Could Bitcoin be the future of DeFi?

by James · March 1, 2023

DeFi investors lost nearly $3.8 billion in 2022 following a series of highly publicized hacks mainly involving smart contract exploitation and vulnerabilities. But this year, one could be forgiven for thinking that the DeFi hacking scene has suddenly become much safer, with a distinct lack of headline-grabbing multi-million dollar crypto heists.

But just because the news has gone quiet doesn’t mean DeFi hasn’t experienced any drama. The amounts stolen are noticeably lower and the hackers seem to be getting slower, but the attacks are just as widespread.

In mid-February, a botched hack attempt saw someone walk away with $8.5 million from Platypus Finance, or at least initially. However, it appears that the attacker must have been an amateur, which he or she consequently lost part of the funds within their own smart contract, which was quickly frozen by Tether. The attacker also appears to have sent some of his illegal winnings to the lending protocol Aave, which froze the amount and is discussing returning it to Platypus.

In addition, the hacker’s wallet address was soon connected to a number of social media accounts by crypto scam buster ZachBTX. And soon after that, BlockSec was able to perform another “reverse hack”. recover an additional $2.4 million of the stolen funds.

Elsewhere, more than $4 million worth of crypto was stolen from dForce Network and Midas Capital in two attacks that took place in January and February of this year. In both cases, the hacker exploited the same smart contract vulnerability. Fortunately for dForce, that hacker offered a bug bounty and was able to recover all the funds.

Hope Finance has had less success recovering the $1.8 million it lost after a February 21 protocol update that was meant to redirect assets to an external wallet. The project’s team quickly accused a colleague of the rye-trekking project, but it seems unlikely that the culprit will be held accountable. Attempts to identify the person have been thwarted because the change was signed by all three accounts controlling Hope Finance’s multisig wallet.

Table of Contents

Ethereum’s vulnerabilities remain

The above events serve as a reminder that the world of DeFi is full of risks and dangers for investors. Even worse, the vast majority of successful hacks are not the end users’ fault. Rather, most hackers exploit the smart contracts that govern and control the DeFi protocols they invest in, which means that the developers are really at fault.

There is a reason for this. DeFi is far more dominant on the Ethereum blockchain than any other. Ethereum was the world’s first smart contract blockchain, and its dominance stems from its first-mover advantage, where it has supported decentralized applications since 2015.

The problem with Ethereum is that its smart contracts are “Turing complete”. What this means is that Ethereum’s smart contracts have the ability to run any algorithm or solve any computational problem, provided they are given the necessary instructions, time, and resources to do so.

Turing-complete smart contracts allow extremely complex structures with a multitude of computable functions and often consist of thousands of lines of code. The more code there is, the more room there is for vulnerabilities to creep in. Even worse, developers are building DeFi protocols using dozens of smart contracts, creating a huge attack surface.

Could Bitcoin DeFi be the answer?

Bitcoin was originally designed only as a peer-to-peer payment network, and it does not support smart contracts, which means it cannot support DeFi in its original form. However, recent updates to the network have enabled developers to create DeFi applications native to Bitcoin.

It’s an exciting possibility because Bitcoin DeFi is likely to be more secure than its Ethereum-based counterpart. That’s because Bitcoin is by far the most decentralized, and therefore the most secure blockchain of all.

Bitcoin DeFi was made possible by the Taproot upgrade implemented in November 2021, which introduced greater functionality around complex scripts. It essentially made it possible for developers to build dApps on Bitcoin via so-called “layer-2” networks or “sidechains”.

Before Taproot, the only way to use BTC in DeFi was to convert it to “wrapped” tokens on other networks. The most popular of these is Wrapped BTC, or wBTC, on Ethereum. Using wBTC made it possible to use Bitcoin with Ethereum-based DeFi protocols.

However, this meant that users face the same risk, as they still have to interact with Ethereum’s smart contracts. With native DeFi now possible on Bitcoin, it is no longer necessary to convert BTC to an Ethereum asset and smart contracts can be avoided.

Until recently, the only real use of Bitcoin was for storage of value and payments. Now that it can accommodate DeFi, its utility has increased tremendously, making it more attractive to a much wider audience. DeFi itself can benefit from the safety and security that Bitcoin enjoys as the world’s most secure blockchain. It will give more confidence to the DeFi space in general.

Bitcoin DeFi Solutions

One of the best platforms for Bitcoin DeFi appears to be Mintlayer, a Layer-2 network that aims to make Bitcoin more scalable while supporting smart contracts. It enables Bitcoin DeFi, Bitcoin NFTs and more besides. In many ways, it’s like a rival blockchain to Ethereum, only it benefits from Bitcoin’s increased decentralization and security.

Mintlayer was conceptualized in 2019 and aims to support DeFi development on both Bitcoin and the Lightning Network, which is a Layer-2 payment protocol that supports lightning-fast BTC micropayments at scale.

Mintlayer’s big advantage lies in its smart contracts. While Ethereum’s smart contracts are Turing complete, Mintlayer’s are “non-Turing complete”. What this means is that they are more specialized and have a simpler code base. They lack support for concepts such as recursions, loops and other processes that do not normally terminate by themselves. The lack of complexity in Mintlayer’s smart contracts has a number of advantages.

Non-Turing complete smart contracts only support basic scripting functionality, meaning there is less chance for developers to make mistakes when writing the code. The lack of support for complex loops and recursions also makes them easier to audit. Finally, the simplicity of non-Turing complete smart contracts ensures that they can be executed with fewer resources, easing the network congestion often found on the Ethereum network.

Mintlayer isn’t the only Bitcoin DeFi game in town. Its closest competitor appears to be Rootstock (RSK), which is an independent sidechain as opposed to a Layer-2 network. Dating back to 2017, RSK was designed to enhance Bitcoin’s capabilities through the introduction of dApps.

RSK relies on the same proof-of-work consensus mechanism as Bitcoin, using an algorithm that allows community members to participate in fusion mining. With this, a single computer can validate transactions in two blockchains simultaneously. RSK therefore shares the same hash rate as Bitcoin, and so theoretically it is just as secure.

Another rival is Stacks, which is an independent, smart contract-capable blockchain linked to Bitcoin via its new “proof-of-transfer” consensus algorithm. PoT enables Stacks to settle transactions on the main Bitcoin blockchain, thus benefiting from the same level of security it offers.

Like Mintlayer and RSK, Stacks can support Bitcoin DeFi and NFT, along with micropayments via the Lightning Network. It also has its own native token, STX, which can be wagered to earn a passive income. In other words, it has its very own DeFi functionality secured by the Bitcoin blockchain.

However, it should be noted that neither RSK nor Stacks support complete non-Turing smart contracts. In their case, they support regular Turing complete smart contracts, similar to Ethereum.

Does Bitcoin DeFi Have a Future?

Almost certainly the answer is yes. Given that the value of BTC has already grown significantly, it seems unlikely that it will see the same kind of explosive gains that it did in the last decade when the first generation of Bitcoin millionaires was created. So people are looking for alternative investments to increase their BTC holdings.

Bitcoin already has both the security and liquidity, and now, with the addition of smart contract capabilities from projects like Mintlayer, RSK and Stacks, it has all the ingredients required for DeFi to take off.