin's role in decentralized finance ( DeFi ) is undergoing a significant transformation. From its initial use as a peer-to-peer transfer tool, Bitcoin is gradually becoming an important force in the DeFi space, beginning to challenge Ethereum's dominance. By analyzing on-chain data, we can clearly see that the integration of BTCFi ( Bitcoin and DeFi ) is not only a technological revolution but may also trigger a paradigm shift in Bitcoin's role within DeFi, redefining the entire DeFi landscape.

The Rise of BTCFi

When Satoshi Nakamoto launched Bitcoin in 2008, his intention was to create a peer-to-peer electronic cash system. Although this framework has revolutionary significance in the field of crypto assets, it has obvious limitations in supporting more complex financial applications like DeFi.

( The limitations of Bitcoin's original design

1. UTXO model: The unspent transaction output model used by Bitcoin )UTXO### is suitable for simple transfers, but lacks the flexibility to support complex smart contracts.

2. Limited scripting language: Bitcoin's scripting language is designed with restrictions, and the number of executable opcodes is limited, making it difficult to support complex DeFi applications.

3. Lack of Turing completeness: Bitcoin scripts are not Turing complete, making it difficult to implement complex smart contracts that depend on state.

4. Block size and transaction speed limits: The 1MB block size and 10-minute block time result in a slower transaction processing speed.

Although these designs enhance the security and decentralization of Bitcoin, they also limit the possibility of directly implementing DeFi functions on the Bitcoin blockchain.

( early attempts to introduce DeFi

Despite facing limitations, developers are still seeking innovative solutions to expand Bitcoin's functionality:

• Colored Coins )2012-2013###: Representing real-world assets by "coloring" Bitcoin.
• Counterparty(2014): Introduces the ability to create and trade custom assets.
• Lightning Network (2015 to date ): Layer 2 protocol enhances transaction scalability.
• Discrete Log Contracts ( DLC ) (: Implementing complex financial contracts.
• Liquid Network ) 2018 to present (: A settlement network based on sidechains.
• Taproot upgrade )2021(: Enhances smart contract capabilities.

These early attempts laid the foundation for the expansion of Bitcoin's functionality, demonstrating the potential of the Bitcoin ecosystem.

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Key Innovations in Implementing Smart Contracts

In recent years, multiple protocols have aimed to introduce smart contracts and DeFi functionalities for Bitcoin:

1. Rootstock: The earliest Bitcoin sidechain that supports EVM-compatible smart contracts.

2. Core: An EVM-compatible blockchain closely integrated with Bitcoin, innovatively transforming Bitcoin into a yield-generating asset.

3. Merlin Chain: A Bitcoin second-layer network integrated with technologies such as ZK-Rollup.

4. BEVM: The first fully decentralized and EVM-compatible Bitcoin Layer 2 network.

The main innovations of these protocols include:

• Tokenized Bitcoin Assets
• Smart contracts and EVM compatibility
• Yield-bearing BTC
• Scalability and privacy enhancement

As of September 8, 2024, the total locked value of Bitcoin Layer 2 solutions and sidechains reached $1.07 billion, a 5.7-fold increase from the beginning of 2024 and an 18.4-fold increase from the beginning of 2023. Core leads with 27.6% of the TVL, followed by Bitlayer 25.6%, Rootstock 13.8%, and Merlin Chain 11.0%.

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The Current State of Bitcoin DeFi

) Main BTCFi Projects

1. Pell Network: Cross-chain re-staking protocol that enhances the security of the Bitcoin ecosystem and optimizes yields.

2. Avalon Finance: A multi-chain DeFi platform that provides lending and trading services.

3. Colend Protocol: A decentralized lending platform on the Core blockchain.

4. MoneyOnChain: A comprehensive DeFi protocol on Rootstock that issues the stablecoin DoC.

5. Sovryn: A multifunctional DeFi platform across BOB and Rootstock.

6. Solv Protocol: Promoting NFT financialization on the Merlin Chain.

As of September 8, 2024, Core leads in the Bitcoin DeFi space, accounting for 25.2% of active projects. Rootstock and Bitlayer each account for 13.0%, while Merlin Chain accounts for 9.9%.

( Key Narrative

• Security and decentralization first
• Bitcoin as a programmable token
• Interoperability with Ethereum
• Unlock Bitcoin Capital

) compared to Ethereum DeFi

As of September 8, the amount of BTC locked in Ethereum DeFi protocols is (15.34 million), far exceeding the Bitcoin native DeFi ecosystem amount of (0.897 million). Although native Bitcoin DeFi projects are smaller in scale, they operate within Bitcoin's own security framework, avoiding cross-chain risks.

Future Outlook

technological progress

Bitcoin DeFi is expected to make progress in the following areas:

• Improve Layer 2 solutions
• Develop a more scalable and interoperable framework
• Secret log contract ( DLCs ) and advancements in privacy protection technology.

Growth Area Forecast

• Income-generating products
• DEX and cross-chain liquidity pools
• DeFi products for institutions

Challenge

• Scalability issues
• Interoperability challenges
• Regulatory scrutiny intensifies

Conclusion

The Bitcoin DeFi ecosystem is expected to continue expanding driven by technological advancements and institutional interest. The key lies in developing more scalable Layer 2 solutions, enhancing interoperability, and launching more sophisticated financial products. Yield-generating products, DEXs, and institutional-focused DeFi services are anticipated to attract significant attention.

However, the changing regulatory environment and the technical challenges related to scalability and security still need to be overcome. Addressing these issues is crucial for maintaining growth momentum and ensuring long-term success.

Overall, the future of Bitcoin DeFi is promising and is expected to have a profound impact on the entire DeFi ecosystem, making Bitcoin a core participant in DeFi.