Bitcoin could become the foundation of DeFi with more single-sided liquidity pools

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For many years, Ethereum reigned supreme over the decen­tral­ized finance (DeFi) land­scape, with the blockchain serv­ing as the des­ti­na­tion of choice for many of the most inno­v­a­tive projects serv­ing up their take on decen­tral­ized finance. More recent­ly, how­ev­er, DeFi projects have start­ed to crop up across mul­ti­ple ecosys­tems, chal­leng­ing Ethereum’s hege­mo­ny. And, as we look to a future in which the tech­ni­cal prob­lem of inter­op­er­abil­i­ty is solved, one unlike­ly con­tender for the role of DeFi pow­er play­er emerges — Bit­coin (BTC).

In that future, Bit­coin plays poten­tial­ly the most impor­tant role in DeFi — and not in a tri­umphal­ist, max­i­mal­ist sense. Rather, Bit­coin can com­ple­ment the rest of cryp­to as the cen­ter­piece of mul­ti­chain DeFi. The key to this is con­nect­ing it all togeth­er so that Bit­coin can inter­act with Ethereum as seam­less­ly as iOS and Android do today.

An argu­ment in favor of har­mo­niz­ing Bit­coin with DeFi may come as a sur­prise. Com­men­ta­tors often pit the incum­bent Bit­coin blockchain against its more agile and func­tion­al coun­ter­part, Ethereum. The real “flip­pen­ing,” how­ev­er, is con­nect­ing DeFi to Bit­coin. Doing so gives users the best of both worlds, com­bin­ing the dex­ter­i­ty of Ethereum with the puri­ty of Bit­coin. The debate revolves around what a Bit­coin-enabled DeFi indus­try looks like or if it is even pos­si­ble to accomplish. 

The rocky road to interoperability

The under­ly­ing Proof-of-Work (PoW) con­sen­sus mech­a­nism of the Bit­coin net­work offers a rock-sol­id bedrock for a glob­al pay­ment net­work sep­a­rat­ed from any state. The built-in com­pu­ta­tion­al guar­an­tees are enough to attract insti­tu­tion­al mon­ey, illus­trat­ing that it’s good enough for the pow­er play­ers of tra­di­tion­al finance. Despite being designed to become the cash of the inter­net, the intrin­sic prop­er­ties of Bit­coin have inspired less resource-inten­sive net­works like Ethereum. 

Despite the arrival of chal­lengers, Ethereum native projects still dom­i­nate DeFi, which remains a frag­ment­ed ecosys­tem of smart con­tract-dri­ven appli­ca­tions facil­i­tat­ing an open peer-to-peer finan­cial sys­tem. Glob­al net­works of devel­op­ers work tire­less­ly to bring this arrange­ment of decen­tral­ized appli­ca­tions (DApps) into cohe­sion, large­ly with­out suc­cess, although atom­ic swaps have emerged as one viable option. Gen­er­al­ly, sub­op­ti­mal solu­tions like cross-chain bridges pro­lif­er­ate, leav­ing DeFi users vul­ner­a­ble to exploits, while oth­er pop­u­lar solu­tions such as wrapped tokens come with their own down­sides, name­ly centralization.

Relat­ed: Bit­coin will surge in 2023 — but be care­ful what you wish for

As of yet, the DeFi prod­ucts have not been brought to on-chain Bit­coin trans­ac­tions, as the Bit­coin pro­to­col does not facil­i­tate smart con­tracts. This is a con­se­quence of the design of Bit­coin, which was con­struct­ed with a lim­it­ed script lan­guage to opti­mize secu­ri­ty over data stor­age and pro­gram­ming capac­i­ty. Remem­ber, this stuff is only as valu­able as the degree to which it is decentralized.

Permissionless multichain finance

So, Bit­coin is incom­pat­i­ble with DeFi, and for some, col­lat­er­al­ized expo­sure to non-native chains through wrapped tokens like Wrapped Bit­coin (wBTC) is one step too far away from the core ethos of the indus­try. While this might lead some to believe that inter­op­er­abil­i­ty between DeFi and the Bit­coin net­work is a hope­less cause, there are ways that it can be done. For many, Bit­coin was the first step to recon­cep­tu­al­iz­ing what it means to have access to finan­cial ser­vices and to expe­ri­ence finan­cial independence.

Self-cus­tody neces­si­tates finan­cial lit­er­a­cy, and with more than half of users engag­ing with cryp­tocur­ren­cies under 35, I would wager that we are only at the tip of the eco­nom­ic ice­berg. With time, inno­va­tion will fil­ter out DeFi-native draw­backs like slip­page and imper­ma­nent loss. More specif­i­cal­ly, enabling sin­gle-sided yield for DeFi and Bit­coin would unlock new pos­si­bil­i­ties that could tip the scales in favor of main­stream adop­tion. Sin­gle-sided is sig­nif­i­cant­ly safer, as it involves deposit­ing a sin­gle token into a liq­uid­i­ty pool as opposed to a token pair.

Relat­ed: What will the cryp­tocur­ren­cy mar­ket look like in 2027? Here are 5 predictions

Intro­duc­ing sin­gle-sided yield to a Bit­coin-enabled DeFi ecosys­tem is when things start to get inter­est­ing, not only for the max­i­mal­ists but for any­one with skin in the game. This would be an authen­tic way to accrue val­ue with­out com­pro­mis­ing on decen­tral­iza­tion. The risk would be tak­en by the pro­to­col enabling the sin­gle-sided yield, mean­ing users could explore lend­ing and bor­row­ing options not cur­rent­ly available. 

A by-prod­uct of this devel­op­ment would like­ly be the con­sol­i­da­tion of decen­tral­ized exchange (DEX) aggre­ga­tors. A sat­u­ra­tion of aggre­ga­tors splits up the avail­able liq­uid­i­ty, which cor­re­lates with an increase in trans­ac­tion costs. On that note, there are thou­sands of cryp­tocur­ren­cies on the mar­ket, mean­ing more assets, more chains and more lay­ers to account for. While mod­u­lar­i­ty can be great for spe­cial­iza­tion, it is high time for a “less is more” countermovement.

Unlocking a new world of opportunities forBitcoin

Build­ing a seam­less, dis­trib­uted mul­ti­chain finan­cial sys­tem like this is not an easy task. It reach­es a lev­el of intri­ca­cy that is dif­fi­cult to con­cep­tu­al­ize. Con­sol­i­da­tion could nar­row the focus enough so that users can opti­mize for speed or secu­ri­ty with­out los­ing access to the rest of blockchain-based finance.

Still, the impact that these alter­na­tive finan­cial tech­nolo­gies have had in such a short space of time is incred­i­ble. Bit­coin has been inte­gral to the broad­er move­ment as most people’s intro­duc­tion to the world of cryp­to. Per­haps Bit­coin can dri­ve the next DeFi rev­o­lu­tion, return­ing to cypher­punk cul­ture and open­ing up new finan­cial pos­si­bil­i­ties for everyone.

Mar­cel Har­mann is the founder and CEO of THOR­Wal­let DEX and a board mem­ber of the Cryp­to Val­ley Asso­ci­a­tion. He pre­vi­ous­ly co-found­ed the DEC Insti­tute, which pro­vides online cer­ti­fi­ca­tion for dig­i­tal assets spe­cial­ists backed by lead­ing blockchain uni­ver­si­ties. He grad­u­at­ed from the Uni­ver­si­ty of Zurich in 2012 with a mas­ter of arts in bank­ing and finance.

This arti­cle is for gen­er­al infor­ma­tion pur­pos­es and is not intend­ed to be and should not be tak­en as legal or invest­ment advice. The views, thoughts, and opin­ions expressed here are the author’s alone and do not nec­es­sar­i­ly reflect or rep­re­sent the views and opin­ions of Cointelegraph.

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