The Breakdown - Bitcoin as a DeFi Platform

Episode Date: September 2, 2024

A reading and discussion inspired by https://blockworks.co/news/bitcoin-powerful-defi-potential Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Sunday, September 1st, and that means it's time for Long Read Sunday. Before we get into that, however, if you were enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or get a bit.ly slash breakdown pod. Hello, friends. One quick note. Tomorrow, we will. will be off at Labor Day here in the U.S. We will be back on Tuesday. And for this LRS, we're talking

Bitcoin, but in a way that we'll have half of you very excited and half of you pounding your fists. We are reading a piece from the Blockworks opinion pages called Bitcoin's Evolution into Defy is inevitable and it's about time. As always, I will include a link to it in the show notes. The piece reads, we need to embrace Bitcoin as the foundation for Defi in order to create a more secure and resilient financial ecosystem. Otherwise, we'll miss the opportunity to leverage the most stable and proven blockchain for the next wave of innovation. For too long, Bitcoin has been viewed as merely a static store of value, digital gold. But those days are over. The Defy revolution is coming to Bitcoin, and in inheriting the security and robustness of the original blockchain, it stands

to be better for it. If we aim to build truly decentralized financial applications without the need for middlemen, Bitcoin is a no-brainer. Until recently, the infrastructure needed to facilitate the development of these financial applications has been limited. While Defi flourished on Ethereum, Solana, and other blockchains, the idea of building a similar ecosystem on top of Bitcoin was seen as a contrarian bet. Bitcoin was often criticized as being too rigid, lacking the smart contract functionality needed to support the diverse range of tools and technologies necessary for Defi use cases. But that perception is changing. The introduction of segregated witness in 2017, not only mitigated some of Bitcoin's data limitations, but also paved the way for the development

of layer two networks. These networks, such as the Lightning Network, stacks and rootstock, process transactions off the main chain to increase speed and lower costs while maintaining the security of the Bitcoin blockchain. More recently, the market is expanding even more with Casey Rotimer's development of Ordinals, Rune, Kordaou, and B2 network. Additionally, because developers and businesses already have a framework to follow in the Ethereum-Defi ecosystem, Bitcoin's DeFi ecosystem is being recreated in months. Developers and businesses are skipping the experimentation phase and diving straight into building cutting-edge apps on Bitcoin. From tokens to NFTs to lending and borrowing markets, Bitcoin now offers a comprehensive and secure DeFi ecosystem.

Utilizing Bitcoin for Defi could replicate traditional finance without its inefficiencies and risks. Imagine building a decentralized version of Morgan Stanley on the Bitcoin blockchain, a radical shift that could activate the vast reserves of Bitcoin currently sitting passively in wallets. While DGEN sometimes shy away from the idea of bringing traditional finance institutions into the crypto ecosystem, the utility provided by these types of organizations can be a huge benefit to aggressive crypto investors and users. Opening up these markets for Bitcoin holders would not only provide new avenues for returns, but also tied defy to a blockchain secured by real-world hardware and energy consumption through its proof-of-work consensus mechanism.

This approach offers more stability and less centralization than the proof-of-stake model adopted by Ethereum back in 2022. Hello, friends. Before we get back to the rest of the show, I want to implore you to join me at Permissionless. Permissionless is the conference for Cryptonatives by CryptoNatives, and the reason it's so important this year is that despite regulators' best attempts to push industry founders, and executives out of the U.S., the United States remains the beating heart of crypto. Today, the tide is turning. Policymakers have pivoted from fighting crypto to embracing it.

Literally now, we are in a major political party's platform, which will lead ultimately to the creation of new financial products, new applications, and ultimately new adoption. Permissionless is the conference for those using and building on-chain products. It's home to the power users, the devs, and the builders. And perhaps more importantly, I will be there. The location is Salt Lake City, the dates are October 9th to the 11th, and tickets are just $499.99. If you want to get 10% off, use code breakdown 10. Go to the Blockworks website, blockworks.com. There will be links to register for the conference, and again, you can use code Breakdown 10 to get 10% off. Defy on Bitcoin represents a blue sea of opportunity,

but it's not without challenges. The user interface and user experience of these defy solutions on Bitcoin can be complex. This isn't just a problem for Bitcoin. It's a criticism of crypto generally. For Bitcoin Defi to truly succeed, developers must prioritize accessibility to ensure that even the least tech-savvy can take advantage of the revolutionary power of Bitcoin's financial freedom. Moreover, the layer-2 ecosystem on Bitcoin is still in its early stages. The narrative that building Defi on Bitcoin is pointless, or worse, a threat to its security and stability, is only just beginning to dissipate. As investment into Bitcoin Defi projects grows, so too does the potential for innovation. Entrepreneurs have more runway to build more and push boundaries. New

development such as Stax Nakamoto upgrade, which aims to increase transaction throughput and enhance finality guarantees, will continue to empower Bitcoin as a Defi protocol. As the Defy ecosystem continues to evolve, the choice of foundational technology will determine its resilience and success. Bitcoin, with its unmatched security, stability, and emerging layer two solutions is uniquely positioned to lead this charge. By building on Bitcoin, we can ensure that Defy remains true to its core principles, decentralization, security, and transparency, while expanding its reach and impact. So like I said, this will be one that some of you are cheering for and others of you are incredibly frustrated. Let's talk about the frustrated side first. One of the things that I find

people often bristle at, and I think appropriately so, is the idea that being just digital gold isn't good enough, that somehow Bitcoin's incredible product market fit as a savings preservation technology is not good enough because it doesn't do a bunch of other fancy stuff. I use that term product market fit really intentionally. For the people who are keeping their wealth and in Bitcoin, it is useful. It is useful that it's not a melting ice cube to use Sailor's analogy. I think any discussion of what else Bitcoin can be needs to start from the standpoint that it is not merely, quote unquote, a store of value, but that a decentralized peer-to-peer store of value that has stood the test of time is an incredibly powerful thing all on its own.

That said, I do think that there is an incredible energy to build more off of that base. And I believe that there are roughly three camps when it comes to that type of innovation and exploration. On one end of the extremes, there are those who are incredibly excited about it, who are willing to take big risks because they believe that something very unique is possible. On the other end of the spectrum, are those who believe that Bitcoin's role as a digital gold, as a store of value, is so significant and so important to the world that things like Defi on Bitcoin introduce risks that are not only unnecessary, but that just by adding risk at all are actively harmful. In the middle, I think, there's a big space for folks who

appreciate and even hold reverent the importance of Bitcoin as a digital gold, but who also believe that it's more resilient than some of the most conservative bitcoiners seem to think, and that experimentation doesn't inherently add too much risk. I think the debate in the coming years will be around the margins of that middle position, which types of innovations or developments are actually too risky versus which or not. That's going to be a really interesting conversation. It's certainly one that we'll keep paying attention to here, and I'm excited that it's now part of the ecosystem. For now, though, that is going to do it for today's holiday weekend edition of The Breakdown. Until next time, be safe and take care of each other.

Peace.