Decentralized Finance (DeFi) applications are now the primary focus within the crypto space. Many believe this might be the killer use case of blockchain technology—an opportunity to deliver all financial services on a peer-to-peer arrangement, and not just payments.
Some reports have indicated that while the amount of Bitcoin-related transactions reduced in the third quarter of 2020, those related to DeFi increased significantly. This could be an indicator of what to come.
Even more, they have created a possibility of leveraging a small amount of crypto capital to generate an amount of revenue several times what is possible on centralized exchanges and trading platforms.
While DeFi Decentralized exchanges like Uniswap support hundreds of coins, Bitcoin is not one of them. You can’t use Bitcoin as collateral or borrow funds to trade it on any of the DeFi exchanges or platforms.
BUT WHY IS THAT SO?
The transactions on DeFi are implemented through smart contracts, coded agreements that self execute when launched. It is not like a Bitcoin transaction can’t be programmed into a smart contract.
However, right now, the activity is with the smart applications built on top of the Ethereum blockchain. While Bitcoin was the first on the scene, Ethereum was the first to see smart contracts’ potential and prepare for it.
This has given it a considerable advantage, and almost 70 percent of tokens and cryptocurrencies listed on exchanges are domiciled on the Ethereum blockchain.
It is important to point out that all tokens that are traded and processed through DeFi platforms also meet the ERC-20 standards put in place by the Ethereum community.
Interestingly ETH does not meet this standard, and to have it as part of transactions on the DeFi platforms, it is usually locked and replaced with wrapped ETH (wETH), an ERC-20 token.
WILL BITCOIN BE ON A DEFI APPLICATION?
It might seem like it is too late for Bitcoin to achieve this, but we are still in the early days of blockchain.
An option will be to create an ERC-20 token that is pegged on Bitcoin. Traders who need to use Bitcoin as collateral or borrow to margin trade might have to lock the cryptocurrency and get an equivalent amount in tokens.
It might take long before Bitcoin is part of the DeFi environment, but we are highly likely to reach there. It might not even be the same way, but Bitcoin started the peer-to-peer experience, and it can deliver even more.