Smart contracts functionalities on the Bitcoin network could boost adoption and provide additional liquidity to DeFi.
One year after the Bitcoin soft fork, industry support for Taproot is still at a crawl, demonstrating that the world’s largest cryptocurrency holds great promise for innovation and wider adoption of Web3 solutions. CEO of the Web3 developer platform Hiro, Alex Miller noted:
“Since early on, Satoshi predicted that layers being built on top of the Bitcoin blockchain would enable Bitcoin to move beyond being only sound money by adding programmability, which makes Bitcoin the optimal framework to build out Web3 capabilities,”
The Taproot upgrade, which happened in November 2021, laid the groundwork for the Bitcoin (BTC) network to quickly adopt decentralized financial services.
It allows for more effective multi-signature script validation, which addresses privacy concerns, and enhances block storage by minimizing the size of complex network transactions.
The changes were long-awaited in the industry, as many Bitcoin holders do not use their coins on decentralized finance (DeFi) applications “because it involves the cumbersome task of wrapping it using a bridge so that it can be processed by smart contracts on another blockchain such as Ethereum,” commented Dominic Williams, founder and chief scientist at DFINITY, the foundation behind the Internet Computer blockchain, which is one of the companies working to unlock Bitcoin’s potential for DeFi.
In 2022, when billions of dollars were stolen, one of the targets of hackers was the blockchain bridges, which is why Internet Computer announced on December 5 that its mainnet integration with the Bitcoin network would function as a Layer-2 where smart contracts could hold, send, and receive BTC natively without the need for intermediaries or bridges.
The company claims that almost of DeFi applications being built on the blockchain of Internet Computer plan to use Bitcoin because of the liquidity it offers. Users who want to take part in DeFi can deposit their coins to the Bitcoin smart contract address and then easily withdraw them from their wallets thanks to the smart contract functionality for Bitcoin.
“Soon you will be able to send a simple chat message, such as ‘Happy Birthday! Here are 100,000 satoshis!’ using a fully on-chain Web3 service such as Open Chat,” noted Williams. Enabling Web3 on the Bitcoin blockchain also means more trust in cryptocurrencies and DeFi applications, stated Alex Miller:
“The recent implosions in centralized entities like FTX will only serve to keep pushing forward interest in truly decentralized finance – where transactions are secured algorithmically at the consensus level and users don’t have to trust third-party custodians to ‘do the right things’ with their coins. And given its history of pioneering decentralized trust, Bitcoin is the most logical place for people to conduct DeFi transactions.”
Miller argues that decentralized autonomous organizations (DAOs) could also profit from Bitcoin’s smart contract capabilities, but DeFi is likely to be responsible for the majority of the growth.
“People want to know that the blockchain they invest time and money into will be around in a couple of years, Bitcoin has a proven track record here. In bear markets, developers, and investors alike look for safer assets to concentrate on, and Bitcoin will always hold a unique distinction here. Looking to 2023, I think DeFi will be the biggest point of growth in our ecosystem.”
Since it has been around for almost 14 years, Bitcoin has undergone a number of hard and soft forks encouraged by the cryptocurrency community. The Covenants, which is outlined in Bitcoin Improvement Proposal (BIP) 119 and restricts the addresses to which users can send payments in a list, could be one of the upcoming updates.
