A group of computer scientists known as Cypherpunks who strongly advocated for privacy dreamt of creating an asset native to the internet. After decades of research and experimentation, Bitcoin was created in 2008 by an anonymous person referred to as Satoshi Nakamoto. The blockchain technology behind Bitcoin solved a critical issue called the double spend problem. Basically, for the first time, Bitcoin protocol allowed two strangers to trust each other on the internet without involving a third party.
After the phenomenal success of Bitcoin, people like Vitalik Buterin figured out that the functionality of Bitcoin was inherently limited. For instance, Bitcoin has proved itself to be the best performing asset of the decade. Yet when it comes to scaling the Bitcoin network to say, a billion users, challenges arise. Satoshi Nakamoto had given utmost importance to security and decentralization when designing the protocol leaving no room for bigger alterations that can be made to the network to handle high traffic or complex protocols. Despite the shortcomings, several developers have built innovative products on top of Bitcoin.
In this article, we will take a closer look at the applications that are being built using the Bitcoin network other than its primary use case as a potential institutional grade asset.
Bitcoin has made progress in the scalability department. Lightning network, a layer 2 blockchain protocol, was designed to offload transactions from the main Bitcoin network enabling faster transactions. It processes transactions off chain more cheaply and efficiently. While Bitcoin layer 1 can handle 10 transactions per second, the Lightning layer 2 can theoretically handle millions of transactions per second. It also consumes less energy compared to the energy intensive Bitcoin mining.
Twitter uses a Lightning network to let users tip creators. El Salvador became the first nation to make Bitcoin legal tender. The government created a wallet called Chivo which is Lightning-compatible and designed to enable seamless cross-border payments.
The first and successful layer 1 blockchain that was built on Bitcoin was Stacks. Using a consensus mechanism called proof of transfer (PoX), Stacks allows developers to build dapps on the Bitcoin network. STX is the token that powers the Stacks network and can be used to earn Bitcoin by temporarily locking STX tokens in liquidity pools.
One of the first decentralized finance (DeFi) protocols to be built on Stacks is Arkadiko. It is a non custodial liquidity protocol that allows investors to deposit their assets and earn a US dollar pegged stablecoin called USDA. Utilizing yield from PoX, a STX collateralized vault that mints USDA creates a self paying loan.
Some of the DeFi projects that are currently built using the properties of the Bitcoin network are Mintlayer (MLT), RSK smart bitcoin (RBTC), Sovryn (SOV) etc.
Mintlayer is a sidechain for Bitcoin that offers smart contract solutions and also runs a decentralized exchange (DEX). RSK’s smart contracts are secured by Bitcoin hashing power through merged mining. Currently, 49% of bitcoin miners are also mining RSK. Sovryn resides on RSK’s blockchain and uses RBTC in its smart-contract system. It offers an automated market maker (AMM) where one can take out a loan at just 2.86% APY and get into yield farming with the wrapped bitcoin, RBTC.
Though DeFi is synonymous with Ethereum these days, layer 1 blockchains such as Stacks are trying to change the status quo by allowing developers to build dapps and at the same time, tapping into the security features provided by the underlying Bitcoin network. When looking at the future of DeFi, Bitcoin might definitely be amongst the most happening blockchains.
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Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.