The tokens from the Bitcoin decentralized finance (BTCfi) sector are down 23.4% on common in 2024, in accordance with information from Artemis. This contrasts with the hype shared by traders that the Bitcoin decentralized finance (BTCfi) ecosystem would rise this 12 months. Nevertheless, Charlie Hu, the co-founder of layer-2 blockchain Bitlayer, highlights that this narrative is much from useless and lists three explanation why BTCfi is lagging behind.
“When BRC-20 got here out, the market had nearly zero hype as an entire. The Web3 house was in a bear market, and there weren’t too many issues to speak about within the deep bear when buying and selling quantity was low. In comparison with now, we now have different issues to attract folks’s consideration, so distraction is the primary motive,” Hu explains.
BTCfi is a comparatively new ecosystem that consists of blockchains created on high of Bitcoin’s blockchain, which function base layers for decentralized purposes. The entire worth locked (TVL) of this ecosystem is up over 100% in 2024, in accordance to information aggregator DefiLlama.
Nevertheless, Hu mentions that since BTCfi is one thing new, its consumer expertise remains to be not optimized. This creates confusion, which leads to liquidity fragmentation, and that is the second motive why BTCfi nonetheless hasn’t taken off the bottom.
“I feel there’s a few issues we nonetheless want to coach the market. There are lots of people who nonetheless haven’t gotten accustomed to learn how to bridge belongings from Bitcoin layer-1 to layer-2. Now, you’re shifting out of Bitcoin layer-1, however what are the use instances that truly make sense?”
Subsequently, by fixing the consumer familiarity with the Bitcoin layer-2 purposes, Hu believes {that a} “huge wave of liquidity,” and factors out that protocols resembling Bitlayer have a key function on this course of.
“Bitlayer is without doubt one of the first vacation spot chains amongst all these liquidity protocols. We attempt to bridge all these programmable Bitcoins [wrapped tokens] into our ecosystem and use that liquidity to help all of the DeFi protocols as a result of you’ll be able to’t do a lot with them with out liquidity.”
The third motive is expounded to the crypto market as an entire since costs and buying and selling volumes have been falling since March. Consequently, the BTCfi narrative wants the return of on-chain exercise to take off, and Bitlayer’s co-founder thinks that is “not that far-off.”
An underlying scalability drawback
The implementation of layer-2 blockchains helps to unravel the scalability difficulty, however simply till the second web page. Taking Ethereum for example, the introduction of devoted block house inside blocks, referred to as “blobs”, was essential to deal with the rising quantity of various layer-2 chains created on high of its infrastructure.
Because the variety of layer-2 blockchains created on Bitcoin additionally rises, it’s solely pure that this ecosystem faces the identical drawback. But, Charlie Hu isn’t apprehensive about it, mentioning developments made on this entrance.
“We’re so early on the infrastructure degree. A couple of groups try to create zero-knowledge proofs on Bitcoin, and we consider ZK-snarks have extra value advantages for scalability. No matter you need to inscribe on the Merkle tree and move on Bitcoin’s block is pricey, so it’s necessary to have a price cost-effective strategy to make the state transition and confirm it on Bitcoin,” shares Hu.
Furthermore, Bitlayer’s co-founder additionally mentions the continuing plan to introduce the OP_CAT code on Bitcoin’s blockchain, which might facilitate information interplay on the community. OP_CAT is an operation code disabled by Satoshi Nakamoto in 2010 to keep away from potential vulnerability exploits whereas the Bitcoin blockchain was nonetheless nascent. Nevertheless, the thought was introduced again by the group referred to as Taproot Wizards.
The introduction of OP_CAT might considerably enhance the flexibility to create purposes utilizing Bitcoin as an infrastructure and can also be highlighted by Hu as a strategy to increase scalability. Nonetheless, this isn’t a aim for the present bull cycle.
“On this cycle, the aim is unlocking the prevailing Bitcoin liquidity, which has not been a yield-bearing asset within the final 15 years, sitting in chilly wallets doing nothing, to now turn into programmable cash.”
Why not use Ethereum as a substitute?
A standard function of all layer-2 blockchains constructed on Bitcoin is compatibility with the Ethereum Digital Machine (EVM). Which means the code of Ethereum-native decentralized purposes, resembling Aave or Uniswap, could be replicated on high of those layer-2 networks.
In consequence, customers would possibly surprise why to construct an ecosystem on high of Bitcoin as a substitute of sustaining the present panorama of bridging Bitcoin to Ethereum-native purposes. Hu explains that, regardless of Ethereum being an necessary infrastructure for Web3, Bitcoin gives completely different values and reveals larger sustainability in the long run.
“If we have a look at the long run, which ecosystem can survive over the subsequent one or 20 years, we consider proof of labor remains to be the most effective consensus for a decentralized community, for a public chain. If we choose any public chain that may survive with sound belongings nonetheless on the chain, that’s undoubtedly Bitcoin.”
Moreover, Bitlayer’s co-founder provides that Bitcoin presents itself as a extra decentralized floor to construct a DeFi ecosystem, leading to safer belongings. Bringing battle-tested Ethereum purposes to Bitcoin layer-2 blockchains then is sensible to Hu.
“Asset safety is an important factor when it comes to decentralized finance and so forth. I feel the issues occurring at Ethereum are nice, however in comparison with Bitcoin, it’s only a completely different degree of worth, a distinct degree of selection.”
