In the world of cryptocurrencies, Bitcoin has risen to become the undisputed leader, but it has been missing one key ingredient to unlock its full potential: decentralized finance (DeFi). Since 2020, the De-Fi economy has undergone explosive growth. Today, it is collectively valued at more than $47 billion and, at one point, was worth more than $175 billion amid the crypto bull market.
Yet, Bitcoin has been unable to tap into this lucrative opportunity because of one limitation -- a lack of smart contract functionality. Without smart contracts, developers are unable to create use cases and applications like non-fungible tokens (NFTs), stablecoins, tokens, wallets, and exchanges, to name a few.
But this could be changing.
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Bitcoin gets a boost
In the first few months of 2023, a new type of asset has taken the world by storm: Bitcoin tokens. Thanks to a recent development in technology known as ordinals, people can create their own Bitcoin-based NFTs. While not exactly like traditional NFTs found on blockchains like Ethereum because they don't use smart contracts, ordinals can tie digital assets to individual satoshis, the smallest denomination of Bitcoin.
Demand for ordinals and other tokens is part of the reason the Bitcoin network has experienced a surge in fees. Some Bitcoin blocks have even had transaction fees larger than the block subsidy awarded to miners, a first since 2017.
Interest in new applications of Bitcoin is particularly refreshing because, for the last 14 years, the main investing thesis has been that it is like digital gold and, as such, best utilized as a buy-and-hold asset. Evidence of this buy-and-hold strategy can be seen in statistics like the number of long-term Bitcoin holders, currently sitting near an all-time high.
But with potentially new ways to utilize Bitcoin, the premise of only using Bitcoin to buy and hold could be turned on its head.
Momentum is building
Although ordinals are undoubtedly novel, they lack functionality compared to similar assets on competing blockchains. As mentioned, these ordinals don't technically use smart contracts, which means Bitcoin's blockchain is still unprogrammable.
However, there is one solution that is looking to change this. Known as Stacks, this blockchain is built on top of Bitcoin and enables smart contract functionality, effectively making Bitcoin programmable. Similar to Layer-2 solutions for Ethereum, Stacks processes transactions on its own blockchain but then adds a block hash, something akin to a receipt, to the Bitcoin blockchain.
In addition, Stacks can process more transactions and keep fees low, something ordinals have only exacerbated. Best of all, though, this approach ensures decentralization and security, core tenets of Bitcoin, are maintained.
As these new applications of Bitcoin continue to garner attention, so has Stacks' blockchain. Since the beginning of the year, the total value locked on Stacks (a fancy metric to measure the value a blockchain supports in DeFi) has climbed more than 300%.
Integration of DeFi with Bitcoin is a complete game-changer for the cryptocurrency. It opens up a vast array of new use cases, from decentralized lending and borrowing platforms to tokenized assets and liquidity pools. The potential for innovation and growth is staggering.
The convergence of Bitcoin and DeFi would not only revolutionize finance but could also add unprecedented demand for the world's most valuable, secure, and decentralized cryptocurrency. Although the idea of a DeFi-capable Bitcoin is still in its infancy, based on the current trajectory, it seems the lines previously separating the two will continue to blur, and that could mean great things for Bitcoin's price in the future.
