Finance Redefined: The Bitcoin Price Special at $20,000, December 9-16


Bitcoin DeFi, Bitcoin in Ethereum: We explore the ways DeFi and Bitcoin intertwine.

Today, the world of cryptomontages is celebrating Bitcoin’s new historical high. We did it, guys! We’re back at $20,000 after three grueling years.

So, for this reason, this will be a Bitcoin-themed newsletter. How does Bitcoin relate to DeFi? Well, for one thing, the total value locked in DeFi has a delta of about 0.2 with respect to the price of Bitcoin. This means that for every 1% that the price of BTC goes up or down, the total blocked value changes by 0.2%.

Most of that ratio is due to the peculiar accounting choice of considering BitGo’s Wrapped BTC as its own asset in DeFi, while counting all instances where WBTC is used in DeFi protocols. From a „natural“ value of USD 535 million, Bitcoin’s contribution to the total blocked value jumps to USD 2.9 billion, a pretty significant discrepancy, right?

But beyond the use of Bitcoin in Ethereum, there’s also the phenomenon of Bitcoin in DeFi. Now, the thing is that none of these are really „Bitcoin“ in DeFi, because Bitcoin simply doesn’t allow you to create the complex smart contracts needed to implement the real DeFi. The only project I know of of that kind is Atomic Loans. You offer Bitcoin as native collateral, but all the smart contracts are in Ethereum and your loan is disbursed there.

Bitcoin DeFi exists in RSK and Liquid, two Bitcoin „side chains“, independent block chains that use Bitcoin as their native currency. RSK also uses combined mining to validate its own string, resulting in a much closer link to the main string.

The problem is, of course, that since Bitcoin doesn’t have any smart contracts, the way for BTC to reach those „DeFi“ side chains is usually through custody and centralization. But recently we saw RSK push a solution that makes the bridge effectively DeFi-free, so I’m starting to warm up to seeing it as two sides of the same Bitcoin.

The Bitcoin summary in DeFi

RSK has definitely been active at the head of DeFi. This week, Sovryn launched a full range of products for DeFi at RSK. It is a combination of several basic components, including a loan protocol and an automated market maker exchange, or AMM. Like bZX’s Fulcrum, the combined range makes it easier to enter leveraged positions in Bitcoin Fast Profit without taking the manual steps you would have to take in, say, Compound.

Among the most interesting protocols in RSK we have TEX, a kind of mix between an AMM and an exchange order book. The mechanism is complex, but basically it settles orders every few minutes based on an average of all the limited orders sent. The exchange was launched by Dollar on Chain, the RSK Maker analog with some additional features.

On the side of Liquid, the side chain developed by Blockstream, there is less variety, although there is another interesting twist on the decentralized exchanges called TDEX. It uses atomic exchanges to make trades and allows complete control over the settlement price, unlike MMAs, where the price of the trade is not really known until the order is executed.

Bitcoin tokenized in Ethereum

The most popular type of Bitcoin in Ethereum is Wrapped Bitcoin, as I mentioned. Simply, BitGo (and supposedly other partners) take custody of Bitcoin that’s connected to Ethereum, and then they coin the corresponding WBTC tokens. Very similar to Tether or other centralized stablecoins, it feels like an output.

For a tokenized Bitcoin to be relevant, we must solve this annoying problem of relying on custodians to connect it to new strings.

The tBTC project is one of those trustless Bitcoin transition mechanisms. The project really embodies the principle of „making lemonade“ to the fullest. To avoid the limitations of the Bitcoin Smart Contracts, it allows anyone to become a „binding agent“ in charge of performing the conversions between Bitcoin and Ethereum. In case of any irregularities, users can claim the agent’s bond in Ethereum, which is over-guaranteed compared to the bridging amount.

As expected, tBTC’s bonding and slashing mechanism is quite complex and is probably stifling adoption, so this week tBTC teamed up with the exchange CoinList to provide an easier method of coining the token. That can also be interpreted as an excuse, but the key feature is that the system is still open to anyone, rather than being operated by a unique and well-defined set of validators.

Finally, there is RenBTC. While the team uses sophisticated words like „Shamir’s Secret Sharing“ and „Multi Party Computation“ to justify itself as a bridge protocol without trust and permission, Wanchain’s research seems to show that all the BTCs on his bridge are in one wallet, presumably controlled by the team. Wanchain is a competitor, so do with this what you want; I really don’t have the experience to corroborate this quickly.

In practice, Ren is definitely simple enough and without permission. So much so that DeFi hackers have now resorted to this to launder their profits. The most likely explanation I see is that the Bitcoin block chain is much harder to trace, and the mixing solutions are much more liquid than Ethereum’s Tornado Cash.

If Ren really is as centralized as it seems, it could foresee major problems if the computer continues to allow hackers to use it. The general rule of financial regulation is that if you can stop money laundering, it must be done, in a very forceful and proactive way. Still, individual cases of money laundering are not a big problem, as long as there is an acceptable anti-money laundering program in place.

Overall, Bitcoin may become the most promising avenue of expansion for DeFi. You simply can’t argue with its market capitalization of $383 billion. Whether it’s at Ethereum, at the Bitcoin side chains or elsewhere, DeFi would be a natural extension for Bitcoin as an asset.