The $20,000 Bitcoin special, Dec. 9–16


Finance Redefined is Cointelegraph’s DeFi-centric newsletter, delivered to subscribers every Wednesday.

Today the crypto world is celebrating Bitcoin’s new all-time high. We did it guys! We’re back to $20,000 after three grueling years.

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So for this reason, this will be a bit of a Bitcoin-themed newsletter. How is Bitcoin related to DeFi, you ask? Well, for one thing, DeFi’s total value locked has a delta of about 0.2 to Bitcoin’s price. This means that for each 1% that BTC price goes higher or lower, DeFi TVL changes by 0.2%.

BTC and Wrapped BTC locked in DeFi, according to Defipulse.

Most of that relationship is due to the peculiar accounting choice of considering BitGo’s Wrapped BTC as its own asset in DeFi, while also counting all instances where WBTC is used in DeFi protocols. From a “natural” worth of $535 million, Bitcoin’s contribution to total value locked jumps to $2.9 billion — a pretty major discrepancy, right?

But beyond Bitcoin’s use on Ethereum, there is also the phenomenon of Bitcoin DeFi. Now, the thing is that none of these are really “Bitcoin” DeFi, because Bitcoin just does not let you create the complex smart contracts needed to implement true DeFi. The only project I know of that sort of does that is Atomic Loans. You pledge Bitcoin natively, but all smart contracts are on Ethereum and your loan is disbursed there.

Bitcoin DeFi does exist on RSK and Liquid, two Bitcoin “sidechains” — separate blockchains that use Bitcoin as their native currency. RSK also uses merge mining to validate its own chain, resulting in a much tighter bond with the main chain.

The problem is of course that since Bitcoin doesn’t have smart contracts, the path for BTC to reach those “DeFi” sidechains is usually custodial and centralized. But we recently saw RSK push a solution that makes the bridge effectively trustless, so I’m starting to warm up to seeing it as two sides of the same Bitcoin.