What is Bitcoin DeFi and how does it work? Bitcoin DeFi Projects
Bitcoin holders are entering the decentralized finance (DeFi) world using wrapped tokens and DeFi projects built on the native bitcoin blockchain.
Since decentralized finance (DeFi) first emerged in 2020, most DeFi projects have been built on the Ethereum blockchain.
Bitcoin holders who want to access DeFi often use “safesun coin ” such as WBTC. This allowed them to use tokens pegged 1:1 to Bitcoin on blockchains like Ethereum.
However, there have been big changes in the DeFi world in 2021 and 2022. Not only have potential Ethereum killers like Solana taken the DeFi market share away from Ethereum, but there has also been growth and vitality in DeFi projects built around the Bitcoin blockchain.
What is DeFi?
DeFi products are primarily Ethereum-based tools designed to revolutionize and replace existing borrowing, lending, and banking methods in traditional finance.
DeFi has also spawned relatively new concepts like yield farming.
The goal of DeFi is to make the world of finance accessible to everyone (or anyone with an internet connection).
What does Bitcoin have to do with DeFi?
Most DeFi platforms are still built on smart contract platforms like Ethereum.
But many people own bitcoin and want to get involved in DeFi too. This has led to the creation of several solutions to help Bitcoin holders invest in DeFi.
Bitcoin is the largest cryptocurrency by market cap, so it’s no surprise that there is demand for solutions that allow Bitcoin holders to leverage their holdings in the DeFi world.
How does Bitcoin DeFi work?
Bitcoin DeFi works differently depending on the blockchain it is deployed on.
Bitcoin DeFi is built on Ethereum.
To use their Bitcoin holdings in Ethereum, Bitcoin holders need to use a token such as Wrapped Bitcoin (WBTC).
A Wrapped Bitcoin is a 1:1 transfer of Bitcoin (without creating new Bitcoins) that can be used on other blockchains.
On Ethereum, the Wrapped xwp price (WBTC) ERC-20 token can be used on DeFi platforms like any other asset on the Ethereum blockchain.
A Bitcoin owner can convert Bitcoins to WBTC and then borrow against WBTC to borrow stablecoins using a platform like MakerDAO.
These stablecoins can then be reinvested back into the DeFi ecosystem.
This strategy carries the risk that the WBTC used as collateral may be liquidated.
Bitcoin DeFi built on Stacks.
Stacks, like Bitcoin, is an independent, first-level blockchain. Stacks and Bitcoin networks are connected through a process called Proof of Transfer.
To mine Stacks, miners need to send Bitcoin to the Bitcoin network. Multiple transactions on the Stacks network can correspond to one transaction on the Bitcoin network.
A range of DeFi applications is possible on the Stacks blockchain, from staking the Stacks token for Bitcoin rewards to exploring decentralized applications (dapps) that offer familiar DeFi strategies such as staking and yield farming.
Bitcoin DeFi built on Rootstock (RSK)
The RSK blockchain operates as a sidechain for the Bitcoin blockchain and uses Smart Bitcoin (RBTC) as a utility token. RBTC is used to pay fees for smart contracts on the RSK blockchain in the same way that ETH is used to pay fees on the Ethereum blockchain.
Smart Bitcoin (RBTC) is pegged to the price of Bitcoin (BTC) at a ratio of 1:1. Because the RSK blockchain is a sidechain of Bitcoin, there is a two-way peg between RBTC and BTC, and the two assets can be exchanged back and forth between the two blockchain networks.
Using Bitcoin DeFi to Generate Passive Income
Why would anyone want to invest their Bitcoins in DeFi when they can get into DeFi by buying Ethereum directly?
Many people consider Bitcoin to be a store of value. While not without risk, the use of Bitcoin for DeFi can open up passive income in addition to this store of value.
What Bitcoin DeFi projects exist?
- Wrapped Bitcoin (WBTC) is an ERC-20 token on the Ethereum blockchain, pegged 1:1 to the price of Bitcoin and backed by an equivalent amount of Bitcoin stored in digital storage. Originally launched by BitGo, Ren, and Kyber, WBTC is now backed and operated by the WBTC DAO.
- Ren VM is a network that allows you to wrap cryptocurrencies, including bitcoins, and send them to other blockchains using RenBridge.
- RSK (Rootstock) is a smart contract blockchain that works like a Bitcoin sidechain and supports multiple DeFi platforms.
- BadgerDAO is a decentralized autonomous organization (DAO) offering solutions for using Bitcoin in the DeFi ecosystem; BadgerDAO was the victim of a $120 million hack at the end of 2021.
- Stacks is an independent layer 1 blockchain connected to the Bitcoin network and supports several decentralized applications.
What is the future of Bitcoin DeFi?
As of May 2022, almost $9 billion worth of Bitcoins were locked in Wrapped Bitcoin (WBTC).
While the rise of WBTC is one of the metrics showing an increase in Bitcoin holdings flowing into DeFi, there is a growing number of ways Bitcoin holders can use to enter DeFi.
Which Bitcoin DeFi platforms and protocols will be the most successful depends on their security and long-term longevity and the rewards they offer investors.
What is bitcoin mining?
Bitcoin mining at home is a rather high investment, with the need to create special conditions for equipment operation and a lot of trouble. However, digital gold, which is what the BTC cryptocurrency is often called, still remains the most expensive virtual asset. And it will probably always be so, or at least for a long time.
And, after all, at the dawn of the crypto industry, the first bitcoin coins did not cost a penny, then they gave 1 cent for them, and at the end of 2017, the price of 1 BTC increased to $ 20,000, and this is not the limit. Imagine the rise of crypto enthusiasts who started mining bitcoins in 2010. Of course, it is impossible to determine the exact amount of earnings of everyone who believed in the Satoshi Nakamoto project 10 years ago. But most of them made a fortune. Despite the unpredictability, the digital money industry is very promising. What do you need to start bitcoin mining at home?
Mining is the calculation of special equipment of an encrypted and limited number of cryptographic program codes. The task is performed by enumeration of numerical combinations. In the process of this work, a new cryptographic block is formed. It includes all data on coin transfers between users for a certain period, a link to the previous block, and the final hash amount. She needs to be found to complete the creation of the block and start a new one. When the miner finds a hash signature, the rest of the network nodes check the block for validity and after that, it becomes an integral part of the blockchain, and the equipment owner receives a reward in digital coins.
Copies of the data are stored on many computers connected to the network and each of them is regularly updated, adding information about new blocks. A cryptographic network is a chain of many nodes in different parts of the world. It includes all the owners of crypto coins, but only some are engaged in its maintenance. In order to earn income by participating in the search for new blocks of the Bitcoin ecosystem, a specialized computing device (ASIC) is needed. During block formation, miners process transactions, protecting the system from Double Spending attacks (double spending). Since it is profitable to mine Bitcoin, many people are engaged in this business. The POW (proof of work) consensus algorithm provides better decentralization than alternative network security methods.
The supply of digital gold is limited to 21 million coins. The blockchain ecosystem is not regulated by the state and at the moment, in principle, anyone can mine bitcoins at home. However, not everyone can set up the equipment and start the mining process independently.
bitcoin mining process
The creator of the first cryptocurrency, Satoshi Nakamoto, compiled the program code so that digital money was protected from inflation. For this, it is provided:
- Coin limit (21,000,000 BTC).
- Computational complexity correlation.
- Miner reward reduction after every 210,000 blocks mined.
Payouts are halved, but this is only good, because bitcoin is constantly growing in price due to its scarcity. To mine bitcoins yourself, you need special knowledge and start-up capital to purchase computer equipment and pay for electricity costs.
You can immediately exchange earned coins for fiat. But, when the bitcoin rate is significantly lower than the historical maximum, it is not advisable to spend cryptocurrency. Check out the materials on the Internet, look at the prices and decide whether such a business is profitable. After all, crypto mining is a business, not a hobby. Bitcoin mining at home is a commercial enterprise that is organized to make a profit.
Once upon a time, it was possible to mine bitcoins on a home computer or laptop. With the growing popularity of digital currencies, mining equipment began to improve. In principle, this was the original concept of the inventor of the first cryptocurrency, Satoshi Nakamoto: “one processor, one vote.” He probably imagined the bitcoin network as a community of equal owners of ordinary PCs. However, some experts believe that Satoshi foresaw the possibility of mining on GPUs, hence the launch of mining farms.
But progress has gone even further and for a long time, central processors and GPU-rigs are no longer suitable for bitcoin mining. After all, the more miners dig digital gold, the faster the complexity of calculations grows and equipment of low power ceases to cope with the task. There was a need for miners who could sort through long cryptographic chains at high speed. Therefore, special-purpose integrated circuit computing devices ( ASICs ) were released.
ASIC is a highly specialized computer that performs only one operation – cryptocurrency mining on a specific algorithm. ASIC is arranged extremely simply.
The rectangular metal case contains the control board and one or more hash boards with chips. In the end, there are fans of the cooling system, and the power supply can either be bundled with the device or sold separately. When choosing an ASIC miner, you need to pay attention to the following parameters:
- Hashrate ;
- Power consumption;
The higher the hash rate, the faster you will receive money. But if you can buy a model with a lower hash rate, but is more energy efficient and cheaper, then the choice is obvious. ASICs for bitcoin mining can also mine its forks that work on the SHA-256 algorithm. But, it is impossible to mine Litecoin or Ethereum without their help.