The Rise of the BTCFi Ecosystem: Bitcoin's New Role in Decentralized Finance

Bitcoin's position in the field of Decentralized Finance ( DeFi ) is undergoing a significant transformation. Initially just a peer-to-peer transfer tool, this first cryptocurrency in the world is now rising as a powerful force in the DeFi space, beginning to challenge Ethereum's long-standing dominance.

By analyzing on-chain data, we can clearly see the current state and growth trajectory of the BTCFi( Bitcoin and DeFi integration ) ecosystem. This is not just a technological revolution, but it may also trigger a paradigm shift in Bitcoin's role in DeFi, redefining the landscape of the entire DeFi field.

The Rise of BTCFi

In 2008, Satoshi Nakamoto created Bitcoin, originally designed as a peer-to-peer electronic cash system. Although this architecture is revolutionary in the field of crypto assets, it has obvious limitations in more complex financial applications like Decentralized Finance.

( The original design of Bitcoin and its limitations in Decentralized Finance

Core Design Elements and Their Limitations:

1. UTXO Model: Bitcoin uses the Unspent Transaction Output ) UTXO ### model. This method is very effective for handling simple transfers, but lacks the flexibility needed to support complex smart contracts.

2. Limited scripting language: The scripting language of Bitcoin is intentionally restricted, mainly to avoid security vulnerabilities. This limitation also hinders its support for complex Decentralized Finance applications, as the number of executable opcodes is limited.

3. Lack of Turing Completeness: Unlike Ethereum, Bitcoin's script is not Turing complete, which makes it difficult to implement complex smart contracts that rely on state, and these smart contracts are crucial for many Decentralized Finance protocols.

4. Block Size and Transaction Speed: The 1MB block size limit and 10-minute block time of Bitcoin result in its transaction processing speed being much lower than other blockchains focused on Decentralized Finance.

Although these design choices enhance the security and decentralization of Bitcoin, they also create obstacles for directly implementing DeFi functions on the Bitcoin blockchain. The lack of native support for features such as loops, complex conditions, and state storage makes it very difficult to build applications like DEX, lending platforms, or liquidity mining protocols on Bitcoin.

( Early attempts and developments of introducing DeFi on Bitcoin

Despite these limitations, Bitcoin's strong security and widespread use encourage developers to seek innovative solutions:

1. Colored coins )2012-2013###: This is one of the early attempts to extend the functionality of Bitcoin. Colored coins represent and transfer real-world assets by "coloring" specific Bitcoins and attaching unique metadata. Although this is not considered true Decentralized Finance, it laid the groundwork for developing more complex financial applications on Bitcoin.

2. Counterparty(2014): This protocol introduces the ability to create and trade custom assets on the Bitcoin blockchain, including the first NFT. Counterparty demonstrates the potential for developing more complex financial instruments on Bitcoin.

3. Lightning Network (2015 to present ): The Lightning Network is a second-layer protocol aimed at enhancing transaction scalability. It opens up possibilities for more complex financial interactions by introducing payment channels, including some preliminary Decentralized Finance applications.

4. Discrete Log Contracts ( DLC ) Since 2017 (: Proposed by Tadge Dryja, DLC allows for the implementation of complex financial contracts without altering the Bitcoin base layer, providing new possibilities for derivatives and other Decentralized Finance tools.

5. Liquid Network ) 2018 to present (: This is a sidechain settlement network developed by Blockstream that supports the issuance of crypto assets and more complex Bitcoin transactions, paving the way for DeFi-like applications.

6. Taproot Upgrade )2021(: By introducing the Merkleized Alternative Script Tree ) MAST (, Taproot compresses complex transactions into a single hash, reducing transaction fees and memory usage. Although it is not a DeFi solution itself, it enhances Bitcoin's smart contract capabilities, making the implementation of complex transactions simpler and more efficient, laying the foundation for the future development of DeFi.

These early developments of Bitcoin's functionality laid the groundwork for expanding from simple transfers to more applications. Although introducing DeFi on Bitcoin faces challenges, these innovations also demonstrate the potential of the Bitcoin ecosystem. These foundations paved the way for layer two solutions, sidechains, and a wave of innovations in Bitcoin DeFi.

Key Innovations: Implementing Smart Contracts on Bitcoin

In recent years, multiple protocols have emerged in the Bitcoin ecosystem, aiming to introduce smart contracts and Decentralized Finance functionalities to the world's first cryptocurrency. These innovations are changing the uses of Bitcoin, making it more than just a store of value or a medium of exchange. Here are some of the main protocols driving Bitcoin to realize smart contracts:

1. Rootstock: As a pioneer of Bitcoin smart contracts, Rootstock is the longest-running Bitcoin sidechain and has become an important foundation of the BTCFi ecosystem.

It utilizes 60% of Bitcoin's computing power, supports dual mining, and is compatible with the Ethereum Virtual Machine )EVM(, allowing Ethereum's smart contracts to run on Bitcoin. Rootstock's unique Powpeg mechanism ensures seamless conversion between Bitcoin )BTC( and Rootstock Bitcoin )RBTC(, and its "depth defense" security model emphasizes simplicity and robustness.

Since the mainnet launch in 2018, the on-chain activity of Rootstock has steadily increased, establishing its position as a stable and scalable solution.

2. Core: Core is a blockchain based on Bitcoin, closely integrated with Bitcoin, and compatible with the Ethereum Virtual Machine ) EVM (.

Core stands out with its innovative dual staking model, which combines Bitcoin and Core. Through non-custodial Bitcoin staking, Core establishes a risk-free yield for Bitcoin, effectively transforming Bitcoin into a yield-bearing asset. Core reports that 55% of Bitcoin mining hash power is delegated to its network, which helps enhance its security in Decentralized Finance applications.

3. Merlin Chain: Merlin Chain is a relatively new Bitcoin layer two network dedicated to unlocking the DeFi potential of Bitcoin, gaining increasing attention. It integrates ZK-Rollup technology, decentralized oracles, and on-chain anti-fraud modules, providing a complete set of DeFi functionalities for Bitcoin holders. The M-BTC launched by Merlin is a wrapped Bitcoin asset that can earn staking rewards, opening new avenues for yield generation and participation in DeFi.

4. BEVM: BEVM represents a significant advancement in bringing the extensive DeFi ecosystem of Ethereum directly to Bitcoin. As the first fully decentralized and EVM-compatible second-layer network for Bitcoin, BEVM utilizes Bitcoin as fuel, allowing for the seamless deployment of Ethereum's decentralized applications )DApps( on Bitcoin. BEVM is supported by mining giant Bitmain, pioneering the concept of "computing power RWA," which could unlock new value dimensions for the Bitcoin ecosystem.

Key Innovations of Bitcoin Layer 2 Networks and Sidechains:

• Tokenized Bitcoin assets
• Smart Contracts and EVM Compatibility
• Yield-bearing Bitcoin
• Scalability and privacy enhancement

These protocols are not merely replicating Ethereum's DeFi strategies on Bitcoin, but are opening new directions by utilizing Bitcoin's unique features. From Rootstock's deep defense mechanisms, to Core's dual staking model, to the comprehensive DeFi solutions provided by Merlin and the computational RWA innovations of BEVM, the BTCFi space is rapidly evolving.

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As of September 8, 2024, the total locked value of Bitcoin's layer 2 solutions and sidechains reached $1.07 billion, growing 5.7 times since January 1, 2024, and an astonishing 18.4 times since January 1, 2023.

Core leads with 27.6% of the total locked value ) TVL (, followed by Bitlayer at 25.6%; Rootstock at 13.8%; and Merlin Chain at 11.0%.

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The Current State of Bitcoin Decentralized Finance

With the continuous development of the Bitcoin DeFi ecosystem, some key projects have emerged as important players, driving innovation and user adoption. These projects rely on Bitcoin's layer two solutions and sidechains to provide various DeFi services:

) Major BTCFi projects

Pell Network(multi-chain)

Pell Network is a cross-chain re-staking protocol aimed at enhancing the security of the Bitcoin ecosystem and optimizing yields. Users earn rewards by staking Bitcoin or liquid staking derivatives (LSD), while decentralized operators are responsible for running validation nodes to ensure the network's security. Pell offers a range of active validation services, such as oracles, cross-chain bridges, and data availability, supporting a broader Bitcoin Layer 2 ecosystem. With its robust infrastructure, Pell aims to become a key player in providing liquidity and ensuring the security of the crypto economy, driving sustainable growth in the Bitcoin economy.

Avalon Finance### Multi-Chain(

Avalon Finance is a multi-chain DeFi platform that spans Bitlayer, Core, and Merlin Chain, known for providing comprehensive lending and trading services in the BTC DeFi ecosystem. Avalon’s main services include over-collateralized lending for major assets and low liquidity assets, with dedicated isolation pools. The platform also integrates derivatives trading, enhancing the functionality of its lending services. Additionally, Avalon has launched an algorithmic stablecoin designed to optimize capital efficiency, making it a versatile and secure DeFi solution within the Bitcoin ecosystem. Its governance token AVAF adopts the ES Token model to incentivize liquidity provision and protocol usage.

Colend Protocol)Core(

Colend Protocol is a decentralized lending platform built on the Core blockchain, allowing users to securely lend and borrow Bitcoin and other assets. By leveraging Core's dual staking model, Colend seamlessly integrates with the broader Decentralized Finance ecosystem, enhancing the utility of Bitcoin in DeFi. Its main features include decentralized and immutable transactions, liquidity pools with various dynamic interest rates, and a flexible collateral system.

MoneyOnChain)Rootstock(

MoneyOnChain is a comprehensive DeFi protocol built on Rootstock that allows Bitcoin holders to enhance their asset returns while retaining full control of their private keys. The core of the protocol is the issuance of a stablecoin called Dollar on Chain)DoC(, which is a stablecoin fully backed by Bitcoin, designed for users who wish to keep the value of their Bitcoin holdings pegged to the US dollar. In addition, MoneyOnChain also offers Token BPRO, enabling users to gain leveraged exposure to Bitcoin, thereby achieving passive income.

The architecture of the protocol is based on a risk-sharing mechanism, utilizing a proprietary financial model to cope with extreme market fluctuations. At the same time, it also includes a decentralized Token trading platform )TEX(, a decentralized oracle )OMoC(, and a governance Token )MoC(, enabling users to participate in protocol decision-making, stake, and earn rewards.

Sovryn) Multi-chain(

Sovryn is a DEX and one of the most feature-rich DeFi platforms built on Bitcoin, designed to enable users to trade, lend, and earn yields using Bitcoin. Sovryn spans across the BOB and Rootstock platforms, offering a variety of DeFi services including trading, swapping, liquidity provision, staking, and lending. The platform focuses on creating a permissionless financial layer for Bitcoin and integrates with other blockchains, making it a unique multi-chain platform within the Bitcoin DeFi ecosystem.

Sovryn's governance token SOV is issued through the Bitocracy system to manage the decentralized protocol.