When it comes to blockchain applications, DeFi is one of the most prominent. Short for decentralized finance, DeFi has grown exponentially over the last few years, with billions of dollars spent and invested thus far and more prominence in the mainstream than ever before.

Despite all of this, it is clear that the DeFi space is ruled by Ethereum and Ethereum killer tokens, leaving Bitcoin mostly on the sidelines. But some enthusiasts speculate that we could see the rise of Bitcoin in DeFi spaces in the next few years. But is this possible?

An Introduction to DeFi

Decentralized finance, at its core, essentially involves blockchain technology and its by-products being used to deliver financial services to consumers. Typically, this is done with a view to more access and convenience that you would enjoy in the mainstream financial world.

An example of a DeFi service would be insurance. Typically, you would have to engage with a mainstream insurance broker to get coverage, and this isn’t available to everyone. With DeFi, you can essentially receive insurance coverage online, and this is backed up by smart contracts. Businesses and individuals who might be denied or face slow service with mainstream insurance brokers can turn to DeFi platforms for their needs.

The same occurs with token swapping, lotteries, and so on. We’ve also heard of decentralized exchanges, which essentially see DeFi platforms swapping tokens in the way a centralized one would. Another example would be casinos. Online casinos have been prominent for several years now, but blockchain-based casinos allow users to enjoy these services without setting up accounts. Many of these platforms accept major tokens like Bitcoin, and as Andjelija Blagojevic explains, Bitcoin friendly platforms are becoming more of the norm in the sector. 

Decentralized finance first took off in the late 2010s and especially saw growth during the COVID-19 pandemic. Some of the biggest DeFi platforms include Sushi Swap and UniSwap,  and DeFi services have become almost as vital as centralized crypto services. Take the rise of decentralized exchanges, for example. Major exchanges like Binance have gone as far as launching their own DEXs because the demand for them has been so high.

Benefits Of DeFi

It is worth noting that DeFi offers several benefits to consumers, which is why it has remained so popular. First, a majority of DeFi platforms are non-custodial in nature. As the name would imply, its decentralized nature means that consumers can conduct transactions without giving up ownership of their tokens. If you swap tokens using a DeFi platform, you only need to connect your wallet to it and not necessarily transfer control over your tokens. Then there is the privacy factor. The fact that wallets are connected and accounts are not set up means that virtually anyone can access DeFi services without having to give up their sensitive information, which is often a concern for consumers.

Then there’s the matter of efficiency. Most DeFi platforms are governed by smart contracts, which means that decision-making and transaction processing aren’t at the whims of humans. If you take out a DeFi-backed insurance policy in the case of a natural disaster, your funds are automatically transferred to you once the smart contracts confirm that the disaster has happened. This means no waiting months for your claim to be processed, and instead, waiting merely minutes. Finally, DeFi platforms offer a lot of access to businesses and people that otherwise would be shut out of the mainstream financial system. This is especially true for those seeking loans and insurance.

The Blockchain Matter

The DeFi space is worth billions of dollars, and as we’ve explained, it is becoming increasingly popular within and outside of blockchain circles. It is also worth noting that a majority of DeFi platforms are backed by Ethereum, Solana, and other such chains. As much as Bitcoin remains the most popular cryptocurrency on the planet, it is largely unrepresented in the DeFi space. 

Statista indicates that Ethereum, the Binance Smart Chain, and Tron continued to dominate DeFi. This begs the question of whether the blockchain behind the biggest crypto in the world can find its place in DeFi. To answer this, a few things must be considered.

Speed

Ultimately, Bitcoin as a token succeeds because of its popularity and value to consumers. As a blockchain, Bitcoin is not exactly the most efficient. DeFi is working towards mainstream use and acceptance, and for this to happen, it will process millions of transactions a day. This means that DeFi platforms have to be built on blockchains that are known for their speed, which does not include Bitcoin. For comparison, Ethereum currently processes up to 174 transactions per second, and the most recent announcement from the Ethereum Foundation aims to push the speed to over a hundred thousand in the future. Bitcoin, on the other hand, can process up to 7 transactions per second, and it is not unheard of for one transaction to take up to an hour to be processed. 

Needless to say, while Bitcoin might be valuable, its blockchain simply isn’t designed to handle the speed required in the DeFi space. This isn’t to say Ethereum itself is out of the woods yet. Other blockchains like Solana and Tron are giving it a run for its money in terms of speed, with the term ‘Ethereum Killer’ even emerging to describe such networks.

Environmental Impact

One of the big controversies of the crypto sector has been its impact on the environment. The Bitcoin network alone uses enough energy to power entire countries, and this has prompted a wave of change within the industry. Ethereum notably switched from the proof-of-work consensus, which is what Bitcoin currently uses, to the proof-of-stake consensus, cutting its electricity use by over 95%. This made it appeal to both the mainstream that had been critical of crypto’s energy use, as well as DeFi developers. 

However, Bitcoin continues to use the proof-of-work consensus, and this shows no signs of changing anytime soon. This means that for Bitcoin to see more use in the DeFi space, it might need to make drastic changes to its underlying blockchain.

A Head Start

All the statistics show that Ethereum has a years-long head start in the DeFi space, as it does with other sectors like NFTs. Bitcoin making significant strides in the DeFi space will essentially mean that it will steal some users away from other blockchains. This might be difficult to do unless it has something unique to offer. It is already at a disadvantage in terms of Speed, and so, existing developers and DeFi users might be reluctant to embrace it. 

Smart Contract Functionality

Virtually every DeFi Project is powered by smart contracts, and this means that they will only be built on blockchains that have an established smart contracts system. Unfortunately for Bitcoin, this is not the case. Bitcoin has some smart contract functionality that dictates how the token can be spent, it is several miles behind that of Ethereum, Solana, Binance Smart Chain, and others. This is partially fueled by a chicken-and-egg scenario; Bitcoin missed the head start when DeFi was first being established, and thus, smart contract functionality within its ecosystem hasn’t been developed. And because the smart contract functionality has not been established, it continues to be shot out of the DeFi space. 

Security

To Bitcoin’s credit, it is considered one of the most secure blockchains in the world, and despite being the most visible and thus the most targeted for attack, a security breakdown within the ecosystem seems quite unlikely.  This is because the proof-of-work consensus means that transactions on the blockchain are manually reviewed and approved. As such, fraudulent transactions being approved or any single person gaining control of the network would require an amount of manpower and resources that is very unlikely to happen. Proof-of-stake ecosystems like Ethereum and Solana are also quite secure, with the 51% attack being a very rare occurrence. Still, this would mean that Bitcoin would be a valuable network to leverage if you are conducting mass financial transactions, especially given previous security issues with DeFi. 

Conclusion

From all that we’ve analyzed, it is clear that Bitcoin will struggle to secure a place in the DeFi sector, much less unseat the current giants of the space. Most of this is down to the fact that Bitcoin, as a blockchain, simply isn’t equipped to meet DeFi’s needs. While it is very secure and is backed by the most famous crypto on the planet, it is not fast enough to support the level of activity within the DeFi space, and its smart contracts system is severely underdeveloped. Then there is a fact that other blockchains have gotten their start before Bitcoin, and are unlikely to see a decline in their use. For Bitcoin to successfully infiltrate the DeFi sector, it might need to change its entire foundation, and this is unlikely to happen. 

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