Most, if not all, DeFi platforms are built on Ethereum. Bitcoiners get involved in DeFi: huge amounts of Bitcoin go into smart Ethereum contracts, so they can essentially be tokenized and used to invest in DeFi products. Welcome to Bitcoin DeFi:
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In brief
- Decentralized Finance (DeFi) platforms are built on Ethereum, but Bitcoin holders are getting involved by "locking" their coins.
- Bitcoin DeFi involves locking Bitcoin into smart contracts that give them Ethereum-based tokens that represent the largest cryptocurrency by market capitalization.
- By locking their Bitcoin on Ethereum, Bitcoiners are using DeFi to generate passive income.
You may have heard of decentralized finance (DeFi). It's the latest craze to enter the cryptocurrency world, with billions of dollars invested in DeFi products by 2020 alone.
Bitcoin holders are becoming increasingly involved in DeFi by "locking" their coins in exchange for tokens that can be used on DeFi platforms.
What is DeFi?
DeFi products are tools built primarily on Ethereum that are intended to revolutionize and replace current methods of borrowing, lending and banking as seen in traditional finance.
The goal of DeFi is to make the financial world available to everyone (or anyone with an Internet connection).
Why is Bitcoin involved?
Most DeFi platforms are built on Ethereum. But there are many people who own a lot of Bitcoin who also want to join. So it is getting easier and easier for those with Bitcoin to be able to invest in DeFi platforms with their money.
Bitcoin is the largest cryptocurrency in terms of market capitalization, so it makes sense for things to move in a direction that connects the asset to DeFi products.
How does Bitcoin DeFi work?
Bitcoin DeFi works by essentially running Bitcoin - a currency on one blockchain - on Ethereum's very different, separate blockchain.
How? This is where things get a little complicated.
You cannot use Bitcoin directly on Ethereum platforms - as mentioned earlier, the blockchains are different. To do this, Bitcoin must be converted into a currency that represents Bitcoin but is actually an Ethereum-based token.
Then Bitcoin is essentially locked into a smart contract (a piece of code that executes instructions to replicate matches) and can be used on the network. Think of it as an exchange.
Using Bitcoin DeFi to generate passive income
Why would anyone want to put their Bitcoin into smart Ethereum contracts, you may ask, when they could just buy Ethereum tokens directly and get started from there?
One good reason is to make your Bitcoin work for you in the form of passive income. We all know that many people hold their Bitcoin as a store of value - not to buy things online (as originally intended) or to make mutual payments.
Moreover, there are many other cryptocurrencies that serve that purpose now, some claim. So if Bitcoin is just sitting there as an investment in hopes that its value will one day skyrocket, why not use it to make money for you in the meantime?
One way to generate passive income with Bitcoin is to use a DeFi platform to borrow and earn interest with Bitcoin that is otherwise just sitting idle. It works like this: convert Bitcoin into Ether or directly into Dai (a stablecoin linked to the U.S. dollar) and place it on a platform where you can lend it out and get it back with interest.
One way to do this is to use the MakerDAO platform.
Who leads the Bitcoin DeFi space?
A relatively new concept and there are currently a handful of companies running this space. They include Wrapped Bitcoin (WBTC), RenVM and RSK.
- WBTC is a centralized collaboration between several DeFi protocols, including Maker, Compound, Kyber Network and Aave, among others. It works to lock Bitcoin onto the Ethereum blockchain in exchange for ERC-20 tokens of the same value.
- RenVM is a network that contains Bitcoin (among other cryptocurrencies) and a representation of that currency as an ERC-20 token.
- Global lending platform RSK helps its users earn interest from Bitcoin by converting it into stablecoin before lending it out.
What does the future look like for Bitcoin DeFi?
Right now, more Bitcoin than ever before is being sent to Ethereum; close to $1 billion worth, as of September 2020. This is no doubt due to the rise of DeFi. As the scene has grown in popularity, so have the methods of running Bitcoin on such platforms.
Companies in the space report record amounts of Bitcoin being converted into ERC-20 tokens.
As long as DeFi is popular, we will continue to see new companies enter this space to provide fast, easy and inexpensive ways to help tokenize Bitcoin on DeFi platforms.