DeFi
Decentralized finance is poised to transform Bitcoin
Since its creation in 2009, bitcoin (BTC) is increasingly adopted and now has a market capitalization of over $1.3 trillion. It was designed to be a decentralized currency and real-time gross settlement system. The decentralized protocol-based approach allows holders to move trust from a centralized actor to a decentralized, code-enforced protocol.
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Although Bitcoin is the original cryptocurrency and corresponding blockchain, its functionality has until now been extremely limited compared to smart contracts and decentralized finance (DeFi) features offered by Ethereum, Solana and other blockchains . However, this dynamic is set to change with the emergence of Bitcoin Layers, meta-protocols, sidechains, layer 2s, and other technologies currently built on the Bitcoin blockchain. These layers will enable faster payments, as well as lending, improved functionality of fungible and non-fungible tokens, decentralized exchanges, GameFi, SocialFi and many other use cases. Bitcoin holders will soon be able to increase the productivity of their assets through a protocol-based decentralized financial system. The main differentiator between DeFi on Bitcoin and DeFi on other chains is the underlying asset (native token). While Ethereum, Solana, and next-generation blockchains compete on the merits of their respective technologies, DeFi on Bitcoin focuses solely on increasing the productivity of bitcoin, putting the Bitcoin DeFi ecosystem in a league of its own.
The arguments for creating value through a decentralized financial system based on Bitcoin are based on three assumptions:
We are already seeing strong demand signals for the Bitcoin blockchain as a base layer for other tokenized assets. The market for non-fungible tokens on Bitcoin, called Ordinarywent from less than $100 million to more than $1.5 billion in less than six months.
However, the biggest opportunity is yet to come. Most of the market value of Bitcoin’s decentralized financial system will appear in the value of fungible tokens on Bitcoin. Fungible tokens will enable greater productivity of bitcoin (the asset) through yield generating instruments and decentralized financial systems through protocols and layer 2s. Compared to Ethereum, Solana and other chains, the value of tokens fungibles on Bitcoin is still tiny, largely because we are in the early stages of programmable features on this blockchain.
Bitcoin’s main non-fungible token protocol, Ordinals, was only released in January 2023. BRC20 and Runes, Bitcoin’s main fungible token protocols, were launched in March 2023 and April 2024, respectively. These recent releases, additional features are needed for a robust decentralized financial ecosystem to exist on Bitcoin.
Additional features are introduced into Bitcoin in two ways:
As mentioned earlier, Bitcoin’s decentralized financial ecosystem is still in the early stages of its lifecycle. However, strong indicators of future growth can be seen thanks to increasing developer and DeFi activity in the space. In 2023, 40% of Bitcoin open source developers focused on Bitcoin L2 and scaling solutions. Then, in the first quarter of 2024, the total value locked (TVL) of the Bitcoin ecosystem increased sixfold, from $492 million to over $2.9 billion. Given these early indicators, coupled with what we have seen happening in other ecosystems, we believe that over $1 trillion in value could be created in the Bitcoin DeFi ecosystem over the next five to 10 years.
Franklin Templeton Disclaimer:
All investments involve risks, including loss of principal.
Investments in digital assets are subject to numerous specialized risks and considerations, including but not limited to risks related to:
(i) immature and rapidly developing technology underlying digital assets, (ii) security vulnerabilities of that technology, (iii) credit risk of digital asset exchanges that may hold the digital assets of an cautioned account, (iv) regulatory uncertainty around the rules governing digital assets. Assets, digital asset exchanges and other aspects and parties involved in digital asset transactions, (v) high volatility in the value/price of digital assets, (vi) unclear acceptance of all or part of the digital assets by the users and global markets, and (vii) manipulation or fraud resulting from the pseudo-anonymous manner in which ownership of digital assets is recorded and managed.
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