HEATH MUCHENA: Why bitcoin defi is the new frontier of the cryptocurrency market

Bitcoin, the world’s first cryptocurrency, has long been hailed as the digital gold of the crypto world, largely for its role as a store of value. But something revolutionary is happening that could change the way we think about bitcoin. It’s stepping into a new role: decentralised finance (defi).

In an ecosystem where ethereum has long been the king of defi, bitcoin is slowly carving out its space. Welcome to the era of bitcoin defi (BTCFi), where your bitcoin is doing more than just sitting in a wallet collecting digital dust. 

In its early days, bitcoin was pretty straightforward: it was a peer-to-peer digital cash system, as laid out by its creator, Satoshi Nakamoto. But let’s be honest — it wasn’t exactly the place to get fancy with complex financial operations like borrowing, lending or earning interest. That’s where ethereum stepped in, becoming the go-to blockchain for decentralised finance because it was built to support smart contracts — self-executing agreements coded right onto the blockchain. 

Bitcoin wasn’t designed for that level of complexity. Its architecture prioritised security and decentralisation over flexibility, making it perfect for simple transactions but not so much for the bustling world of defi. The blockchain’s rigid structure limited scripting language and its relatively slow transaction times kept it boxed into a single role — until now. 

So, what changed? In a word: innovation. Developers, long inspired by bitcoin’s unparalleled security, have spent years tinkering, testing and pioneering ways to make bitcoin do more without compromising its core principles. Side chains such as Rootstock and second-layer solutions such as the Lightning Network have emerged to bring defi to bitcoin’s doorstep. These technologies are unlocking the power of smart contracts on bitcoin, allowing it to step up its game and compete with ethereum for a slice of the defi pie. 

Bitcoin’s transition into defi is as much about staying true to its original ethos as it is about technological innovation. In short, bitcoin is transforming from a simple store of value to a programmable, multipurpose financial tool, and it’s doing so while keeping its reputation for security intact. 

To understand how bitcoin is stepping into this new role, let’s look at some of the projects at the heart of this revolution:

• Rootstock: Think of Rootstock as the bridge that’s allowing bitcoin to speak ethereum’s language. Rootstock’s side chain integrates with bitcoin and offers compatibility with ethereum’s smart contracts, meaning defi platforms built on ethereum can now work with bitcoin too.
• Core blockchain: This blockchain is pioneering a new approach, combining bitcoin’s hashing power with ethereum’s smart contract flexibility. Core’s big selling point? It turns bitcoin into a yield-bearing asset through a dual staking model, giving holders a way to earn passive income on their bitcoin.
• Merlin chain: A newer player but one with big ambitions, Merlin chain is adding serious defi capabilities to bitcoin using a combination of technologies like ZK-Rollups (a fancy way of saying faster, more secure transactions) and decentralised oracles. This opens the door for a whole range of decentralised applications (dApps) on bitcoin. 
• BEVM: In a bid to bring ethereum’s vast defi ecosystem directly onto bitcoin, BEVM lets developers deploy ethereum dApps on bitcoin without major overhauls, creating a seamless experience that bridges the two worlds.

Now, let’s talk about growth because it’s the numbers that really show how fast bitcoin defi is catching on. As of September the total value locked (TVL) in bitcoin defi projects had skyrocketed to $1.07bn. For context, this is a 5.7 times increase since January. Leading the charge is Core, holding about 27.6% of that TVL, followed closely by Bitlayer and Rootstock. 

While ethereum still dominates in sheer size, bitcoin’s defi ecosystem is growing faster than expected, fuelled by the introduction of new protocols and the increasing appeal of yield-bearing bitcoin assets. And here’s the kicker — this growth isn’t just happening in some crypto niche. It’s drawing in everyone from individual investors looking to earn passive income to major institutions wanting to diversify their portfolios.

At this point, you might be wondering whether bitcoin’s defi ecosystem's a real contender, or is it just playing catch-up to ethereum? Ethereum, with its robust infrastructure and developer-friendly environment, has over 150,000 BTC locked in its defi protocols. In comparison, bitcoin’s native defi ecosystem has just under 9,000 BTC locked. But there’s more to the story than just numbers. Bitcoin defi projects operate within bitcoin’s tight security framework, meaning they don’t depend on custodians or cross-chain bridges, which can introduce security risks. In contrast, wrapped bitcoin assets on ethereum, like wBTC or renBTC, add extra layers of risk through reliance on third parties. 

Bitcoin’s entry into defi is like a high-stakes chess game: slow, deliberate moves with long-term strategies. While it may not have ethereum’s vast array of defi products yet, the security and decentralisation ethos that bitcoin is built on make it a compelling alternative. 

Despite the momentum, bitcoin’s defi future faces some challenges. For starters, scalability is a concern. Bitcoin’s base layer isn’t designed for the high transaction throughput needed to support large-scale defi operations. And let’s not forget the ever-present regulatory challenges. Governments are clamping down on defi as it grows, with stricter anti-money-laundering and know-your-customer rules that bitcoin defi projects will need to navigate carefully. 

• Muchena is founder of Proudly Associated and author of “Artificial Intelligence Applied” and “Tokenized Trillions”.