Wednesday, 20 October 2021

Decentralized Finance comes to Bitcoin!

      You’ve probably heard the term Defi or Decentralized Finance being used in the news or by people you know. But in case you don’t know what it means, here’s a simple breakdown:

Decentralized finance, or Defi, is a system by which financial services and products are made available to private individuals on a public decentralized blockchain network. Being on a blockchain makes them open to anyone with an internet connection to use. Being decentralized means it's independent and free from the control of governments, central banks, and other middlemen like Hedge funds or brokerages. And unlike with a bank or brokerage account, you don’t have to provide a government-issued ID, Social Security number, or proof of address to use Defi.

More technically, Defi refers to a system by which software written on blockchains makes it possible for buyers, sellers, lenders, and borrowers to interact peer to peer and exchange financial services, tokens, and assets within a strictly software-based trust-less(secure) environment rather than through a company or centralized institution that facilitates a transaction and charges fees and commissions.

Blockchain in general and Defi, in particular, make use of smart contracts which are a set of rules and protocols that automate agreement terms between buyers and sellers or lenders and borrowers making a new and democratized financial services industry possible. Regardless of the technology or platform used, Defi systems and blockchain networks, in general, are designed to remove intermediaries between transacting parties. Smart contracts enable a host of decentralized applications of which Defi is just a small subset. Very popular blockchain networks and projects that comprise the Defi ecosystem are Ethereum, Avalanche, UniSwap, and Polygon to name a few.

But can you guess which blockchain network has been noticeable absent from the Defi scene until now? Which network is not only the oldest (ten years plus) and most secure but whose market capitalization is the largest? If you said Bitcoin you would be very right. Bitcoin was the first cryptocurrency out there, setting the stage for all the rest. Bitcoin is the most secure network out there because it was designed to be a store of value and nothing else. Because of this Bitcoin’s market cap is almost 1.2 Trillion dollars as of this writing and each coin is worth $64,000 and rising again, breaking its all-time historical since bitcoin was invented! Again!

To fully understand what separates Bitcoin from the rest, it would help to recognize the distinction between an asset and a service. Just like in the business world, you can sell a product or a service. So most blockchains projects either operate to host assets or to host services (applications). Now if you want to do both, you will have to make a trade-off in terms of speed, efficiency, ease-of-use, simplicity, transaction costs, and a host of other factors. Bitcoin does one thing and it does it well — that is to be the most secure, deflationary (as opposed to fiat or normal currency which is inflationary), and accessible store-of-value in the world. It was designed with a very minimalist scripting language that did not allow apps or other services to be created on its network.

So how do you unlock $1.2T in monetary value just sitting there? Well, the Stacks network was designed to do exactly that. Created in 2017 by two Princeton alumni, Stacks is technically a separate Layer-1 Blockchain (same as Bitcoin), created to host an ecosystem of apps and services. It links into the bitcoin blockchain to verify and secure the transactions of all the activities it carries out.

And so after a lot of work by the Stacks community, we finally have Bitcoin Defi, a term that would have been an oxymoron just a short while ago. And a strong building block of this evolution is the ability to swap or exchange native Bitcoin to new assets and other native cryptocurrencies. This opens the door to let in a new wave of advanced decentralized apps and financial transactions, which benefit from the security and stability of pure Bitcoin. Defi users will soon be able to perform trust-less BTC swaps to stable coins, derivatives, variants of these, and other crypto-assets built on Stacks, as well as purchase any digital assets (like NFTs and decentralized domains), all by pure Bitcoin transactions on the Bitcoin chain!

Decentralized finance is still in the beginning stages of its evolution. The total value locked in Defi is more than $128 billion and growing according to Coingecko. The total value locked is calculated by multiplying the number of tokens in the protocol and their value in USD. Though the total figure for Defi may sound huge, it is important to remember that it is relatively small because many Defi tokens lack sufficient liquidity and volume to trade in crypto markets. This is why unlocking the full potential of Bitcoin’s trillion-dollar value capital has been one of Stacks’ major objectives and lo and behold here we are.

The Stacks network now makes true Bitcoin Defi possible, given that smart contracts built on the Stacks network have the ability to see into the Bitcoin state and have an inherent ability to leverage Bitcoin’s security and settlement assurances. All Stacks transactions are settled on Bitcoin. This ensures that Stacks shares Bitcoin’s long-term, unparalleled security for transactions! You can read more about the revolutionary work and developments that Stacks is making a reality here.

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