Bitcoin (BTC) is known for its immutability and hardcoded rules that make the system secure, but modernization takes time. However, that does not mean that the Bitcoin blockchain – the underlying network that powers the original cryptocurrency – is closed to innovation and development. Even though the first efforts to bring decentralized finance (DeFi) to Bitcoin, such as cross-chain bridges and wrapped tokens, have resulted in a massive wave of hacks and exploits in the DeFi space, developers are more We are constantly looking for new and more reliable methods. Unrivaled liquidity of BTC pools.
The Bitcoin Taproot upgrade, launched in November 2021, was a significant step towards adding additional functionality to Bitcoin’s base layer. Among other benefits, including cheaper and more efficient transactions, the Taproot upgrade also introduced the backbone of DeFi, the underlying smart contracts, to Bitcoin for the first time.
The Taproot upgrade adds basic smart contracts to the Bitcoin network.Source: Chain Debrief
Bitcoin DeFi: First Attempts
A smart contract is an automated agreement between multiple parties stored on the blockchain. These enable a wide range of his DeFi capabilities. The introduction of smart contracts into Bitcoin’s base layer hinted that common DeFi trends such as non-fungible tokens (NFTs) could emerge on the Bitcoin network, and developers rushed to work on it.
Shortly after, Bitcoiners devised their own version of NFTs using the Ordinals protocol, sparking a heated debate about whether to add usability to Bitcoin’s base layer or to “crowd” it with unnecessary content. I was. Ordinals, also known as Bitcoin NFTs, allow users to write digital content onto the Bitcoin blockchain. Launched in January 2023, Ordinal quickly became a popular way to interact with baselayers, surpassing his 3 million registrations.
The total number of ordinal numbers exceeded 3 million on May 1st. Source: Dune
Following the ordinal launch, the BRC-20 token emerged as an experimental token standard based on Bitcoin’s Request for Comments (BRC) protocol. These tokens represented fungible assets on a 1:1 basis. However, the influx of memecoins, such as the BRC-20 standard Pepecoin (PEPE), caused congestion issues, with 500,000 outstanding transactions awaiting settlement. This surge in demand caused transaction fees to jump to $30 per transaction, significantly impacting the efficiency of the Bitcoin network as a whole.
Bitcoin DeFi: A Second Attempt
To make NFTs more efficient on Bitcoin, a new protocol called Bitcoin Stamp, or “safely maintained, safe and tradable art,” was launched shortly after the ordinal. Also, unlike ordinal numbers, Bitcoin Stamp allows mining or embedding of image data into the Bitcoin network by storing image data across multiple unused transaction outputs for greater decentralization and immutability. It will be possible.
A second attempt to add NFT usability to the Bitcoin network is widely considered an improvement over Ordinal, but Bitcoin Stamp is far from ideal. This protocol requires a canvas size of 24 x 24 pixels, which limits the possibilities of pixel art NFTs.
On the other hand, the problem of “pollution” of the Bitcoin blockchain by storing data directly in the base layer remains unresolved. Additionally, a controversial topic still floats in the Bitcoin community: Do we need NFTs on the main Bitcoin chain?
Additionally, stamps formed their own tokenization standard called SRC-20, just as BRC-20 was generated from ordinal numbers. However, while SRC-20 tokens have higher immutability, they occupy even more block space than BRC-20 tokens, which could further congest the Bitcoin network as their popularity grows.
Bitcoin DeFi with Layer 2
An alternative approach is to move NFTs and tokens to Layer 2, thus solving all the shortcomings of Layer 1 (i.e. Bitcoin), decongesting Bitcoin, lowering fees, and adding additional use cases. The purpose is that. Just as the Lightning Network solved many aspects of Bitcoin payments as a layer 2 solution, we can also move NFTs and tokens to a second layer to keep Bitcoin’s base layer clean and efficient. . This reduces the need to use Bitcoin as payment for every transaction.
mint layeris a Layer 2 solution that builds tools to enable DeFi on Bitcoin, aiming to open Bitcoin to NFTs along with smart contracts, atomic swaps and decentralized applications (DApps). Using the Layer 2 network directly on top of Bitcoin can reduce minting and transfer costs while adding smart contract functionality to reduce base layer congestion.
Rather than trying to connect DeFi to the Bitcoin network through untrusted gateways such as cross-chain bridges or wrapped tokens, Mintlayer uses native Bitcoin and other tokenization minted directly on Mintlayer. Allows direct exchange of assets, eliminating all middlemen between Bitcoin and DeFi.
To tokenize assets in protocols designed for specific use cases, Mintlayer has introduced three tokenization standards. MLS-01 was created for securities, stablecoins and equity tokens to work on top of Bitcoin, while MLS-02 is designed for confidential trading. The third, MLS-03, is built specifically for NFT. Developed specifically with NFTs in mind, unlike Ordinals and Stamps, you don’t need to write a smart contract. MLS-03 also unlocks the limitations introduced by Layer 1 attempts by leveraging Layer 2 freedom.
Mintlayer CEO Enrico Ruboli said, “It’s exciting to see innovation on the Bitcoin blockchain,” adding, “But ultimately, NFTs and tokens need to live on Layer 2. NFTs and tokens have many constraints in terms of size, smart contract functionality, and immutability that Mintlayer is not affected by.”
Bitcoin DeFi enables sustainable and efficient use of decentralized financial applications on the Bitcoin network. By offloading DeFi complexity to Layer 2, Bitcoin users will benefit from increased scalability, lower transaction costs, and a wider range of financial services while leveraging the security and robustness of the underlying Bitcoin blockchain. can now receive
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