In Bear Crypto Markets, All Roads Lead To Bitcoin
In the beginning, Satoshi created bitcoin
A dozen years is an epoch in tech, and since the Bitcoin network’s genesis, a lot has changed in the world of crypto. From a Cambrian-style explosion of altcoins to smart contracts and decentralized finance, on-chain innovations have left Bitcoin looking antiquated.
Back to Bitcoin
It is an irony that during bull markets, when the price of bitcoin reaches record highs, it under-performs versus the rest of the market. Had you bought bitcoin in early 2017 or 2020 you’d certainly have made money on your investment, but you’d have made multiples more if you’d bought other native protocol tokens such as ETH, BNB, and ADA.
Conversely, when the market starts to cool and bearish conditions return, bitcoin out-muscles the competition. As altcoins hemorrhage their triple-digit gains almost as swiftly as they were accrued, a flight to quality assets occurs, with the biggest beneficiaries being bitcoin, ethereum and of course stablecoins.
Lauren Stephanian, a partner at Pantera Capital, observes, “Whenever there’s a bear market there’s usually an emotionally driven flight to safety and crypto is no different. Bitcoin is the decentralized digital asset that has held up the longest and many feel it’s a safer store of value.”
But the period when bitcoin seriously starts to flex is once the market has bottomed and the long, slow road to recovery has begun. As BTC enters an accumulation phase, eyeballs return to the crypto asset that started it all, bringing a renewed focus on building out an ecosystem of products to extend bitcoin’s utility and ultimately its market dominance.
In 2013, bitcoin dominance (the percentage of the total crypto market cap it commands) stood at 95 percent. By late 2017, that figure had dropped to 32 percent and today sits at 42 percent.
Building on the Base Layer
The last five years has seen hundreds of millions of dollars invested in building out bitcoin’s base layer. Projects such as Lightning Network and RSK have sought to extend bitcoin’s functionality through the creation of secondary layers that support sub-tokens, smart contracts, and micro transactions. The goal is to harness bitcoin’s unrivaled security to create decentralized finance products built upon the most liquid and trusted crypto network.
Portal, meanwhile, is building a full-fledged DEX and self-hosted wallet as layers on the Bitcoin network. It aims to deliver on the promise of self-sovereignty for everyone by offering DeFi services like asset issuance, swaps, staking, liquidity, derivatives, and more while retaining the robust security of bitcoin.
Assessing the connection between bitcoin and DeFi, Stephanian stresses the differences between the two, noting, “Bitcoin is considered a store of value especially when you look at its volatility compared to most other assets in the space. DeFi enables access to different, modular financial primitives such as global lending and trading.”
Stephanian believes that DeFi on bitcoin has yet to take off citing, “The Bitcoin ecosystem doesn’t offer the same developer tooling and standards that other layer ones have provided.”
What Might A DeFi-enabled Bitcoin Resemble?
A recent report commissioned by Trust Machines, “Bitcoin: Beyond the Base Layer,” outlines this vision. Its authors acknowledge that extending bitcoin’s utility is a “multi-front exercise” that will require further funding and development to match the developer and user experience of EVM chains such as Ethereum.
Trust Machines aims to utilize bitcoin as a final settlement layer for the applications it develops using Stacks, a programming layer for Bitcoin. The idea of trading NFTs on a Bitcoin-anchored network may seem novel, but this proof of concept has pushed the number of smart contracts deployed on Stacks into the thousands. As the report notes, however, it remains easier for developers to clone Solidity contracts on EVM chains than it is to code afresh using Stacks’ Clarity programming language.
Former director of growth at Kraken exchange Dan Held is one of those who has bought into the DeFi on bitcoin narrative. Now with Trust Machines, the Bitcoin proponent is backing the original cryptocurrency to prove its doubters wrong, and reinvent itself as a playground for decentralized finance, asserting, “I think there’s going to be this renaissance in the Bitcoin DeFi world. Right now, DeFi is not synonymous with Bitcoin, and most people think those two words don’t really go together.”
The Case for Building on Bitcoin
For years, blockchain developers have flocked to newer networks that are purpose-made for hosting decentralized applications (dApps) for trading, lending, and saving. Such dApps rely extensively on smart contracts to interact with the blockchain, something which Bitcoin in its raw state is singularly unsuited for. Many of these so-called “next generation” blockchains have done little more than replicate Ethereum, right down to its virtual machine, with only faster block times and a modified consensus mechanism to differentiate them.
U-Zyn Chua, lead researcher at DeFiChain, believes EVM is great for experimentation, especially for new DeFi protocols and notes, “Beyond experimentation, users and investors seek mature protocols built on robust proven systems like Bitcoin. DeFi on Bitcoin is exactly that: take a matured EVM-based DeFi and solidify it on a consensus level.”
Despite the lack of originality shown by many post-Ethereum blockchains, these networks saw rapid growth during the bull market that reached its zenith in late 2021. Metrics such as total value locked, native token price, and number of wallets created hit record highs across networks such as Harmony, Avalanche, and Terra last year. Then, the market began to drop, exposing underlying flaws in the multi-chain model.
The collapse of Terra’s native stablecoin, UST, sent the native cryptocurrency it was collateralized against, LUNA, to zero. Billions were wiped off the crypto market in a matter of days and thousands of cryptocurrency holders lost their life savings. The fallout caused a domino effect that also took out crypto saving platform Celsius and crippled BlockFi and Voyager.
Coupled with the hack of two major blockchain bridges, which stole close to $1 billion from the Ronin and Harmony One ecosystems, and the multi-chain thesis has rescinded fast. High speed, low security chains no longer look so attractive – nor do algorithmic stablecoins. The great crypto collapse of 2022 has exposed holes in platforms and protocols both centralized and decentralized. But one thing that has held up its promise, underneath it all, is Bitcoin.
Could the network to bootstrap the next wave of DeFi innovation have been hiding in plain view all along?
A Trillion Dollar Opportunity
So far, no one has quite cracked the concept of “Bitcoin with bells on.” An all-singing, all-dancing ecosystem, anchored by BTC’s Proof-of-Work consensus and unrivaled decentralization, remains a utopia for now. That hasn’t stopped its imagineers from dreaming big. Like the mythical city of El Dorado, there is a metropolis of digital gold just out of reach of the maximalists who believe that all roads lead to Bitcoin.
Described as a trillion-dollar opportunity, the prospect of Bitcoin DeFi remains alluring.
“Imagine how powerful Bitcoin could become if more developers were actively building in its ecosystem,” ponders Hiro, a creator of developer tooling for Stacks, “Capital is already in the ecosystem. The earliest crypto adopters are holding Bitcoin…Building attractive Bitcoin projects across DeFi, NFTs, DAOs, and other Web3 applications provide new streams into which the wealth lying dormant in Bitcoin can flow.”
Bitcoin might be the world’s strongest decentralized network, but does that make it the best qualified candidate for hosting decentralized finance? Bear markets were made for building, the crypto community is known to be duty-bound to this, and all eyes are currently on The Merge. By the time the market has rallied and set about reclaiming the highs of 2021, we’ll know whether DeFi and Bitcoin have a shared future or are destined to remain eternally estranged.