Bitcoin DeFi ecosystem explained
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Loading... - Cassia Karras
- 17 Jan 2023
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What is Bitcoin DeFi?
The Bitcoin Taproot upgrade unlocked the potential to create DApps on the Bitcoin blockchain, improving the blockchain’s long-term viability by accelerating the DeFi movement on the Bitcoin network.
Decentralized finance (DeFi) has experienced tremendous success since 2020, with nearly all of that growth being fueled by Ethereum. Ethereum paved the way for novel financial services and instruments, including decentralized exchanges (DEXs), automated loan platforms and nonfungible tokens (NFTs).
On the contrary, developing smart contracts powered decentralized applications (DApps) was not possible on the Bitcoin blockchain until the Taproot upgrade, opening the door to DeFi for the world’s first cryptocurrency. In this context, Bitcoin DeFi refers to developing innovative decentralized applications on Bitcoin’s network, which wasn’t possible before due to the problem of transaction scalability.
Due to the requirement that each digital signature had to be verified against a public key before the implementation of the Taproot upgrade, Bitcoin transactions were comparatively slow. Thanks to Taproot, the network can now group several digital signatures and validate them all at once. As a result, less space is needed on each block, allowing the Bitcoin blockchain to support the development of DeFi applications.
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How does Bitcoin DeFi work?
Wrapped tokens like Wrapped Bitcoin, layer-1 blockchains like Stacks, and sidechains like Rootstock enable DeFi on Bitcoin.
The scripting language used by Bitcoin, termed Script, is not Turing complete, which means it is deficient in several logical operations, such as loops. As a result, the Bitcoin network supports limited programmability despite the Taproot upgrade, meaning that Bitcoin DeFi platforms rely on layer-2 scaling solutions and sidechains to host their smart contracts. Read More…
