Bitcoin could become the foundation of DeFi with more single-sided liquidity pools

For many years, Ethereum reigned supreme over the decentralized finance (DeFi) landscape, with blockchain serving as the go-to destination for many of the most innovative projects serving their perspective on decentralized finance. More recently, however, DeFi projects have started popping up in multiple ecosystems, challenging Ethereum’s hegemony. And, as we look to a future in which the technical problem of interoperability is solved, an unlikely candidate for the role of DeFi power player is emerging – Bitcoin (BTC).

In this future, Bitcoin potentially plays the most important role in DeFi – and not in a triumphalist and maximalist sense. On the contrary, Bitcoin can complement the rest of the crypto as the centerpiece of multi-chain DeFi. The key is to connect everything so Bitcoin can interact with Ethereum as seamlessly as iOS and Android do today.

An argument for harmonizing Bitcoin with DeFi may surprise. Commentators often contrast the established Bitcoin blockchain with its more agile and functional counterpart, Ethereum. The real “turnaround”, however, connects DeFi to Bitcoin. This gives users the best of both worlds, combining the dexterity of Ethereum with the purity of Bitcoin. The debate revolves around what a Bitcoin-enabled DeFi industry looks like or if it is even possible to accomplish.

The bumpy road to interoperability

The underlying Proof of Work (PoW) The Bitcoin network’s consensus mechanism provides a rock-solid foundation for a state-separated global payment network. Embedded IT guarantees are enough to attract institutional money, illustrating that it is good enough for powerful players in traditional finance. Although it was designed to become the money of the internet, Bitcoin’s intrinsic properties have inspired less resource-intensive networks like Ethereum.

Despite the arrival of challengers, native Ethereum projects still dominate DeFi, which remains a fragmented ecosystem of contract-based smart applications facilitating an open peer-to-peer financial system. Global developer networks are working tirelessly to bring this arrangement of decentralized applications (DApps) together, largely without success, although atomic swaps have emerged as a viable option. Typically, sub-optimal solutions such as cross-chain bridges proliferate, leaving DeFi users vulnerable to exploits, while other popular solutions such as wrapped tokens come with their own drawbacks, namely centralization.

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For now, DeFi products have not been integrated with on-chain bitcoin transactions, as the bitcoin protocol does not facilitate smart contracts. This is a consequence of Bitcoin’s design, which was built with a limited scripting language to maximize security on data storage and programming capability. Remember that this material only has value insofar as it is decentralized.

Multi-channel financing without authorization

Thus, Bitcoin is incompatible with DeFi, and for some, guaranteed exposure to non-native chains via wrapped tokens like Wrapped Bitcoin (wBTC) is a step too far from core industry ethics. While this may lead some to believe that interoperability between DeFi and the Bitcoin network is a hopeless cause, there are ways to do it. For many, Bitcoin was the first step in reconceptualizing what it means to have access to financial services and experience financial independence.

Self-custody requires financial knowledge, and with more than half of users using cryptocurrencies under the age of 35, I’d bet we’re just the tip of the economic iceberg. Over time, the innovation will filter out native drawbacks of DeFi such as slippage and impermanent loss. Specifically, enabling one-sided yield for DeFi and Bitcoin would open up new possibilities that could tip the scales in favor of mainstream adoption. The single side is significantly safer, as it involves depositing a single token into a pool of liquidity as opposed to a pair of tokens.

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The introduction of unilateral yield in a Bitcoin-enabled DeFi ecosystem is where things start to get interesting, not just for maximalists, but for anyone with skin in the game. It would be a genuine way to increase value without compromising decentralization. The risk would be taken by the protocol allowing unilateral yield, which means that users could explore lending and borrowing options that are not currently available.

A by-product of this development would likely be the consolidation of decentralized exchange aggregators (DEXs). A saturation of aggregators splits the available liquidity, which is correlated with an increase in transaction costs. On that note, there are thousands of cryptocurrencies in the market, which means more assets, more chains, and more layers to consider. While modularity can be great for specialization, it’s high time for a “less is more” counter-movement.

Unlocking a New World of Bitcoin Opportunities

Building a seamless, distributed multi-chain financial system like this is no easy task. It reaches a level of complexity that is difficult to conceptualize. Consolidation could reduce focus enough that users can optimize for speed or security without losing access to the rest of blockchain-based finance.

Yet the impact these alternative financial technologies have had in such a short time is incredible. Bitcoin has been an integral part of the larger movement as most people’s introduction to the world of crypto. Perhaps Bitcoin can lead the next DeFi revolution, returning to cypherpunk culture and opening up new financial possibilities for everyone.

Marcel Harman is the founder and CEO of THORWallet DEX and a board member of the Crypto Valley Association. He previously co-founded the DEC Institute, which provides online certification for digital asset specialists backed by leading blockchain universities. He graduated from the University of Zurich in 2012 with a Master of Arts in Banking and Finance.

This article is for general informational purposes and is not intended to be and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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