Source 1: Horizen Academy
The development of these sidechains made it possible to build DeFi projects on top of the Bitcoin blockchain, allowing developers to offer the same financial services on Bitcoin as other projects do on Ethereum. A prominent example hereof is the Sovryn protocol, a decentralized financial operating system built on the Rootstock Smart Contract (RSK) sidechain. Sovryn is a one-stop shop for DeFi banking services and offers trading, lending, borrowing, and yield farming in a decentralized manner. And thanks to the recent Bitcoin Taproot upgrade which was released in November 2021 the possibilities for DeFi on Bitcoin have improved even further.
Why DeFi on Bitcoin will be important in 2022
Many Bitcoiners believe that the Bitcoin network is the most secure blockchain, which makes Bitcoin the hardest money the world has ever seen. Consequently, it is only logical that they call for DeFi services on the most secure chain in the hardest currency possible. Bitcoin sidechains make this possible and a whole new ecosystem is developing as we speak. Sidechains like RSK, Stacks, Liquid, and Mintlayer, even though they pursue differ- ent approaches, are moving full steam ahead with the sole goal of providing the best smart contract and DeFi solutions on Bitcoin.
In the past, it has been difficult to put one’s Bitcoins to work without compromising Bitcoin’s fundamentals of decentralization and self-custody, as only centralized services enabled the lending of Bitcoin. DeFi on Bitcoin fundamentally changes this and offers Bitcoin lending in a decentralized, self-custodial manner. As Bitcoin is a trillion US-Dollar asset with millions of coins held in cold storage, the potential market for DeFi services on Bitcoin is massive.
During 2021, Bitcoin and many crypto assets with it were in a bull market. Should the crypto market repeat its typical cycle as it has done several times over the last decade, then the end of the bull market can be expected sometime in 2022. At the end of each prior cycle, crypto assets went through a phase referred to as ‘crypto winter’ where their valuations collapsed, and the crypto market entered hibernation. Of course, the repeat of such cycles is far from certain. Michael Saylor, CEO of MicroStrategy, an IT company known for its large Bitcoin holdings, argues that now that institutional investors have entered the crypto market, large drawdowns as seen in 2014 and 2018 are a thing of the past.
”It can be expected that investors will increasingly look for opportunities to earn an extra yield on their Bitcoin investments.”