Well, There's Your Problem: Bitcoin DeFi Edition.

I was recently looking at Bitcoin DeFi: Stacks and RSK/Sovryn in particular. Despite these chains being around for a while, they have not had the same level of adoption or uptake as other chains. Base, for example, which has only been around a few months, has 4X the TVL of RSK and around 25X the TVL of Stacks. Compared to other chains, Bitcoin DeFi chains barely show on the above chart (Stacks not at all). On paper, one would think that Bitcoin-dedicated smart contracts would be much more significant – Bitcoin is the biggest chain by far. So, why is Bitcoin DeFi struggling so much, and what can its struggle tell us about the sector’s future?

First, there are some interesting stats to look at. The Stacks and RSK ecosystem are both dominated by two apps. For RSK: Sovryn and Money On Chain account for 99% of the TVL. For Stacks: Alex Labs and Arkadiko account for almost all of Stacks TVL. 

Like most DeFi Dapps, market conditions have hammered Stacks and RSK, and their TVL has fallen from their highs. However, their TVL never got that high initially, so the fall is less steep than something like Solana. Regardless, it is unexpected to see Bitcoin DeFi struggle to take off – especially as RSK and Stacks are reliable projects with some solid apps. 

I think the failure of Stacks and RSK to attract significant BTC TVL is due to a few issues:

  • First is that getting BTC on to RSK and Stacks has some friction and, to Bitcoiners concerned with security, eyebrow-raising security assumptions. 
  • Second, as the ecosystems are small and yields compressed, BTC holders probably view moving BTC there as not worth the risk. 
  • Third, the ecosystem being dominated by a few super apps and a few others makes their market a little dull.

This is not an exhaustive list of why Bitcoin DeFi has struggled, but I am sure readers get the picture.

Thankfully, the lack of success with Stacks and RSK right now gives us some insight into what Bitcoin DeFi projects may need to do to succeed. 

First, the major apps on RSK (Sovryn and Money On Chain) and Stacks (Alex Labs and Arkadiko) are wide protocols. Wide protocols are spread horizontally across a bunch of different verticals. Wide protocols spend precious dev time building a wide range of products. For example, Sovryn has a Dex, lending, zero-interest loans, and margin trading. Wide apps create two issues for Stacks and RSK. The first issue is that wide protocols are thin – rather than perfecting a single verticle, they have numerous mediocre ones. Secondly, a tiny ecosystem like RSK and Stacks with wide super apps disincentivizes developers from creating new apps. Why build an AMM or lending protocol when one super app already has both? Wide protocols strangle early ecosystems.

The second thing I realized with Bitcoin DeFi is that Bitcoiners are anti-financialization. Complex products like AMMs and margin trading do not appeal to Bitcoiners. Culturally, Bitcoiners seem to view complex financial products as haram and prefer simple hard money banking. Simple lending and borrowing apps are probably best suited for Bitcoin – maybe even ones tied to tangible world assets. 

Finally, RSK and Stacks both emphasize BTC as an asset in their design, and I think this may be a wrong move. Bitcoiners love BTC. Holders should only enjoy BTC from afar, never use it, and never touch it – Saylor even argued that Bitcoiners should die with their coins. Rather than work against this, protocols wishing to build DeFi-like products for Bitcoin will probably need to abandon relying on BTC as the asset. RSK using BTC as gas is probably a nonstarter for many Bitcoiners. Thankfully, with inscriptions, BRC-20s, and Runes, there are other native Bitcoin-based assets that protocols can try to attract. Also, as inscriptions have made Bitcoin an ad-hoc DA layer, protocols could leverage Bitcoin’s security, even without using BTC.

The current crop of Bitcoin DeFi products is informative in their lack of success. Users have not shown up to use or move their BTC over to them. I think Bitcoin DeFi will happen – Bitcoin is hugely popular, and a new culture of experimentation has popped up. I am just less sure that the existing entrants will be the ones who pull it off. The market is signaling that they don’t like what RSK and Stacks offer, so Bitcoin DeFi must rethink its models and assumptions to get it right.

Super relevant write-up. I wonder how we talk about Bitcoin DeFi in 3-5 years. There's so much experimentation happening that kinda reminds me of RSK in 2019. I wonder if these new bitcoin EVM-compatible chains (eg Botanix Labs) will be able to execute and attract users...

FWIW - also a topic that surfaced in 2019 is Discreet Log Contracts (DLCs) on the Bitcoin chain. Now in 2023, there's Ordinals-related projects that use DLCs such as Liquidium (a lending market). IMO that could have a different dynamic going into the next cycle given that Ordinals are a new asset class that was not around before.

Yes! DLC was on my list to actually look at today as I have seen some projects mention using it.

My guess, based on what we are seeing now, is that Bitcoin DeFi will probably be less monolithic than Ethereum. Like all DeFi on Eth is built using solidity and on ETH. Whereas I think on Bitcoin, their version of DeFi - if it emerges - will be a hodge podge of different tech. Ordinals, DLC, layer 2s, ZK, CeDeFi, etc.