Bitcoin DeFi is on the rise as Jack Dorsey’s Square muscles into territory long held by ethereum

Bitcoin DeFi is on the rise as Jack Dorsey's Square muscles into territory long held by ethereum

Jack Dorsey looking at the camera: Jack Dorsey in 2017. Rolf Vennenbernd/picture alliance via Getty Images

© Rolf Vennenbernd/picture alliance via Getty Images
Jack Dorsey in 2017. Rolf Vennenbernd/picture alliance via Getty Images

Square CEO Jack Dorsey earlier this week announced his payments company was diving into the decentralized finance space. But he’s not doing it on ethereum, the usual stock-in-trade of DeFi. Dorsey wants to build his platform with bitcoin.


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DeFi, which some call the “fourth wave” of crypto, is blossoming. Companies are building it, users are buying into it, and regulators are worried about it. Over $50 billion in assets is locked into a DeFi exchange, according to DeFi Pulse.

But the ethereum-based applications that have come to dominate DeFi, such as Uniswap and Compound, don’t have to be the only option.

Bitcoin DeFi is rising, albeit slowly, and could see significant gains from Square’s entry into the space. By one count, there are at least 26 active bitcoin-related DeFi projects, spanning everything from derivatives trading to payments.

So far, DeFi services have largely been built on ethereum, in part because of the cryptocurrency’s easy use of smart contracts, pieces of code that automate agreements between two parties. 80% of products listed by DeFi Prime, an analytics firm, are based on ethereum.

Smart contracts directly on the bitcoin blockchain could exist in principle, but the technology just hasn’t come to fruition, said Peng Zhong, CEO of Tendermint and a developer at Cosmos, a collective trying to stitch together independent blockchains.

“I’ve heard of smart contracts being able to be built directly on bitcoin for quite a while,” Zhong, a veteran of the crypto world, told Insider. “I do feel like development has stalled a little bit. So we haven’t seen any real examples of this yet.”

The main attempt to create bitcoin DeFi has come through the “Layer 2” network – that is, protocols built on top of “Layer 1,” the main bitcoin blockchain. But by and large, smart-contract protocols on Layer 2 have simply received less development energy than smart contracts on ethereum.

“Ethereum is the network with the most developers,” Tally Greenberg, business development head at Allnodes, told Insider. “But I think the smart contract idea is coming to bitcoin as well.”

“It will take a while for bitcoin to catch up,” she added, noting that even a highly successful bitcoin DeFi ecosystem would be unlikely to hurt ethereum’s development trajectory or price.

As Dorsey’s Square develops its new venture, bitcoin DeFi could get new impetus from Taproot, a protocol upgrade slated for this November. Taproot is supported by broad swathes of the bitcoin community, and will make a number of technical changes to bitcoin that should smooth the process of creating Layer 2 smart contracts.

“There are hundreds of projects on DeFi right now,” said Greenberg.

“The more the merrier!”

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