A DeFi guide for Bitcoin players: What should we know?

Source: Blockchain

Decentralized finance (DeFi) is exploding. It’s concentrated in the Ethereum ecosystem and provides the types of services that have so far been dominated by the traditional financial system, such as lending and saving. But like the ICO craze a few years ago, the growing frenzy surrounding it has caught the attention of those with a deep understanding of distributed ledgers and strong opinions on monetary policy. Early Bitcoin investors may be skeptical of DeFi, while those in traditional finance may take a “wait and see” approach to judging DeFi’s staying power.

DeFi is moving toward a parallel, decentralized financial system

Bitcoin was created in response to the 2008 global financial crisis, when it became clear that the financial system underpinning the world economy was self-serving, unstable, and inefficient. Mistakes by central authorities led to the loss of trillions of dollars; in practical terms, that meant the loss of jobs, homes, and savings for ordinary people. Bitcoin, premised on sound monetary policy, includes a fixed money supply and an immutable commitment to fairness and transparency. It was designed to fill the void left by the incompetence of the global financial elite.

More than a decade later, BTC is still one of the only digital currencies that has demonstrated real value and utility. But we all know that this is not the end of the story. In order to make the vision of a decentralized financial system a reality, many more applications, protocols, and digital assets will and must emerge in large numbers. In the current state of the decentralized economy, Ethereum is the only viable protocol that is achieving this goal. Today, applications built on Ethereum are becoming more and more powerful and complex.

The biggest change in the cryptocurrency space right now — in terms of growth, of course — is the multitude of DeFi applications currently emerging on Ethereum. Over the past year, the DeFi space has grown by over 1,000% — with over $10 billion in value locked. And it’s getting mainstream media attention, with Bloomberg, Forbes, and Entrepreneur all recently reporting on this rapid growth.

As a Bitcoiner, you might be saying, "Why should I care about this?" There are several reasons. The simplest is that it's always good to know what's happening in the space as a whole, even if we don't have a positive view of everything. Beyond that, DeFi is valuable. It can be an important piece of the puzzle that we need to achieve our shared vision of a decentralized economy. Not only that, there are more and more ways for Bitcoin holders to make money in DeFi.

With that in mind, here’s what Bitcoin investors should know about decentralized finance.

DeFi 101

DeFi refers to any application or product that provides financial services on the blockchain. In practice, almost all DeFi applications run on Ethereum. They provide services such as borrowing, lending, savings, derivatives, and insurance-all functions that exist in the traditional economy, but they are opaque, inefficient, and controlled by powerful "gatekeepers" such as banks.

Decentralized finance offers broader access and transparency by removing these powerful gatekeepers. The technology also brings benefits like immutability and censorship resistance — while often imposing greater accountability requirements on each individual investor. Ultimately, DeFi promises to radically expand access to services like lending and provide regular people with far better returns than the below-inflation rates paid by banks or the negative rates now offered on many sovereign debts.

The question, of course, is whether DeFi can live up to that promise. Bitcoiners are used to looking down on Ethereum—after all, it has been promising world-changing applications and products for years, and in the eyes of many, that was little more than talk. Worse, there’s ample evidence that the ICO frenzy of a few years ago actually distracted people from the general advancement of blockchain technology. In the eyes of mainstream businesses, the media, and the financial world, the hype, opportunists, and scammers in the Ethereum community cast a shadow on the development of the entire ecosystem—a shadow from which we are still recovering.

Why is DeFi different?

The world of DeFi

The growth of DeFi applications is different from previous bubbles, such as the ICO boom, because it offers real products with real use cases. Platforms such as Maker and Compound allow people to earn income by investing their cryptocurrencies in various ways: they can deposit their cryptocurrencies and earn interest, they can take out loans, or they can trade derivatives based on this activity. These are basic functions of the financial system, and the blockchain version must gradually develop steadily, with the native functions of the decentralized and immutable underlying technology of blockchain to realize its potential.

The innovative power of blockchain technology also means that DeFi platforms have provided people with financial opportunities that are not possible in the traditional financial system. For example, Aave offers flash loans, which allow people to borrow money without collateral or proof of credit. This does not exist in traditional finance - it is the innovation of DeFi.

Of course, not everything in DeFi is as promising as this. There are bad and good things in this space. There are many opportunists who want to take advantage of the current frenzy to make quick profits. Projects like TARD make this clear, as do platforms like SushiSwap, BurgerSwap, and YAM Finance. Any potential investor has an obligation to conduct proper due diligence before participating in any DeFi platform. But the emphasis on personal choice and personal responsibility is actually completely in line with Bitcoin's governance philosophy.

Bubbles aside, DeFi offers real opportunities for both the development of a decentralized economy and for yield on digital assets. Honest Bitcoiners will recognize that many DeFi applications are built on solid sovereign monetary principles. Furthermore, while most DeFi applications are built on Ethereum, transaction behavior is not limited to a single chain. Projects like tBTC and WBTC, and even the Bitcoin sidechain RSK, allow people to invest and earn yield across chains - and with roughly two-thirds of cryptocurrency wealth currently denominated in Bitcoin, this will be very important for the overall development of the decentralized economy. Bitcoin is still king, and cross-chain innovation will bring opportunities to Bitcoin holders who like to earn yield on the native blockchain system, but prefer to retreat to sound BTC.

DeFi has a chance to do something important, and Bitcoin should play a big role

There is a lot of good and bad in the rapidly expanding DeFi space, but fundamentally, many of the projects emerging in the space are part of an important step forward for the decentralized financial system. Bitcoin has a market cap of about $200 billion, which dwarfs the size of the DeFi market ($10 billion) and the market cap of Ethereum (currently $43 billion). In order for DeFi to succeed, Bitcoin must play a major role. The cross-chain functionality provided by BTC and ETH integration (such as sBTC, tBTC, wBTC and other projects) can help achieve this result, and there may be money to be made.

Original source: https://thedefiant.substack.com/p/the-bitcoiners-guide-to-defi-by-carolyn-86a