This conversation dives into the exciting world of Bitcoin and Decentralized Finance (DeFi), exploring how innovation is happening around the Bitcoin network. We hear from Charlie Hu, co-founder of Bitlayer, who shares insights on the growing connection between Asian retail investors and Western institutions, the current state of DeFi, and the future potential for Bitcoin ETFs and staking.
Bridging Worlds: Asian Retail and Western Institutions in Bitcoin
Charlie Hu highlights a fascinating dynamic in the Bitcoin space: the convergence of Asian retail investors and Western financial institutions. While seemingly different, both groups share a common interest in Bitcoin, effectively putting them on the same team. This connection is fueled by various factors, including Bitcoin’s upgrade in 2021 (BIP 430), which allowed for the creation of encrypted data on satoshis. This feature was particularly embraced by the Asian retail community, leading to the creation of a significant portion of Bitcoin Ordinals. Meanwhile, Western institutions have found a pathway into Bitcoin through the approval of ETFs, providing a more traditional vehicle for investment.
This duality showcases Bitcoin’s decentralized nature, allowing for diverse interpretations and uses. While some focus purely on Bitcoin as a digital asset, others are keen on building innovative use cases and generating more value around it. This has led to a vibrant ecosystem where different approaches coexist and contribute to Bitcoin’s growth.
The Rise of Bitcoin DeFi
DeFi, or Decentralized Finance, has been a major trend in the Web3 space, proving its resilience and adoption potential. Originating on Ethereum, DeFi has seen continuous innovation, with new primitives like perpetual DEXs, options trading protocols, and liquid staking emerging even during bear markets. While Ethereum’s smart contract capabilities have been a key driver of its DeFi adoption, Charlie sees a massive opportunity in bringing similar programmability and verification features to the Bitcoin network.
Bitcoin, with its incorruptible and censorship-resistant nature, is seen as the ideal asset for on-chain decentralized finance. However, limitations in programmability and infrastructure have historically restricted its use cases to primarily payments, with solutions like the Lightning Network offering an alternative for specific user segments. The vision for Bitcoin DeFi, as Charlie explains, involves:
- Bitcoin as a gas fee: Utilizing Bitcoin for transaction fees.
- Bitcoin as a liquidity asset: Employing Bitcoin in DeFi use cases.
- Settlement on the Bitcoin network: Ensuring transactions are ultimately settled on the Bitcoin blockchain for security.
This approach aims to leverage Bitcoin’s inherent security while enabling higher throughput and lower costs through new layer infrastructure, such as rollups.
Key Takeaways
- Asian retail and Western institutions are both significant players in the Bitcoin ecosystem, driven by different but complementary interests.
- DeFi has proven to be a robust and innovative sector within Web3, with significant growth potential.
- Bitcoin’s inherent security makes it an ideal asset for DeFi, but its programmability limitations need to be addressed.
- The future of Bitcoin DeFi likely involves layer-two solutions and rollups that settle on the Bitcoin network, offering speed, lower costs, and enhanced security.
- The approval of Bitcoin ETF staking could be a major catalyst for further adoption and innovation in Bitcoin DeFi.
Understanding Bitcoin DeFi: Beyond the Hype
When people talk about Bitcoin DeFi, it can evoke different reactions, from excitement to skepticism. Charlie clarifies that Bitcoin DeFi involves using Bitcoin assets as liquidity for DeFi use cases and leveraging the Bitcoin network for settlement. While early attempts like Wrapped Bitcoin (WBTC) used centralized custody, the ultimate goal is to achieve a more decentralized and trust-minimized approach.
Key principles for true Bitcoin DeFi include:
- Bitcoin Finality: Transactions must eventually settle on the Bitcoin network, inheriting its security.
- Bitcoin as Gas and Liquidity: Bitcoin should be utilized as both the fee mechanism and the primary asset within DeFi applications.
This distinction is crucial, as side chains, while offering functionality, do not settle on the Bitcoin network and thus don’t share its security. The development of verification components, like those Bitlayer is working on, is seen as a breakthrough for building Bitcoin security-equivalent rollups.
Bitlayer: Building the Future of Bitcoin DeFi
Bitlayer is at the forefront of developing infrastructure for Bitcoin DeFi. Launched in late 2023, the company is focused on scaling Bitcoin through solutions that adhere to the core principles of Bitcoin security. Their work centers around the Bitcoin Virtual Machine (BVM), which enables on-chain verifiable fraud proofs without requiring Bitcoin network upgrades.
Two key products from Bitlayer are:
- BVM Bridge: A next-generation Bitcoin bridging solution that allows users to bridge Bitcoin in a more trust-minimized way, locking UTXOs and minting a one-to-one packed version of BTC on destination chains. This is already live on the mainnet.
- BVM-Powered Bitcoin Security Equivalent Rollup: This aims to create a rollup that inherits Bitcoin’s security, differentiating it from traditional side chains. A key component is the Bitcoin Verifier, which addresses the lack of built-in smart contract verification on the Bitcoin layer one. This verifier is expected to launch soon, followed by a phased rollout and gradual adoption.
The Importance of Speed, Cost, and Security
For mass adoption, Bitcoin DeFi solutions must balance speed, cost, and security. Bitcoin’s layer one currently handles only about seven transactions per second, which is insufficient for widespread DeFi use. Solutions like Bitlayer aim to provide:
- Higher Throughput: Enabling millions of users to engage in on-chain trading and lending without significant delays.
- Lower Costs: Reducing the exorbitant gas fees that have plagued users during periods of high network congestion.
- Enhanced Security: Maintaining Bitcoin’s robust security by ensuring transactions ultimately settle on the Bitcoin network, avoiding the risks associated with side chains.
Bitcoin as a Productive Asset
Traditionally, Bitcoin has been viewed as a non-productive asset, primarily a store of value. However, the advancements in Bitcoin DeFi are shifting this perception, enabling Bitcoin to become a productive asset that can generate yield. The potential approval of Bitcoin ETF staking in the US could further accelerate this trend. If ETFs are allowed to stake their Bitcoin holdings, it could open up new yield strategies and attract more capital into the Bitcoin DeFi ecosystem.
Charlie anticipates a future where:
- Yield Products Evolve: More sophisticated yield products with varying APYs and risk profiles will emerge, accessible through both centralized and decentralized means.
- Equilibrium is Reached: A balance will be struck between supply and demand for Bitcoin yield, with realistic APYs that are sustainable.
- New Use Cases Emerge: Beyond staking and lending, high-frequency use cases like perpetual DEXs, on-chain options, and prediction markets built on Bitcoin rollups will become more common.
These developments not only benefit users seeking yield but also create new revenue streams for Bitcoin miners through transaction fees, ensuring the network’s long-term security and utilization.
Total Value Locked (TVL) and Ecosystem Growth
Total Value Locked (TVL) remains a key metric for assessing the health and popularity of DeFi protocols. Bitlayer has seen significant growth in TVL, recently ranking number one on DeFi Llama. While TVL is important for indicating liquidity and attracting builders, Charlie emphasizes that it’s not the only metric to consider. The number of use cases and on-chain transactions are also crucial indicators of a healthy ecosystem.
Bitlayer’s growth has been partly driven by educational campaigns, which have brought a significant number of retail users into their ecosystem, providing liquidity for various DeFi protocols. The focus is on retaining these users and fostering a sustainable environment for builders and users alike.