Unlocking DeFi Potential on Bitcoin: A Clean Approach to Blockchain Efficiency
Bitcoin (BTC) Ticker: $26,785
Bitcoin is known for its immutability and the hard-coded rules that make the system secure but slow to modernize. However, that doesn’t mean the Bitcoin blockchain — the underlying network that empowers the original cryptocurrency — is closed to innovation and development. Even though the initial efforts to introduce decentralized finance (DeFi) to Bitcoin such as cross-chain bridges and wrapped tokens resulted in a massive wave of hacks and exploits in the DeFi space, developers continue to look for new and more reliable ways to tap into the unmatched liquidity of the BTC pool.
Bitcoin DeFi: The First Attempt
Smart contracts are automated agreements between multiple parties that are stored on a blockchain. They enable a wide range of DeFi functionality. The introduction of smart contracts to the Bitcoin base layer hinted at the possibility of common DeFi trends such as nonfungible tokens (NFTs) appearing on the Bitcoin network, and developers rushed to work on it.
Shortly thereafter, Bitcoiners came up with their version of NFTs with the Ordinals protocol, sparking a hot debate about adding more usability to the Bitcoin base layer versus “congesting” it with nonessential content. Ordinals, also known as Bitcoin NFTs, allow users to inscribe digital content on the Bitcoin blockchain. Launched in January 2023, ordinals quickly became a popular way to interact with the base layer, surpassing over 3 million inscriptions.
- Following the launch of ordinals, BRC-20 tokens emerged as an experimental token standard based on the Bitcoin Request for Comment (BRC) protocol.
- These tokens represented fungible assets on a 1:1 basis.
- However, the influx of memecoins such as Pepecoin (PEPE) on the BRC-20 standard led to a congestion problem, resulting in a backlog of 500,000 transactions awaiting settlement.
- This surge in demand caused transaction fees to skyrocket to $30 per transaction, significantly impacting the efficiency of the entire Bitcoin network.
Bitcoin DeFi: The Second Attempt
To make NFTs more efficient on Bitcoin, a new protocol called Bitcoin Stamps, or “Secure Tradeable Art Maintained Securely,” was launched shortly after the ordinals. And unlike the ordinals, Bitcoin stamps allow the minting or embedding of image data into the Bitcoin network by storing image data across multiple unspent transaction outputs to increase decentralization and immutability.
Although the second attempt to add NFT usability to the Bitcoin network is widely considered an improvement over ordinals, Bitcoin stamps are far from providing ideal results. The protocol requires a canvas size of 24 by 24 pixels, which limits the possibilities to pixel-art NFTs.
Meanwhile, the issue of “polluting” the Bitcoin blockchain by storing data directly on the base layer remains unsolved. Moreover, a controversial topic still hovers over the Bitcoin community: Do we need NFTs on the main Bitcoin chain?