Bitcoin could become the foundation of DeFi with multiple unilateral liquidity pools

For many years, Ethereum ruled the decentralized finance (DeFi) landscape, with the blockchain serving as the destination of choice for many of the most innovative projects serving their notion of decentralized finance. Recently, however, DeFi projects have begun to emerge across multiple ecosystems, challenging Ethereum’s hegemony. And as we look to a future where the technical problem of interoperability is solved, an unlikely contender for the role of DeFi power player is emerging – Bitcoin (BTC).

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

An argument for harmonizing Bitcoin with DeFi may come as a surprise. Commentators often pit the incumbent Bitcoin blockchain against its more agile and functional counterpart, Ethereum. However, the real “flip” is connecting DeFi to Bitcoin. Doing so 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 achieve.

The rocky road to interoperability

The underlying Proof-of-Work (PoW) consensus mechanism of the Bitcoin network offers a rock-solid bedrock for a global payment network separate from any state. The built-in computational guarantees are enough to attract institutional money, illustrating that they are good enough for the power players in traditional finance. Despite being designed to become the money of the internet, the inherent properties of Bitcoin have inspired less resource intensive networks like Ethereum.

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

Related: Bitcoin will rise in 2023 – but be careful what you wish for

Currently, the DeFi products have not been brought to Bitcoin transactions on the chain, as the Bitcoin protocol does not facilitate smart contracts. This is a consequence of the design of Bitcoin, which was constructed with a limited scripting language to optimize security over data storage and programming capacity. Remember that these things are only as valuable as the degree to which they are decentralized.

Permission-free multi-chain financing

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

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

Related: What will the cryptocurrency market look like in 2027? Here are 5 predictions

Introducing one-sided returns to a Bitcoin-enabled DeFi ecosystem is when things start to get interesting, not just for the maximalists, but for anyone with skin in the game. This would be an authentic way to accumulate value without compromising on decentralization. The risk will be taken by the protocol enabling unilateral returns, meaning users can explore lending and borrowing options not currently available.

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

Unlocking a new world of possibilities for Bitcoin

Building a seamless, distributed multichain financial system like this is no easy task. It reaches an intricate level that is difficult to conceptualize. Consolidation can narrow the focus enough that users can optimize for speed or security without losing access to the rest of the blockchain-based economy.

Yet the impact these alternative financial technologies have had in such a short time is incredible. Bitcoin has been an integral part of the wider movement as most people’s introduction to the world of crypto. Perhaps Bitcoin can drive the next DeFi revolution, return to cypherpunk culture and open up new financial opportunities for all.

This article is for general information purposes and is not intended to be and should not be taken as 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.