The introduction of layer 2 protocols on Bitcoin has been instrumental in expanding the network’s smart contract abilities and addressing its scalability problem. A byproduct of addressing Bitcoin’s constraints is the development of Bitcoin DeFi protocols. Read on as we discuss five exciting Bitcoin DeFi protocols you need to know and pay attention to.
What Is Bitcoin DeFi?
Before defining Bitcoin DeFi, let’s take a step back and talk about DeFi in general. Decentralized finance (DeFi) is blockchain’s response to traditional finance that eliminates the centralized intermediaries in financial systems and replaces them with peer-to-peer networks. DeFi protocols rely on smart contracts to automate financial transactions.
Bitcoin DeFi applications typically operate on Bitcoin Layer 2, which offers the type of smart contract capabilities that Bitcoin’s main chain lacks. Bitcoin’s status as the most secure blockchain network provides the ideal infrastructure for DeFi projects prioritizing safety.
Top 5 Bitcoin DeFi Protocols
Let’s look at the top five DeFi protocols utilizing Bitcoin as their main chain.
Sovyrn
Sovyrn is the largest Bitcoin DeFi protocol, with over $150 million in TVL. Operating on Rootstock (RSK), Sovyrn utilizes smart contracts for collateralized peer-to-peer lending on the Bitcoin blockchain. Rootstock is a Bitcoin sidechain with a reputation for its security. The non-custodial smart contract dApp allows Bitcoin holders to earn a yield from their assets.
The Sovyrn platform is powered by the SOV token, which acts as the protocol’s governance token. Determination of voting power utilizes a quadratic formula that considers the amount and duration of SOV staked.
ALEX
Automated Liquidity Exchange (ALEX) is the leading Bitcoin DeFi protocol on Stacks with over $70 million in TVL. The platform offers a decentralized exchange, yield farming, borrowing, lending services, and a launchpad for Stacks projects.
ALEX token is the platform’s native currency that primarily serves as a participation incentive but can also be used to earn from staking. The token grants holders voting rights on future developments, policies, and fees. The Alex Lab Foundation makes decisions on the company’s operations. There are plans to transition into a DAO with ALEX holders earning voting rights currently reserved for the foundation.
Arkadiko
Also built on Stacks, Arkadiko is a non-custodial liquidity protocol with over $3 million in TVL. The lending protocol allows participants to collateralize their STX tokens and mine the USDA stablecoin.
DIKO token, the platform’s native token, serves as an incentive for contribution and participation. The token grants its holders governance rights to vote on on-chain governance proposals and future developments.
The voting weight depends on the proportion of tokens staked. Holders cannot, however, vote on matters regarding the company’s management and operations. There are plans to shift the protocol into a DAO structure, allowing DIKO holders to vote on all issues.
LNSwap
LNSwap is a non-custodial atomic swap protocol on Stacks that enables participants to swap Bitcoin for digital assets. Its compatibility with Lightning enables speedy transactions while keeping the transaction cost low.
The platform brings together liquidity providers who add funds to the pool, users who swap assets, and aggregators who record the events on the protocol. Currently, LNSwap utilizes a router to perform the aggregator function. The development team has plans to shift to an on-chain smart contract to achieve full decentralization.
Stackswap
Stackswap is an Automated Market Maker (AMM) on Stacks with over $280,000 in TVL. Users can launch and exchange tokens, mint and trade NFTs, and borrow cryptocurrencies. The platform includes liquidity providers who supply funds to the pool and traders.
The STSW token is the platform’s native utility and governance token. Users who stake their tokens earn voting rights through vSTSW, which are burned when the staking period ends. Voting rights are limited to the platform’s features and do not extend to the management and operations of the company.
Bottom Line
DeFi has come to Bitcoin, attracting a range of new users – from DeFi degens to Bitcoin maximalists – looking to explore the yield-generating opportunities this new market has to offer.
The growth of Bitcoin layer 2 protocols has been the primary growth engine to enable Bitcoin DeFi, which was previously hindered by the lack of smart contract capabilities on the Bitcoin blockchain.
Today, Bitcoin holders can deploy their coins on a wide range of DeFi protocols to earn yield on their digital gold.
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