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A group of computer scientists known as Cypherpunks, who were strong advocates for privacy, dreamed of creating an Internet native asset. After decades of research and experimentation, Bitcoin was created in 2008 by an anonymous individual named Satoshi Nakamoto. The blockchain technology behind Bitcoin has solved a critical problem called the double spending problem. Basically, for the first time, the Bitcoin protocol allowed two strangers to trust each other on the internet without involving a third party.
After Bitcoin’s phenomenal success, people like Vitalik Buterin realized that Bitcoin’s functionality was inherently limited. For example, Bitcoin has proven to be the best-performing asset of the decade. But when it comes to scaling the Bitcoin network to one billion users, challenges arise. Satoshi Nakamoto designed the protocol with security and decentralization in mind, leaving no room for major changes that could be made to the network to handle heavy traffic or complex protocols. Despite the shortcomings, several developers have built innovative products on Bitcoin.
In this article, we will take a closer look at the applications being built using the Bitcoin network, apart from its primary use case as a potential institutional asset.
Building on Bitcoin
Bitcoin has made strides in the scalability department. The Lightning Network, a Layer 2 blockchain protocol, was designed to offload transactions from the main Bitcoin network and enable faster transactions. It processes off-chain transactions cheaper and more efficiently. While Bitcoin Layer 1 can handle 10 transactions per second, Lightning Layer 2 can theoretically handle millions of transactions per second. It also uses less energy compared to energy-intensive bitcoin mining.
Twitter uses a Lightning network to allow users to tip creators. El Salvador was the first nation to make Bitcoin legal tender. The government has developed a wallet called Chivo that is Lightning compatible and designed to enable seamless cross-border payments.
Stack and DeFi
The first and successful Layer 1 blockchain built on top of Bitcoin was Stacks. Using a consensus mechanism called Proof of Transfer (PoX), Stacks allows developers to build dapps on the Bitcoin network. STX is the token that powers the Stacks network and can be used to earn Bitcoin by temporarily locking STX tokens in liquidity pools.
One of the first decentralized finance (DeFi) protocols built on top of stacks is Arkadiko. It is a non-custodial liquidity protocol that allows investors to deposit their wealth and earn a USD-pegged stablecoin called USDA. Using the yield of PoX, an STX-collateralized vault minting the USDA, creates a self-paying loan.
Future of DeFi on Bitcoin
Some of the DeFi projects currently being built using Bitcoin network properties are Mintlayer (MLT), RSK Smart Bitcoin (RBTC), Sovryn (SOV), etc.
Mintlayer is a sidechain for Bitcoin that offers smart contract solutions and also operates a decentralized exchange (DEX). RSK’s smart contracts are backed by bitcoin hashing power through merged mining. Currently, 49% of Bitcoin miners also mine RSK. Sovryn resides on RSK’s blockchain and uses RBTC in its smart contract system. It offers an Automated Market Maker (AMM) where you can borrow at as little as 2.86% APY and start yield farming with the wrapped Bitcoin RBTC.
Although DeFi is synonymous with Ethereum these days, Layer 1 blockchains like Stacks are attempting to change the status quo by allowing developers to create dapps while leveraging the security features of the underlying Bitcoin network. Looking at the future of DeFi, Bitcoin could definitely be one of the hottest blockchains.
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Disclaimer: This article was written by Giottus Crypto Exchange as part of a paid partnership with The News Minute. Investments in crypto assets or cryptocurrencies are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about investing.
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