Bitcoin’s evolution into DeFi is inevitable — and it’s about time

We need to embrace Bitcoin as the foundation for DeFi in order to create a more secure and resilient financial ecosystem. Otherwise, we’ll miss the opportunity to leverage the most stable and proven blockchain for the next wave of innovation.

For too long, bitcoin has been viewed as merely a static store of value — digital gold. But those days are over. The DeFi revolution is coming to Bitcoin, and in inheriting the security and robustness of the original blockchain, it stands to be better for it. If we aim to build truly decentralized financial applications without the need for middlemen, Bitcoin is a no-brainer.

Until recently, the infrastructure needed to facilitate the development of these financial applications has been limited. While DeFi flourished on Ethereum, Solana and other blockchains, the idea of building a similar ecosystem on top of Bitcoin was seen as a contrarian bet. Bitcoin was often criticized as being too rigid, lacking the smart contract functionality needed to support the diverse range of tools and technologies necessary for DeFi use cases.

Read more from our opinion section: Web3 doesn’t need flashy — it needs functional

But that perception is changing. The introduction of Segregated Witness (SegWit) in 2017 not only mitigated some of Bitcoin’s data limitations but also paved the way for the development of layer-2 networks. These networks, such as the Lightning Network, Stacks and Rootstock, process transactions off the main chain to increase speed and lower costs while maintaining the security of the Bitcoin blockchain. More recently, the market is expanding even more with Casey Rodamor’s development of Ordinals, Runes, Core DAO and B² Network.

Additionally, because developers and businesses already have a framework to follow in the Ethereum DeFi ecosystem, Bitcoin’s DeFi ecosystem is being recreated in months. Developers and businesses are skipping the experimentation phase and diving straight into building cutting-edge dapps on Bitcoin. From tokens to NFTs to lending and borrowing markets, Bitcoin now offers a comprehensive and secure DeFi ecosystem.

Utilizing Bitcoin for DeFi could replicate traditional finance without its inefficiencies and risks. Imagine building a decentralized version of Morgan Stanley on the Bitcoin blockchain — a radical shift that could activate the vast reserves of bitcoin currently sitting passively in wallets. While degens sometimes shy away from the idea of bringing traditional finance institutions into the crypto ecosystem, the utility provided by these types of organizations can be a huge benefit to aggressive crypto investors and users.

Opening up these markets for bitcoin holders would not only provide new avenues for returns but also tie DeFi to a blockchain secured by real-world hardware and energy consumption through its proof-of-work (PoW) consensus mechanism. This approach offers more stability and less centralization than the proof-of-stake (PoS) model adopted by Ethereum back in 2022.

DeFi on Bitcoin represents a blue sea of opportunity, but it’s not without challenges. The user interface and user experience of these DeFi solutions on Bitcoin can be complex. This isn’t just a problem for Bitcoin; it’s a criticism of crypto generally. For Bitcoin DeFi to truly succeed, developers must prioritize accessibility to ensure that even the least tech-savvy can take advantage of the revolutionary power of Bitcoin’s financial freedom.

Moreover, the layer-2 ecosystem on Bitcoin is still in its early stages. The narrative that building DeFi on Bitcoin is pointless — or worse, a threat to its security and stability — is only just beginning to dissipate. As investment into Bitcoin DeFi projects grows, so too does the potential for innovation. Entrepreneurs have more runway to build more and push boundaries. New developments, such as Stacks’ Nakamoto upgrade (which aims to increase transaction throughput and enhance finality guarantees) will continue to empower Bitcoin as a DeFi protocol.

As the DeFi ecosystem continues to evolve, the choice of foundational technology will determine its resilience and success. Bitcoin, with its unmatched security, stability and emerging layer-2 solutions, is uniquely positioned to lead this charge. By building on Bitcoin, we can ensure that DeFi remains true to its core principles — decentralization, security and transparency — while expanding its reach and impact.

Get the news in your inbox. Explore Blockworks newsletters:

The Breakdown: Decoding crypto and the markets. Daily.
Empire: Crypto news and analysis to start your day.
Forward Guidance: The intersection of crypto, macro and policy.
0xResearch: Alpha directly in your inbox.
Lightspeed: All things Solana.
The Drop: Apps, games, memes and more.
Supply Shock: Bitcoin, bitcoin, bitcoin.