DeFi also works on Bitcoin networks

Today, the favorite topic of Ethereum evangelists is DeFi, Decentralized Finance. The basic idea of ​​DeFi is to replace almost all traditional financial services with some kind of decentralized network or application.

For example, a decentralized exchange like Uniswap allows users to directly trade multiple tokens issued on the Ethereum network without the need for a trusted third party. Another example of DeFi is Maker DAO, which allows users to obtain a dollar-stable currency by pleasing ETH assets—and also does not need to trust third parties.

As one of the many popular terms in the field of cryptocurrencies, DeFi's tags have been linked to projects that are not completely decentralized. For example, The Block included most of the centralized stabilization coins in their Ethereum DeFi project map, such as Gemini's GUSD. As I have argued in the past, such stable currencies do not need to reach the decentralization level of the public blockchain.

Having said that, in order to make full use of the hype surrounding cryptocurrency and blockchain technology, it is quite common for centralization projects to decentralize self-promotion. As I have explained in the past, some of the popular "cryptocurrencies" in the market may not be considered true cryptocurrencies. Facebook's recently published Libra also belongs to this type of pseudo-cryptocurrency.

However, although DeFi is often promoted as an Ethereum phenomenon, Bitcoin can actually develop DeFi.

Bitcoin network as a DeFi platform

First, the Bitcoin network itself is some form of DeFi. Bitcoin networks achieve secure value storage and transfer in traditional financial services through decentralized forms. The Bitcoin network is probably the first real-world DeFi application ever to be built, and now developers are building new DeFi applications on the Bitcoin network.

The best example of a DeFi application built on a Bitcoin network might be Abra. Abra's long-term goal is to be a truly global unmanaged bank that can be used in a license-free manner. It is built on top of the Bitcoin smart contract system, which is a multi-signal address. Please refer to here for a detailed explanation of how Abra works.

Because Abra does not require licensing and decentralized attributes, users are able to participate in a variety of different types of investments for the first time, such as Apple stock or ETFs (Exchange Traded Funds). In a recent user-facing survey, Abra found that 43% of users said that the main problem their app solved for them was the accessibility of financial markets, especially the US securities market. It is worth noting that another 35% of respondents said that for them, Abra's key feature is to provide products within their financial capacity, because Abra allows users to purchase only a small share of the stock.

Other examples of DeFi applications on the Bitcoin network include Lightning Networks, the Liquid Chain developed by Blockstream, and the decentralized exchange Bisq.

Bitcoin network develops restrictions on DeFi

It should be noted that the DeFi application built on the Bitcoin network does have some disadvantages compared to the DeFi application based on Ethereum. Due to security and stability considerations, Bitcoin's scripting language was particularly limited in the early days, so developers couldn't do as much as they did with Ethereum's Solidity language.

In other words, something that developers can do on Ethereum is not possible on the Bitcoin network. In theory, compared to the Bitcoin network, Ethereum developers can reduce the trust required for their DeFi applications to a greater extent while achieving a higher level of decentralization.

To clarify this, let's go back to Abra and Maker DAO. Abra and Maker DAO offer a similar service to their users, using a more stable currency to hedge bitcoin or Ethereum, such as the US dollar. However, these two DeFi applications take a radically different approach to achieving this common goal.

Abra used a simple 2-of-3 multi-signature address to successfully make a bet between the user and Abra about the dollar price of the bitcoin held in the user's account. Users do more dollars and Abra does more bitcoin. Whether the user wishes to raise the US dollar from the Abra account or simply switch back to Bitcoin, the third party (the predictor) will determine the amount of Bitcoin sent to Abra and the user based on the price trend during this bet. The end result is that the bitcoin that the user deposits into the account will basically anchor the current dollar value, in which case the user can also send the bitcoin elsewhere.

Maker DAO is much more complicated. For example, Maker DAO uses multiple oracles scattered across geographical locations instead of one (although Abra can also add multiple oracles in the form that the Bitcoin network currently exists). In addition, DAI tokens are generated when users deposit their ETH into a MakerDAO application, which makes it easier to integrate with other DeFi applications, especially those based on Ethereum. For example, Maker DAO users can lend their own DAI on Compound to earn interest. There is another governance token, MKR, in the Maker DAO system.

There are many differences between how Abra and Maker Dao work. Here are some examples.

Compared to Bitcoin, Ethereum's advantages in DeFi development are also reflected in more complex wallets, where you can directly implement functions like "covenant" scripts; and lightning network, where you don't need to write at the underlying protocol level. New opcodes to ensure better security (as in the case of Bitcoin).

Bitcoin network also has its advantages

However, there are some benefits to building DeFi based on a bitcoin network.

The network effect of Bitcoin means that DeFi applications based on Bitcoin networks may have more users when they are released. And in general, the Bitcoin network is considered to be the safest and most trusted of the existing cryptocurrency networks due to the existence of Bitcoin and the conservative nature of its development process.

In addition to developers and users paying homage to the Bitcoin network, Bitcoin is likely to be the most trusted asset in the cryptocurrency field. Although Bitcoin is still unstable, it has proven itself in many bear markets and its volatility is declining over time.

Although Bitcoin's scripting language somewhat limits what developers can build on their underlying network, the idea that Bitcoin has no smart contracts is incorrect. The Bitcoin community is only taking a different approach to this aspect of blockchain technology. Casa's chief technology officer, Jameson Lopp, explained the difference in the design philosophy of smart contracts between Epicenter, an episode earlier this year.

“Many 'more conservative' bitcoin developers don’t like smart contracts that must be executed by everyone on the network. They are more inclined to execute the same type of logic, and the actual execution process is private, then you just provide one Evidence of enforcement, this evidence can be verified by others on the network."

In other words, the Bitcoin blockchain is equivalent to a trust anchor or a smart contract court. Only when a user in the network has a dispute, needs to call a smart contract. Since blockchains are called only when absolute demand is present, Bitcoin users can theoretically achieve greater privacy and scalability through their smart contracts, because not much information is stored all the time. In the public database.

On the other hand, Ethereum has been criticized for the size of its blockchain. People are questioning how much bandwidth is needed in the future to operate a full node. After all, it is becoming more and more difficult to operate an Ethereum node. .

DeFi applications based on Ethereum can sometimes become cumbersome. For example, many DeFi applications built on Ethereum will embed an additional token in the protocol, so that users can't just use native ETH assets, but need to switch back and forth between multiple tokens. Of course, there will be exceptions. For example, what Uniswap does is basically what Bancor ICO does, but does not require additional tokens.

Another problem with the Ethereum network is that it is very difficult to write a secure smart contract. The most obvious example is Parity, founded by the developer of the Solidity language, Gavin Wood. The Parity client's multi-sign contract is terrible, resulting in more than $150 million in ICO projects and entities using Parity software to secure funds. Loss. Developers can create more powerful smart contracts on their own ideas at Ethereum, but there are some additional security risks.

As Gavin Andresen, the main maintainer of the Bitcoin core, wrote in the 2014 Ethereum online, many interesting things that can be done on the Ethereum network can also be built on the multi-signature feature of Bitcoin. This is mainly due to the oracle problem, which means that in the real world, it is usually necessary for someone to make a decision on a smart contract or submit some data to the blockchain for use in a smart contract.

Smart contracts are not as smart or automated as people advertise. For example, we are not sure whether Maker DAO is decentralized because its system still relies on the input of trusted price data to function properly. In fact, if Abra can add more oracles to the system, then Abra and Maker DAO will not have much difference in anti-regulation and decentralization.

As noted above, it is important to note here that, in theory, Ethereum enables developers to achieve lower confidence requirements and higher levels of decentralization through a more expressive scripting language. But so far, it's unclear how much of these additional features will help the DeFi app. Therefore, perhaps the Bitcoin network can provide enough decentralization for DeFi applications.

It's also worth pointing out that Bitcoin is improving its ability to implement things like "covenant" scripts while also improving lightning networks. In addition, many of the more advanced smart contract features have not yet been deployed to Ethereum, let alone to do so in a provably secure manner.

The Taproot proposal is the next big step forward for Bitcoin Smart Contracts because it offers tremendous improvements in privacy, scalability and flexibility. Having said that, it is unclear when it will be implemented at the agreement level. According to Bitcoin long-term developer Matt Corallo's speech at the recent Bitcoin 2019 conference, it may take two years to activate Taproot on the Bitcoin network.

Another key project to watch about the DeFi app on the Bitcoin network is Drivechain. Drivechain opens a door for users to get the open innovations offered by Ethereum today, with the difference that users can make trade-offs based on different levels of security. RSK is a sidechain of Bitcoin intended to implement most of the unofficial applications that already exist on Ethereum. This class of Ethereum's sidechain uses a model that combines the idea of ​​Drivechain with a federal model like Liquid. Today, the favorite topic of Ethereum evangelists is DeFi, Decentralized Finance. The basic idea of ​​DeFi is to replace almost all traditional financial services with some kind of decentralized network or application.

Drivechain creator Paul Sztorc is also eager to launch his decentralized forecasting market sidechain, Bitcoin Hivemind. Sztorc is the intellectual “godfather” of Augur and other forecasting market projects on Ethereum, which are also considered part of the Ethereum DeFi ecosystem.

If the Drivechain experiment is successful, it would not be a big deal to use any of the interesting DeFi applications on Ethereum as an independent test chain for bitcoin or on the RSK chain. Although as mentioned earlier, a number of interesting DeFi applications are already available on the current Bitcoin network.

In the far future, things like the Simplicity language developed by Blockstream can be connected to the Bitcoin network in some way, so that more complex smart contracts can be developed on the Bitcoin network.

However, most of the above content is still in the theoretical stage. History has shown that due to the conservative nature of the Bitcoin community, it is quite difficult to add new features to the Bitcoin network. Protecting the status of Bitcoin “Digital Gold” remains a top priority.

Despite this, it is possible to build quite powerful DeFi applications on the current Bitcoin network. In addition, although Ethereum currently gives developers more freedom to explore DeFi, we don't know how long this advantage will last. In contrast, Bitcoin has already had a huge advantage in terms of network effects, trust, and durability, and it has already left people with an impression as a real currency.

Therefore, if you want to track the development of DeFi, it is also important to focus on the movement of Bitcoin.

Drivechain creator Paul Sztorc is also eager to launch his decentralized forecasting market sidechain, Bitcoin Hivemind. Sztorc is the intellectual “godfather” of Augur and other forecasting market projects on Ethereum, which are also considered part of the Ethereum DeFi ecosystem.

If the Drivechain experiment is successful, it would not be a big deal to use any of the interesting DeFi applications on Ethereum as an independent test chain for bitcoin or on the RSK chain. Although as mentioned earlier, a number of interesting DeFi applications are already available on the current Bitcoin network.

In the far future, things like the Simplicity language developed by Blockstream can be connected to the Bitcoin network in some way, so that more complex smart contracts can be developed on the Bitcoin network.

However, most of the above content is still in the theoretical stage. History has shown that due to the conservative nature of the Bitcoin community, it is quite difficult to add new features to the Bitcoin network. Protecting the status of Bitcoin “Digital Gold” remains a top priority.

Despite this, it is possible to build quite powerful DeFi applications on the current Bitcoin network. In addition, although Ethereum currently gives developers more freedom to explore DeFi, we don't know how long this advantage will last. In contrast, Bitcoin has already had a huge advantage in terms of network effects, trust, and durability, and it has already left people with an impression as a real currency.

Therefore, if you want to track the development of DeFi, it is also important to focus on the movement of Bitcoin.

LongHash , read the blockchain with data.