Introduction

Bitcoin is traditionally known for its superiority as a secure digital store of value. However, one of the major drawbacks is its lack of native support for smart contracts and DeFi functionalities. To support Bitcoin’s DeFi functions and smart contract capabilities, many innovations have emerged to boost its transaction speed, scalability, and flexibility in DeFi applications, notably the Taproot upgrade. Consequently, Bitcoin has found its way into the vibrant world of decentralized finance, unlocking new possibilities for users and investors.

In this article, we will explore top Bitcoin DeFi projects, their challenges, prospects, and how you can use these platforms.

Understanding DeFi

Decentralized Finance (DeFi) is the umbrella term for decentralized financial solutions with no central authority in control. As a model for organizing and enabling cryptocurrency-based transactions and exchanges, its core premise is that there is no centralized authority to dictate or control operations.

Smart contracts and blockchain technology make DeFi possible because they replace the need for central authority. Further, blockchain’s peer-to-peer functionality adds to the mix, enabling a network of nodes to share the workload. This allows for decentralized control; everyone on the network has the same rights and operates on the agreed terms.

From everyday banking, loans, and mortgages to complicated contractual relationships and asset trading, DeFi is removing the barrier to entry for financial services. The prospect of DeFi is so high that Bank of America reported that it is more disruptive than Bitcoin as a medium for simple transactions. With an estimated market size of USD 46.61 billion in 2024, DeFi is becoming the hottest trend in the crypto landscape.

For further insights into DeFi, please read: What is DeFi?

Bitcoin’s Integration in DeFi

Being the most well-known and secure cryptocurrency in the world, integrating DeFi could be a significant milestone in propelling Bitcoin’s use cases even further. Additionally, DeFi on Bitcoin would attract more users, leading to significant growth of its ecosystem. Since Ethereum is the foremost DeFi development platform, a DeFi functionality on other blockchains like Bitcoin would decrease the pressure on Ethereum.

Initially, Bitcoin’s role in DeFi was primarily through wrapped BTC (WBTC) on the Ethereum network. This solution enabled Bitcoin holders to enjoy DeFi activities on Ethereum without selling their Bitcoin. WBTC, however, didn’t bring DeFi capabilities to the Bitcoin blockchain. Thus, Bitcoin’s foray into DeFi became more realistic with the Taproot upgrade in November 2021, enabling the launch of native DeFi applications within the Bitcoin ecosystem.

Consequent to advancements in innovations and technologies, Bitcoin DeFi’s ecosystem is consolidating. Revolutionary projects are emerging in key areas like decentralized lending, borrowing, yield farming, decentralized exchanges, cross-chain solutions, and security. Let’s explore some of these projects.

Top Bitcoin DeFi Projects

We will examine developments from leading Bitcoin DeFi projects, including WBTC Network, ALEX, and Stacks, as they demonstrate their long-term value. These projects were selected based on their uniqueness, collaborations, growth potential, and the ongoing improvement of the Bitcoin DeFi ecosystem, potentially setting the stage for the competitiveness of Bitcoin in DeFi.

WBTC Network

Source: WBTC Network

In the early days of cryptocurrency, Ethereum dominated the smart contract scene, but Bitcoin holders couldn’t participate with their bitcoin tokens. Wrapped Bitcoin (WBTC) was the solution that brought Bitcoin to the Ethereum blockchain. After the availability of the WBTC option, bitcoin holders can utilize other chains’ functionalities without having to sell their Bitcoin assets.

Wrapped Bitcoin (WBTC) is a groundbreaking ERC-20 token representing a 1:1 peg to Bitcoin. This means that for every WBTC token in existence, an equivalent amount of bitcoin is held in reserve by a firm called BitGo Trust. To achieve a higher degree of transparency, the number of WBTC held in the trust are made public.

WBTC is designed to combine the strength of Bitcoin with the flexibility of an ERC-20 token, offering key features like 100% verifiability, a community-led approach, transparency, and compatibility with ERC-20.

Lightning Network (LN)

Source: Lightning Network

The Lightning Network is a decentralized network built on Bitcoin to facilitate scalable, low-cost, and lightning-fast transactions. It addresses challenges such as confirmation times and scalability issues. ‍Lightning Network solves these limitations by providing fast transactions with a throughput of around 1 million transactions per second (TPS).

While Lightning can be used for any type of transfer, it is most useful for micropayments or smaller transfers that are typically uneconomical due to high base layer fees. The network does not issue any native tokens and exposes its users to all the benefits of Bitcoin blockchain like decentralization, open-source, and permissionless.

LNSwap

Source: LNSwap

LNSwap is a decentralized swap protocol designed to offer users a rapid and private method of exchanging Bitcoin for Stacks (STX) assets and vice versa. This innovative protocol supports all on-chain and Lightning Bitcoin wallets, emphasizing a commitment to user experience and privacy. By leveraging Lightning Network technology, the protocol provides a level of privacy assurance that distinguishes it from other alternatives in the market. Users need a Stacks-compatible wallet like Hiro (Leather) Wallet or Xverse Wallet to use LNSwap. They can deposit native BTC and swap to STX through LNSwap.

LNSwap’s mission is to give users direct control over their funds and increase privacy. Users can go from Bitcoin on Lightning Network to Stacks in a few clicks and with no KYC on LNSwap. In addition, anyone can provide liquidity and add funds to join the LNSwap aggregator and earn ~3% fees on each swap completed by users.

Satoshi Protocol

Source: Satoshi Protocol

Satoshi Protocol is the first collateralized debt position (CDP) protocol built on the BEVM chain—a decentralized EVM-compatible Bitcoin layer 2 based on the Taproot consensus—and introduces a revolutionary solution that aims to make Bitcoin more spendable, allowing users to borrow $SAT stablecoin by depositing Bitcoin as collateral. Essentially, Satoshi Protocol lets you leverage your Bitcoin to borrow cash & earn rewards—all while keeping your Bitcoin safe as collateral, thus, unlocking trillion worth of Bitcoin liquidity, and bringing more utility and revenue to the Bitcoin DeFi (BTCFi) ecosystem. This means you gain access to cash (stablecoin) without the burden of selling your BTC and can obtain your assets upon loan repayment.

Additionally, the decentralized payment system offers two utility tokens namely; SAT, a BTC-collateralized stablecoin, pegged to the US dollar, backed by BTC, and offering a decentralized stablecoin alternative. Unlike other over-collateralized cryptocurrency-backed stablecoins like DAI and LUSD, $SAT has a wider potential for adoption and utility by simply tapping into Bitcoin’s vast market cap, popularity, and massive adoption rate. OSHI is a utility token that serves to incentivize participation and reward contributions to the project. It has a total supply capped at 100,000,000 tokens with a structured vesting period.

OSHI Token Allocation

Source: Satoshi Protocol

How to Use Satoshi Protocol

• Bridge BTC to BEVM Network: bevm.io/bridge-mainnet
• Go to Satoshi APP: app.satoshiprotocol.org/position
• Create Position - Deposit BTC and Borrow SAT (ensure the collateral ratio is above 110%, with a minimum of 10 SAT borrowed)
• Click “Approve”
• Click “Create Position”

Source: Satoshi Protocol

Note: To create a Position, you need a Bitcoin wallet e.g. UniSat wallet to facilitate transactions.

Money on Chain

Source: Money on Chain

Money on Chain is a DeFi protocol that offers four significantly different tokens. The idea is to provide use cases and avenues for performance to Bitcoiners while allowing them full control of their private keys. The platform operates based on a Bitcoin collateralized protocol. This strategy minimizes the counterparty risks found in other stablecoins by holding the collateral in a smart contract secured by Bitcoin, rather than holding it in a third-party bank account.

Money on Chain entails several tokens: the Dollar on Chain (DoC), which is the first Bitcoin collateralized stablecoin; the Bitpro (BPro), a token designed for Bitcoin holders; the BTCX, a leveraged Bitcoin long position; the Money On Chain Token (MoC), a governance token; and a decentralized token exchange (TEX) for the trading of tokens on the Rootstock (RSK) blockchain. The diversity of these tokens enables their functionality across a diverse set of users.

Sovryn

Source: Sovryn

Sovryn is a smart contract platform that is permissionless and based on the RSK sidechain. This protocol is designed to allow for Bitcoin lending, marginal trading, and borrowing. Since the system is built on the RSK sidechain, it ensures the Bitcoin network’s security in combination with the functionality of Ethereum’s Solidity language.

To start using Sovryn, you need a Web3 wallet, that is compatible with the RSK sidechain, for instance, Metamask. You also need to connect the wallet to the Sovryn platform. Lastly, you will need to have some bitcoin and transfer them to the Layer 2 network.

To facilitate lending on the platform, the fees that the protocol collects and provides to the liquidity providers are dynamic, implying that they are determined by the forces of supply and demand. However, the protocol applies an origination fee to every loan which is fixed at 0.09%.

ALEX

Source: ALEX

ALEX is a thriving platform that empowers developers, traders, and investors to explore the full potential of finance on the Bitcoin blockchain. The core team comprises skilled professionals and industry veterans with diverse expertise, ensuring ALEX’s commitment to excellence in product design, development, and operations is fulfilled.

With a robust Total Value Locked (TVL) and Total Transaction Volume, ALEX has quickly become a formidable force in the Bitcoin DeFi ecosystem. Since its launch, the platform has been gaining more active wallets, offering modules covering everything from launching and managing assets to data analysis and trading.

Zest Protocol

Source: Zest Protocol

Zest Protocol is the first Bitcoin native lending protocol enabling users to harness the power of their Bitcoin through straightforward transactions. Smart contracts are at the core of Zest Protocol, facilitating on-chain Bitcoin loans and Bitcoin collateralized loans, providing a seamless and efficient way for lenders and borrowers to engage in the Bitcoin capital market.

The striking advantage of this platform is its ability to enable users to put their Bitcoin to work through a simple Bitcoin transaction, allowing them to achieve their credit requirement without borrowing against assets. Being the pioneering on-chain lending protocol in the Bitcoin ecosystem, Zest Protocol is paving the gateway to a new era of financial opportunities for Bitcoin holders. By leveraging the security and liquidity of Bitcoin in a decentralized lending environment, Zest Protocol is creating a more inclusive and efficient Bitcoin DeFi ecosystem.

Badger DAO

Source: Badger

Badger is a platform that empowers decentralized solutions, focusing on connecting Bitcoin to other blockchains, particularly Ethereum. Badger’s community-driven platform—Badger Builders—aims for the collaborative development of Bitcoin across DeFi. The project also includes a BADGER governance token for decentralized decision-making, SETT vaults for Bitcoin asset optimization, and DIGG, an innovative Bitcoin-pegged elastic supply cryptocurrency. These features highlight Badger DAO’s focus on integrating Bitcoin with DeFi.

Stacks Protocol

Source: Stacks Protocol

Founded in 2019, Stacks aims to enable smart contracts and dApp creation using Bitcoin. Stacks is a layer 2 blockchain network that relies on a unique consensus mechanism called proof of transfer (PoX). Under PoX, miners spend Bitcoin to receive newly minted STX tokens. STX holders can also “stack” their tokens, locking up tokens to support the network and then earn Bitcoin.

STX is used to pay for transactions on the Stacks blockchain, just like ETH or SOL are used to pay for transactions on Ethereum or Solana. However, unlike those other blockchains, Stacks uses STX tokens to settle transactions in another currency, BTC. To power its smart contract functionality, Stacks Blockchain uses Clarity, a smart contract programming language that optimizes security and predictability.

Zeus Network

Source: Zeus Network

Zeus Network functions as a permissionless communication layer that bridges the robust security of the Bitcoin blockchain and the rapid transaction processing of Solana. This innovative solution combines the best of both worlds, allowing users to enjoy Solana’s super-fast transaction speeds and scalability along with the solid security, trust, and liquidity of Bitcoin.

Zeus is a game-changer in the world of DeFi as it unlocks many possibilities, from DeFi apps to secure and efficient financial services. It has a robust product ecosystem that offers developers and founders a wide range of opportunities. This includes APOLLO, which allows users to stake or wrap Bitcoin within Solana; ARTEMIS, which facilitates the seamless transfer of liquidity between Solana and Bitcoin networks; Native & Cross-Chain NFT tools for the creation and exchange of NFTs across Solana and Bitcoin; and the native lending and borrowing feature that aims to foster capital efficiency and liquidity provision.

Rootstock (RSK)

Source: Rootstock

Rootstock is an L2 chain on Bitcoin that aims to enable smart contracts, near-instant payments, and higher scalability for Bitcoin without compromising its core features like security and decentralization. Since Bitcoin was developed for simple peer-to-peer transactions, it does not have the capability of handling complex smart contracts. RSK is a sidechain solution that allows users to run complex smart contracts on Bitcoin.

Transactions on RSK can occur much faster and at a lower cost than on Bitcoin’s main chain. Since established smart contract blockchains like Ethereum are facing network congestion, Rootstock can decongest these blockchains by taking more complex contract structures to Bitcoin. Essentially, RSK extends the functionality of Bitcoin by adding the capability to execute smart contracts, increasing the utility of the Bitcoin blockchain.

Bitcoin DeFi Projects: Challenges and Future Outlook

Bitcoin’s entry into DeFi has raised both positive and negative reactions from the Bitcoin community, some of which are worth mentioning.

Challenges

Many critics have questioned the scalability of DeFi projects built on Bitcoin. Although innovations like Lightning Network directly address these issues, the outcome when more DeFi projects are launched on the Bitcoin network is unclear. High transaction costs may also be a challenge since Bitcoin transactions are expensive, especially during peak periods. As Bitcoin lags behind other blockchain networks in terms of transactions per second, Bitcoin DeFi projects may also experience transaction slowdowns.

Unlike Ethereum, Bitcoin wasn’t created with complex smart contracts as a main focus. This restriction introduces complexities to the Bitcoin network whenever it wants to interact with complex smart contracts. Although upgrades, like Taproots and BitVM, can potentially address Bitcoin’s smart contract limitations, getting widespread agreement on such upgrades may be slow and challenging.

Future Outlook

Despite the challenges, Bitcoin’s potential in DeFi looks very promising. Introducing DeFi functionality into Bitcoin will attract more users to the network, growing its community and consolidating its position as the leading cryptocurrency in the world.

As the DeFi community looks towards Bitcoin, more technologies that can address the network’s scalability issues and allow for more complex activities will surely emerge. Innovations like BRC-20 tokens, Ordinals, Runes, and Taproots are proving to be key drivers of DeFi in the Bitcoin ecosystem. These technologies are helping to address the network’s inherent challenges while making Bitcoin more accessible and inclusive. By reducing fees and streamlining the user experience, these developments will be instrumental in carving Bitcoin’s path in the DeFi market.

How to Use Bitcoin DeFi Platforms

Here is a step-by-step guide on how to set up and use one of the most popular wallets for managing Bitcoin assets, Leather Wallet, to explore the Stacks Network.

1. To download Leather Wallet, visit the website and click on “Install Leather now.”

Source: Leather.io

1. Next, click “Install from Chrome Web Store,” then “Add to Chrome/Get.”

Source: Chrome Web Store

1. After installing the Leather extension, you can create your wallet. Go to the Leather app and click on “Create new wallet.”

1. The page will bring a unique seed phrase. Keep it safe and confidential. Always remember, if you lose your seed phrase, you can’t access your wallet and all your cryptocurrencies.

2. After backing up your seed phrase, you will be asked to create a password to secure your wallet. Thus, endeavor to create a strong password that you won’t forget.

1. To add STX tokens to your Stack wallet, click on “Receive” on the page that comes up as shown below:

1. Then, click the copy button next to Stacks on the window that pops up.

Source: Leather.io

1. You need to buy STX tokens to proceed. To do this, go to the Gate.io crypto exchange, create a Gate.io account if you don’t have one, fund your spot trading account, and go through the steps to buy the token. Once the transaction goes through, you can transfer the STX tokens from your spot trading account to Leather Wallet using the wallet address you copied.

Source: Gate.io

1. Upon completion, you can interact with the Stacks Network using your Leather Wallet. With this, you can stake your STX tokens for Bitcoin earnings, buy and sell NFTs, inscribe a Bitcoin Ordinal, or buy a .btc domain name. The options are endless in Bitcoin DeFi.

Conclusion

With the increasing fuss surrounding financial utility in blockchain, many are curious about Bitcoin’s evolving role in DeFi. Although the Bitcoin DeFi ecosystem is still in its early stage and is less mature compared to Ethereum, yet Bitcoin is making strides with innovations like Stacks and Lightning Network. More technologies are expected to bridge the gap between Bitcoin’s robustness and the decentralized financial ecosystem. High transaction costs and the lack of complex smart contract capabilities remain priorities for developers as they strive to consolidate DeFi into Bitcoin. The projects highlighted in this article are just some of the many significant developments in the Bitcoin DeFi (BTCFi) space, and more groundbreaking projects will be launched soon.、