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The cryptocurrency industry has been about creating a new world of finance, one where people are in charge of their own money. Here, Bitcoin was supposed to be the alternative to the financial system, however, in time, it has become more reliant on “crypto-banks.”In fact, according to Matthew Black, CTO at Atomic Loans, most activities around Bitcoin are dependent on decentralized exchanges and centralized lending platforms.
This dependency on these crypto-banks has made users of the product subject to custodial risk along with others, noted Black in a recent post. However, like Bitcoin, Ethereum is also referred to as the bankless money system, and it has managed to rise above centralized crypto-banks through DeFi projects like MakerDAO and Compound.
DeFi has been noting tremendous growth off-late and it has been one of the most significant contributors to the Ethereum ecosystem. However, the same has been difficult to achieve on Bitcoin. According to Black, part of the reason has to do with the secure way Bitcoin was built, nixing the need for the kind of “smart contract hack” seen on Ethereum. This makes the task of building on top of the world’s largest asset difficult, while the lack of an ecosystem for building financial apps on BTC made it cumbersome. Black noted,
“Without a MetaMask or Web3 ecosystem, the gateway to building on Bitcoin and DeFi is much more difficult.”
There have been several attempts made at Bitcoin DeFi with specifically exchanging Atomic Swaps. But, it could not get enough traction due to several UI/UX issues. In fact, there have been other unique projects created using SPV Proof to prove a BTC transaction occurred on Ethereum. This has been allowing users to use Bitcoin to buy Ethereum assets in an auction. However, the use case is not very popular among the masses and hasn’t been reporting volumes of any note.
Even though the tokenization of Bitcoin has been a good application and has been seeing increasing volume, the systems are not perfect. Despite the flaws, there have been some projects that enabled “DeFi” using the native functionality of Bitcoin like Simplicity, Discrete Long Contracts [DLC], and RGB.
The journey tells us that it has been difficult to build on BTC, but the community is expecting the Bitcoin ecosystem to make it more independent. Even though DeFi solely on BTC is difficult to achieve right now, with the vast ecosystem at hand, it may become considerably easier.