The vast majority of  decentralised finance (DeFi) products — 38 of the top 39, according to DeFiPulse — are currently built on Ethereum. 

That’s a supremacy of 98%, suggesting that Bitcoin is used in a tiny proportion of current projects. 

This dominance comes as no real surprise. 

Ethereum is designed as a ‘world computer’ upon which almost any decentralised app can be built and run. The only Bitcoin-based project to make DeFiPulse’s top project list is the Lightning Network (LN), a scalability upgrade that seeks to bypass Bitcoin’s high fees by moving transactions and processes off-chain. 

But LN’s issues with economic viability, no matter how well-intentioned the solution, have been thoroughly documented.  Serious DeFi watchers will likely disregard LN. Instead, a new market for Bitcoin smart contracts is emerging. 

The wider picture

If we look instead at DeFiPrime, we get a more nuanced sense of the DeFi market. Ethereum still dominates —  yes — but we find that 24 of the 214 current DeFi projects are built on Bitcoin. So the current level of superiority is more like 80% than 98%. And Bitcoin is catching up fast. 

At the end of August, Binance made waves by listing Wrapped BTC (WBTC), the most popular Bitcoin tokenisation protocol on Ethereum. 

As CoinTelegraph suggests, this is just the beginning of Bitcoin’s use in DeFi. Reporter Samuel Haig noted: “During August, the number of Bitcoin[s] being tokenized via WBTC briefly exceeded the rate at which new BTC are mined, signposting booming demand for Bitcoin in the DeFi space.”

Early September research from Messari reveals that $500m in BTC has been tokenised on the Ethereum network in 2020 so far. That half a billion dollar figure represents just 0.3% of Bitcoin’s total market cap. Clearly there is room for more growth. 

A bridge too far?

The introduction of products that use ‘bridges’ between Bitcoin and Ethereum pose the greatest opportunity for Bitcoin DeFi, Messari says. And there are applications for the technology far beyond crypto lending, too. 

Look to RSK, whose devs created an interoperability bridge between Bitcoin and Ethereum.

It works like this: the bridge’s smart contract locks an original token and creates a corresponding number of new tokens on the other blockchain. Ethereum-based tokens can be transformed into RSK’s RRC20 tokens and vice-versa. 

One early use case for RSK’s platform is of particular note. 

California’s primary energy agency has a pilot in progress which use RSK’s Bitcoin smart contracts as a way to bring more transparency and liquidity to carbon credit trading. 

So how does it work? Just as an Ethereum DeFi lending protocol uses an auto-executing smart contract to set the terms and conditions of a loan, and stipulates how and when it should be paid back, this Bitcoin-based smart contract sets the conditions for each carbon credit trade. 

One carbon credit is equal to a tonne of carbon dioxide emissions. With specific limits now imposed on how much of these polluting greenhouse gasses businesses are allowed to emit, there is a growing global market to buy and sell these credits, much like a stock exchange deals in equities. 

But the trading system is sluggish, illiquid and most critically, not digitised. That makes it extremely difficult to track and manage. 

Lowering a business’s carbon footprint is a laudable aim but there is no standardised system to make it simple, frictionless and fast. Using Bitcoin smart contracts could revolutionise the system entirely. 

So, to answer our original question: is Bitcoin DeFi unstoppable? Most certainly. But there are other applications for Bitcoin smart contracts set to have a much broader impact beyond DeFi itself.

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