DeFi and NFTs are coming to Bitcoin

Bitcoin DeFi and NFTs

DeFi and NFTs are coming to Bitcoin.

Bitcoin is the leading decentralized digital currency and store of value and currently accounts for almost 40% of all the crypto market, according to International Monetary Fund (IMF) research. But, Bitcoin wasn’t designed to run complex applications on top of its code.

Ethereum started up in 2013 to overcome this, go beyond money, and become the settlement layer for web3. It has since been the front-runner in several waves of innovation with DeFi, DAOs and NFTs.

Now several projects are looking to increase the scalability and add smart contracts capabilities to Bitcoin with sidechain networks like Liquid Network, RSK Labs, Mintlayer, and the Lighting Network layer2, but they all suffered limitations in their design or applicability.

Stacks might have found a way to build a “theoretically sound and operationally flexible infrastructure to fill this gap and take Bitcoin to the next level,” and its founder new venture Trust Machines raised $150M to build the “largest ecosystem of Bitcoin applications.” It plans to unleash “the true potential of bitcoin” by developing decentralized finance applications, DAOs, and NFTs.

Will Bitcoin acquire DeFi, DAOs, and NFTs too? Can Bitcoin fill the gap and compete with Ethereum and other smart contract L1s?

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Discover over how Stacks is bringing DeFi, DAOs and NFTs to Bitcoin👇Stacks ecosystem of DeFi and NFTs secured by Bitcoin

Bitcoin as a settlement layer

Bitcoin started in 2009 as “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution”. The focus was on censorship-resistant P2P money exchange.
Through the years Bitcoin role has evolved more toward a Store of Value, a “Digital Gold”. An asset to have an edge against inflation and monetary policies that brings to the devaluation of national currencies. However, it is still used as a very speculative asset and increasingly correlated with the stock market. Bitcoin’s correlation to the S&P 500 was just 0.01 from 2017 to 2019, suggesting that equity and crypto prices were moving independently. Leading the narrative as an alternative asset to improve diversification in the portfolio for retail investors and institutions.
That changed in 2020-21, as central banks flooded markets with liquidity and correlation jumped to 0.36, indicating the asset classes were moving closer together.
Crypto is now more closely tied to stocks than gold, investment-grade bonds, and major currencies, implying that its diversification benefits have largely vanished.
according to International Monetary Fund (IMF) research.
Overall, Bitcoin is the leading decentralized digital currency and store of value and currently accounts for almost 40% of all the crypto market.
Now Bitcoin is aiming to become also the settlement layer for Web 3, enabling innovations such as DeFi, DAOs and NFTs.
This puts it into competition with Ethereum, the leading blockchain smart contract platform and Web 3 settlement layer. Which is instead looking to also establish itself as a Store Value with the Ethereum ultrasound money thesis.
Bitcoin and Ethereum evolution converging

Bitcoin scalability efforts

Ethereum is instead pursuing a scalability strategy based on the transition to POS, rollups and sharding. We discussed Ethereum scalability efforts here.
Bitcoin vision has instead always been of purity of the main chain against the complexity of smart contracts platform. Many people in the Bitcoin community are sceptical against what has been created around DeFi, NFTs and DAOs, however, others are looking at the potential to capitalize on the Web 3 opportunities.
The main scalability effort in the Bitcoin ecosystem has been so far its Lighting Network layer2. This is a second layer on top of Bitcoin that allows off-chain transactions. Launched in 2018 it has reached a Total Locked Value of just $250M. The Lightning Network has nothing to do with the Layer2 scalability solutions on Ethereum, it is not a “full” smart contract platform. Its focus is to enable near-immediate and low-cost transactions and does so by creating channels where users can transact and only when the channel is closed then the full block of transactions is sent to the Bitcoin main chain and the users are able to withdraw the funds.
Bitcoin lighting network has just gone live on Block (ex Square) Cash App and a few projects have been built on top of it such as RGB, an asset issuance network; LN Markets, a bitcoin derivatives exchange; Sphinx Chat, a privacy-preserving messenger; Zion, a web 3.0social media and Impervious, an infrastructure to securely transport and host data on private cloud servers. However, it suffers from several limitations, from low routing fees to vulnerability to malicious attacks.
Other projects have focused on increasing the scalability and adding smart contracts capabilities to Bitcoin using sidechains, such as Liquid Network, RSK Labs and Mintlayer. However, sidechains do not inherit the intrinsic security of the Bitcoin network.

How Stacks is bringing DeFi, NFTs and DAOs to Bitcoin

Stacks has developed a solution to address the two main issues of Bitcoin in web 3.0: scalability and limited smart contract capabilities.
Instead of deploying smart contracts directly on the Bitcoin chain, Stacks executes them on its own Layer-1 blockchain and uses Bitcoin for settlement only. Stacks uses a new consensus mechanism, Proof of Transfer (PoX), which exploits the mining energy already consumed on the Bitcoin blockchain to write new blocks on the Stacks blockchain. This way, it can benefit from Bitcoin security. I will not go into details here of the exact mechanism, if you want to go deeper have a look at this overview from Messari.
Stacks do not use the common smart contract languages of Ethereum and several other L1s, Soilidy and Rust. It has developed its own language called Clarity. Its main characteristics are Decidability and Interpretability.
The language is simpler than its counterparts which have a wider range of technical possibilities, but this means it is also less susceptible to bugs and hacks. It also allows developers to see more easily what the code will do before running it. It also allows non-technical users to see in the UI exactly what’s going to happen to their balances before running the smart contract.

Stacks has recently celebrated its first inaugural year, becoming the largest Web 3 ecosystem on Bitcoin.
The network achieved over 350 million monthly API requests, 40,000 Hiro (development tool for Stacks to build applications on Bitcoin) wallet downloads, and 2,500 Clarity smart contracts. To date, the mechanism has delivered over $50 million worth of BTC rewards and surpassed $1 billion in total value locked.
And now Trust Machines has just raised $150 million in order to build the “largest ecosystem of Bitcoin applications.” It plans to unleash “the true potential of bitcoin”, extending Bitcoin from being a passive store of value to being the final settlement layer for a powerful new Web3 computational network of DeFi, DAOs and NFTs.
It has quite some ground to cover to catch Ethereum. According to Electric Capital report on Web 3 developers, the whole Bitcoin ecosystem boast just over 600 monthly active developers compared with more than 4000 on Ethereum, and has been growing at a slower rate. Ethereum also has over $123B in TLV in DeFi, compared to just $114M for Stacks, a 1000x difference. But as we know, things can change very fast in crypto.

Main Applications on Stacks

Let’s have a look at some of the most interesting projects built on Stacks 👇
Stacks ecosystem of DeFi and NFTs secured by Bitcoin
Several DeFi and Web 3 projects have been launched on Stacks. Some of the most interesting are:
Alex a DeFi hub with a suite of DeFi offerings, from lending and borrowing including self-repaying loans to a launchpad for emerging projects, a DEX and yield farming.
Arkadiko aims to make its crypto-backed stablecoin USDA the facto stablecoin to power the Stacks ecosystem.
City Coins, which helps cities launch their own token. The aim is to strengthen local economies and enable citizens to invest in their city’s development, while at the same time earning interest in it and even participating in its governance. The first city to get onboard was Miami in August, followed by New York and other US cities are looking at joining soon.

Several NFT projects have been launched on Stacks, such as NFT marketplaces and minting platforms such as Superfandom, Byzantion, STX NFT, Layer and Boom. A few collections are now live on Stacks such as Megaponts, Satoshibles and Stackpunks. They have however reached a few million sales, compared to the monthly NFT sales of over $5B on Ethereum OpenSea.

The interoperability of Stacks is being enhanced through bridges towards other blockchains, but beware of the risks of cross-chain bridging. The Stacks Bridge is building an NFT bridge between Ethereum and Bitcoin. The Banana Bridge allows Megakongs transferability from Ethereum to Stacks and vice versa and has been used to allow Megapont, one of the most successful projects on Stacks, to debut on Ethereum. Lastly, Orbit Chain, a cross-chain bridge connecting 8+ chains, now connects also to Stacks.

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Additional resources:
Messari: It’s Time to Stack(s) Bitcoin Up