17 years after proving that decentralized, trustless money can exist, Bitcoin continues to grow with new ETF listings and other financial products.
Bitcoiners are extremely stubborn when it comes to other cryptocurrencies. They have the opinion that other tokens fail to embrace the values important to the Bitcoin community like transparency and decentralization. And for the most part, they are right.
However, certain DeFi protocols embrace the ethos of Bitcoin by offering decentralized, trustless access to financial products that are traditionally only available to high-income individuals. DeFi can help you preserve your portfolio value and help you find additional ways to earn on your holdings.
How Does Bitcoin DeFi Work?
The Bitcoin blockchain isn’t designed for DeFi so you’ll have to use other versions of Bitcoin on different blockchains. Using Bitcoin on other blockchains comes with some tradeoffs.
The most popular version of Bitcoin on the Ethereum blockchain and other blockchains is wrapped Bitcoin. Wrapped Bitcoin works in DeFi protocols and is backed 1 to 1 with real Bitcoin.
Ask any Bitcoiner and they’ll tell you the issue with wrapped Bitcoin is they have a centralized custodian (BitGo) holding all of the collateral that backs wrapped Bitcoin.
By design, this centralization goes against the Bitcoin vision. It also opens you to the risk of BitGo getting hacked or stealing user funds. With these risks, it’s prudent to only use a portion of your Bitcoin in DeFi.
Some degree of centralization is a tradeoff you have to make to use your Bitcoin in DeFi. For many people, it ends up as a profitable tradeoff.
BitGo is regularly audited and publishes its on-chain holdings. https://wbtc.network/dashboard/audit
tBTC
Another version of Bitcoin that you can use in DeFi is tBTC. tBTC is a little more aligned with the Bitcoin goal of decentralization.
To get tBTC, you deposit your Bitcoin into the tBTC system and you’ll receive tBTC in return.
This system is more decentralized because your deposited Bitcoin is held in a Bitcoin wallet while the tBTC community has validators that back all issued tBTC with Ethereum. tBTC is backed by 150% of the value of the tBTC in Ethereum collateral.
With validators required to deposit 1.5 ETH in collateral for every 1 tBTC minted, they have a financial incentive to act honestly. The over-collateralization helps maintain the tBTC peg and protect the system against malicious attacks.
tBTC has support on many blockchains thanks to their intergration with Wormhole. The integration with Wormhole is huge since it allows people to use a secure version of Bitcoin on non-EVM blockchains like Solana, Aptos, and SUI. tBTC is also supported on Ethereum, Arbitrum, Optimism, Binance Smart Chain, Base, and more.
https://defillama.com/protocol/tbtc
BTC.b
Another version of Bitcoin you can use in DeFi is Core Bitcoin or BTC.b. This version of Bitcoin is bridged directly to the Avalanche blockchain. Instead of a centralized custodian like BitGo, the reserves for BTC.b are managed in a multi-sig wallet controlled by the Avalanche bridge.
BTC.b is more decentralized than something like Wrapped Bitcoin but less decentralized than tBTC.
Every BTC.b minted is back 1 to 1 with real Bitcoin. You can view proof assets and reserves on this page: https://core.app/tools/proof-of-assets-and-reserves/?proofOfAssetsTab=btc
BTC.b works with LayerZero protocol which means you can use BTC,b on Arbirtrum, Binance Smart Chain, Ethereum, and Avalanache.
How To Use Bitcoin In DeFi:
So far we’ve looked at 3 different versions of Bitcoin you can feel safe using in DeFi: Wrapped Bitcoin, tBTC, and BTC.b.
When using Bitcoin in DeFi, you make the tradeoff of using more centralized tokens. All 3 of these versions of wrapped Bitcoin are highly unlikely to lose their peg or suffer a hack.
With integrations with Layer Zero and Wormhole, the Bitcoin DeFi ecosystem expands past just the Bitcoin blockchain.
Now, here are 3 examples of DeFi protocols that work with Bitcoin and allow you to earn yield:
Aave
On AAVE you can use wrapped Bitcoin as collateral to earn yield or take a loan.
You can also use your wrapped Bitcoin in liquidity pools which allows you to earn a portion of fees from activity on the AAVE protocol.
AAVE is also available on the Avalanche blockchain which is where you can use BTC.b.
Trader Joe
Trader Joe is a protocol on Avalanche that has lending markets and liquidity pools that allow you to put your wrapped Bitcoin to work.
You can use BTC.b to interact with DeFi protocols on Avalanche.
Drift
Drift is a protocol on the Solana blockchain, which means you can use tBTC on wormhole to take advantage of the DeFi features. tBTC shows up as wrapped Bitcoin on Solana.
Start by depositing wBTC into the Drift protocol. You can use your Bitcoin for margin trading or earn yield from liquidity pools and lending markets.
The yield on Drift comes from transaction fees, liquidations, and fees paid by users with open loans on Drift. Check out this article where we go into more detail about earning yield on the Drift protocol.
You’ll need a DeFi wallet to use Bitcoin in these protocols. If you’re new to Solana, check out this article with some safety tips on using the Phantom wallet. You can find MetaMask wallet tips here.
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