In Bear Crypto Markets, all roads lead to Bitcoin
Cryptocurrencies: bitcoin above all coins
In the beginning, Satoshi created bitcoin
A dozen years is an era in technology, and since the Bitcoin network came into being, a lot has changed in the crypto world. From an explosion of Cambrian-style altcoins to smart contracts and decentralized finance, on-chain innovations have made Bitcoin look obsolete.
Back to Bitcoin
It is an irony that during bull markets, when the price of bitcoin reaches record highs, it performs poorly compared to the rest of the market. Had you bought bitcoin in early 2017 or 2020, you would have certainly made money on your investment, but you would have made multiples if you had bought other native protocol tokens like ETH, BNB and ADA.
Conversely, when the market starts to cool down and bearish conditions return, bitcoin obliterates the competition. As altcoins bleed out their triple-digit gains almost as quickly as they were earned, a flight to quality assets is occurring, with the biggest beneficiaries being bitcoin, ethereum and of course stablecoins.
Lauren Stephanian, a partner at Pantera Capital, observes: “When there’s a bear market there’s usually an emotionally driven flight to safety, and crypto is no different. Bitcoin is the longest-lasting decentralized digital asset, and many feel that is a safer store of value.”
But the period when bitcoin really begins to bend is when the market has bottomed out and the long, slow road to recovery has begun. As BTC enters an accumulation phase, eyes return to the cryptoasset that started it all, bringing a renewed focus on building out an ecosystem of products to expand Bitcoin’s utility and ultimately its market dominance.
In 2013, bitcoin dominance (the percentage of the total crypto market value) was 95 percent. By the end of 2017, this figure had fallen to 32 per cent and today stands at 42 per cent.
Builds on the base layer
Over the past five years, hundreds of millions of dollars have been invested in building out Bitcoin’s base layer. Projects such as Lightning Network and RSK have attempted to extend Bitcoin’s functionality by creating secondary layers that support sub-tokens, smart contracts and microtransactions. The goal is to leverage Bitcoin’s unmatched security to create decentralized financial products built on the most liquid and reliable crypto network.
Portal, meanwhile, is building a full-fledged DEX and self-service wallet as a layer on the Bitcoin network. It aims to fulfill the promise of self-sovereignty for all by providing DeFi services such as asset issuance, swaps, staking, liquidity, derivatives and more, while retaining the robust security of bitcoin.
In considering the connection between Bitcoin and DeFi, Stephanian emphasizes the differences between the two, noting, “Bitcoin is considered a store of value, especially when you look at its volatility compared to most other assets in the space. DeFi provides access to different, modular financial primitives such as global lending and trade.”
Stephanian believes that DeFi on Bitcoin has yet to take off citing, “The Bitcoin ecosystem does not offer the same developer tools and standards that other teams have provided.”
What might a DeFi-enabled Bitcoin look like?
A recent report commissioned by Trust Machines, “Bitcoin: Beyond the Base Layer,” outlines this vision. The authors acknowledge that expanding Bitcoin’s utility is a “multi-front exercise” that will require additional funding and development to match the developer and user experience of EVM chains like Ethereum.
Trust Machines aims to use Bitcoin as a final settlement layer for the applications it develops using Stacks, a programming layer for Bitcoin. The idea of trading NFTs on a Bitcoin-anchored network may seem novel, but this concept has pushed the number of smart contracts deployed on Stacks into the thousands. However, as the report notes, it’s still easier for developers to clone Solidity contracts on EVM chains than it is to recode them using Stacks’ Clarity programming language.
Former director of growth at the Kraken exchange Dan Held is one of those who have bought into DeFi on the bitcoin narrative. Now with Trust Machines, the Bitcoin proponent is backing the original cryptocurrency to prove the doubters wrong and reinvent itself as a playground for decentralized finance, claiming: “I think there’s going to be this renaissance in the Bitcoin DeFi world. Right now DeFi is not synonymous with Bitcoin and most people think that these two words do not really go together.”
The case for building on Bitcoin
For years, blockchain developers have flocked to newer networks purpose-built to host decentralized applications (dApps) for trading, lending and savings. Such dApps rely heavily on smart contracts to interact with the blockchain, something Bitcoin in its raw state is singularly ill-suited for. Many of these so-called “next generation” blockchains have done little more than replicate Ethereum, right down to the virtual machine, with only faster block times and a modified consensus mechanism to distinguish them.
U-Zyn Chua, lead researcher at DeFiChain, believes EVM is great for experimentation, especially for new DeFi protocols and notes, “Beyond experimentation, users and investors seek mature protocols built on robust proven systems like Bitcoin. DeFi on Bitcoin is just that : take a mature EVM-based DeFi and solidify it at a consensus level.”
Despite the lack of originality shown by many post-Ethereum blockchains, these networks saw rapid growth during the bull market that peaked in late 2021. Metrics such as total value locked, native token price, and number of wallets created reached record highs across networks that Harmony, Avalanche and Terra last year. Then the market began to fall, exposing underlying flaws in the multi-chain model.
The collapse of Terra’s native stablecoin, UST, sent the original cryptocurrency it was hedged against, LUNA, to zero. Billions were wiped from the crypto market in a matter of days and thousands of cryptocurrency owners lost their savings. The fallout caused a domino effect that also took out crypto savings platform Celsius and crippled BlockFi and Voyager.
Coupled with the hack of two major blockchain bridges, which stole close to $1 billion from the Ronin and Harmony One ecosystems, the multi-chain task has quickly unraveled. High-speed, low-security chains no longer look so attractive – nor do algorithmic stablecoins. The great crypto collapse of 2022 has revealed holes in both centralized and decentralized platforms and protocols. But one thing that has held promise, throughout it all, is Bitcoin.
Could the network to start the next wave of DeFi innovation have been hiding in plain sight all along?
A trillion dollar opportunity
So far, no one has completely cracked the concept of “Bitcoin with bells on it.” An all-singing, all-dancing ecosystem, anchored by BTC’s Proof-of-Work consensus and unmatched decentralization, remains a utopia for now. That hasn’t stopped the imaginations from dreaming big. Like the mythical city of El Dorado, there is a metropolis of digital gold just beyond the reach of the maximalists who believe that all roads lead to Bitcoin.
Described as a trillion-dollar opportunity, the prospect of Bitcoin DeFi remains alluring.
“Imagine how powerful Bitcoin could become if more developers actively built in their ecosystem,” thinks Hiro, a creator of developer tools for Stacks, “Capital is already in the ecosystem. The earliest crypto adopters hold Bitcoin… Building attractive Bitcoin- projects across DeFi, NFTs, DAOs and other Web3 applications provide new streams into which the wealth dormant in Bitcoin can flow.”
Bitcoin may be the world’s strongest decentralized network, but does that make it the best-qualified candidate to host decentralized finance? Bear markets were made to build, the crypto community is known to be committed to this, and all eyes are currently on The Merge. By the time the market has rallied and started to regain its 2021 highs, we will know if DeFi and Bitcoin have a common future or are destined to remain eternally estranged.
