The development of the Bitcoin (BTC) protocol and decentralized finance (DeFi) networks is somewhat similar but also very different, according to a report from OKCoin.
The exchange notes that application developers are focused on supporting the growth of Bitcoin and DeFi. They aim to create an improved, open system of finance. However, Bitcoin and DeFi developers may use different methods to implement network updates.
While Bitcoin and DeFi share the same goal of “decentralizing” finance, OKCoin argues that they exhibit “very different dynamics: DeFi development is exciting in comparison to Bitcoin being cautious.”
The exchange noted in a blog post:
“DeFi’s development culture favors experimentation and rapid iteration. Bitcoin’s development culture values stage-gate development and long-term roadmapping. There is pressure on DeFi projects to become more risk-aware.”
There was only around $1 billion that was locked in DeFi projects in February 2020. But now there’s around $10 billion. This is still a lot less than Bitcoin’s (BTC) $200 billion market cap, but relatively fast growth has brought DeFi to “the forefront” for crypto investors and traders, OKCoin claims.
They argue:
“The goal of decentralizing finance surely resonates with Bitcoin supporters. In fact, Uniswap, a decentralized protocol used to swap tokens over the Ethereum blockchain, states that its team has been ‘long committed to the ideals of permissionless access, security, and immutability’. If that sounds familiar, it’s because these are the same values the Bitcoin community has cherished since day one. DeFi and Bitcoin seem to share both their goal and their values but their culture and dynamics couldn’t be more different.”
While it’s true that both Bitcoin and DeFi networks are based on blockchain or distributed ledger technology (DLT) platforms, they aim to solve fundamentally different problems. For instance, Bitcoin may serve as a medium of exchange or store of value. Meanwhile, DeFi platforms bring additional financial services such as lending, staking, liquidity mining, and yield farming to the blockchain.
The Bitcoin protocol itself does not have the additional functionality needed to carry out complex operations such as setting up borrowing and lending contracts. When Ethereum was launched (around 4-5 years after Bitcoin), the main idea was to introduce programmable money onto the blockchain. This was done by issuing smart contracts that allowed users to specify certain terms and conditions that were somewhat similar to traditional financial contracts.
They’re called “smart” contracts because they are able to automatically execute certain actions based on a specific set of conditions. Many new DeFi protocols have been launched on Ethereum such as Aave and Maker. However, the technology is still in its early stages of developments and these so-called DeFi networks have been hacked on many occasions or have just been ineffective at doing what they claimed they would do. There have also been many scams related to DeFi.
The OKCoin team notes:
“No day in DeFi is eventless, whether it be a hack, a new token gaining 400% in value in 24 hours, a famous developer disappearing, hacked funds being refunded, said developer reappearing, etc….To take only a handful of recent examples: on the 13th of August, the two-day-old YAM project fell from $60M to $0 in 35 minutes; on the 2nd of September, the ‘Hotdog’ token went from $4000 to $1 in five minutes; on the 14th of September, the bZx protocol was attacked for the 3rd time in the year and lost $8M because of a faulty code; on the 29th of September, a hacker drained $15M out of the Eminence Finance contract — of which he returned $8M right after.”
When compared to the DeFi space, the Bitcoin (BTC) ecosystem appears to be a lot more stable and more mature. But that’s also because the Bitcoin protocol was launched many years before DeFi and it has had plenty of time to develop.
The OKCoin team points out that Bitcoin developers are “intensely security-focused, and therefore much more risk averse than DeFi developers.” The exchange explains that this is “especially true at the protocol level, because it is the most sensitive.”
OKCoin further notes:
“Bitcoin application developers such as OKCoin’s Developer Grant recipient BTCPayServer, on the other hand, tend to ship very quickly. At the protocol level, the proposed changes are called ‘Bitcoin improvement proposals’ and need to be evaluated by a number of other Bitcoin developers. Every aspect of the process is designed to ensure the adoption mechanism remains as decentralized as possible.”