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DeFi for Bitcoin: A Cheaper, More scalable Future for DeFi?

DeFi – the crypto world’s poster child of 2020. Transaction volume in the DeFi industry grew more than 10-fold, surpassing over US$123 billion in volume from Q2 to Q3, according to a report by decentralized app (dApp) tracker DappRadar on the state of the DeFi world. Of those transactions, 96% were on Ethereum, the world’s second-largest cryptocurrency platform. Yet, there have been serious concerns about congestion on the Ethereum network, citing scalability issues and high costs in particular. Observers – wondering if it is the right platform for the growing DeFi sector – are on the look-out for alternatives. 


Growth of DeFi

DeFi, short for decentralized finance, is the idea that the financial instruments of the traditional banking system can be recreated using a decentralized architecture. These financial applications in cryptocurrencies or blockchain are designed in an open, permissionless manner, outside of a company’s or government’s control. According to CoinDesk, “DeFi is distinct because it expands the use of blockchain from simple value transfer to more complex financial use cases.”

Clogged plumbing

Most DeFi applications have so far been built on top of Ethereum. But the Ethereum blockchain network has become somewhat a victim of DeFi’s success. Headlines have begun to appear proclaiming, “Ethereum scalability issues exposed as high gas fees stall DeFi boom”, “Ethereum Struggles under the Weight of DeFi Growth: Is ETH Doomed to Fail?”, and “How Ethereum Poses Legitimate Problems to DeFi’s Potential”.

Scalability refers to the ability to process transactions on any given network. For mass adoption of blockchains to occur, networks will need the ability to handle millions of users. According to blockchain data company Amberdata, Ethereum’s network has been facing congestion since early March; there were 19,922,385 unconfirmed transactions as of 8th June, up 225% from the total on 1st March of 611,872.

High fees are also putting users off. CoinDesk reported in September that transaction fees on Ethereum had soared to record highs, with average and median transaction fees skyrocketing to record highs of $10.33 and $5.68 respectively.

Sidechain solutions

One way around these sticking points, is by utilising a smart contract platform that is connected to Bitcoin’s blockchain through sidechain technology. RSK is one such platform which allows you to create and run smart contracts on top of the Bitcoin blockchain. Applications can be created which are compatible with Ethereum while still enjoying the security provided by Bitcoin´s blockchain. 

The difference between RSK and Ethereum, however, is that RSK has the potential to scale Bitcoin up to 300 transactions per second, without needing to sacrifice decentralization and reduce storage space. RSK also offers much lower fees with the same transaction volume because RSK blocks can hold many more transactions than Bitcoin blocks due to the reduced size of its transactions. 

RSK’s technology stack is particularly well-suited to the development of decentralized financial applications owing to its ability to deliver a high transaction throughput. With the ascension of the synthetic bitcoin sector users have sought exposure to a variety of different assets without needing to hold the underlying asset, but it does introduce an intermediary step of putting tokens into ‘wrappers’ which takes extra time and money to process. 

According to Onchain data, there are roughly 69,836 synthetic bitcoin tokens that are worth over $700 million circulating on the Ethereum network. The Wrapped Bitcoin (WBTC) protocol is currently leading the synthetic bitcoin movement with over 100 million in bitcoin currently wrapped (meaning it’s sold for an ERC20 IOU on Ethereum pegged 1:1 to BTC). So there is significant interest in DeFi services from Bitcoin holders that can now take advantage of DeFi services with Bitcoin directly.

Looking forward to 2021

The opportunities DeFi presents are exciting indeed, yet in order to reach its full potential the existing infrastructures need to adapt in order to handle throughput. DeFi with RSK not only offers users lower fees, faster transactions and a higher rate of scalability, but it is well-positioned to capture the immense value that lies at the intersection of two major financial use cases for crypto – DeFi and Bitcoin.