Bitcoin remains the crypto industry’s most valuable asset; however, the Bitcoin network was not designed with decentralized finance (DeFi) applications in mind.
Its architecture is secure but relatively inflexible, making it difficult to build smart contracts and complex financial products directly on the Bitcoin PoW network.
This limitation has created an opportunity for other platforms, such as Ethereum, Solana, and Hedera, to offer DeFi connections with faster performance, programmability, and layer 2 scalability.
How could the liquidity and trust embedded within Bitcoin be connected to decentralized applications with interoperability? Without interoperability, Bitcoin DeFi remains isolated and unable to fully participate in the next generation of financial innovation.
Hedera Hashgraph is well-positioned to play a central role in solving such issues with BTC. Most recently, Chainlink’s CCIP was chosen by Bitlayer Labs for their decentralized cross-chain infrastructure to power YBTC.
Bitlayer is a Bitcoin Layer 2 designed to enhance Bitcoin’s scalability and create a DeFi ecosystem by utilizing its BitVM (Bitcoin Virtual Machine) to enable smart contracts and zero-knowledge proofs.
With Hedera also connected with CCIP and partnered with Chainlink, interoperability between Bitcoin layer 2s, such as Bitlayer, may be possible with BTC L2 users now able to bridge assets via CCIP dApps.
Another potential path to interoperability is through wrapped or tokenized versions of Bitcoin. Similar to Wrapped Bitcoin (WBTC) on Ethereum, a Hedera-based wrapped asset (HBTC?) could allow Bitcoin holders to participate in DeFi applications on Hedera.
A tokenized Bitcoin asset could be created using Hedera’s token service, which allows for customizable tokens with built-in compliance and governance features.
These features allow custodians and institutional investors to create Bitcoin representations on Hedera Hashgraph, allowing for the possibility of lending, borrowing, and yield-generation opportunities that Bitcoin cannot natively support outside of L2s.
Once Bitcoin is represented on Hedera, a wide range of DeFi use cases becomes possible. Bitcoin holders could stake BTC in liquidity pools on HBAR or use its versions of BTC as collateral for loans and DeFi services.
Developers on Hedera could also build complex financial products that utilize Hedera’s speed and low costs, while investors can benefit from earning yields on their Bitcoin holdings.
This interoperability may also extend to institutional applications. Where, thanks to Hedera’s enterprise-grade network, banks or payment networks can integrate tokenized Bitcoin into various investment use cases powered by Hedera.
While certain interoperability hurdles are in the way, Hedera Hashgraph can offer a strong vision of how Bitcoin could become more than just a store of value and home to a bustling DeFi ecosystem, supported by networks like Hedera Hashgraph and Chainlink.
By enabling interoperability through tokenization and smart contract infrastructures, Hedera can possibly unlock Bitcoin’s liquidity for DeFi.
Bitcoin would be able to retain market dominance while benefiting from innovation and scalability via Hedera.
The post Could Hedera DLT Be Used to Support Bitcoin DeFi Expansions? first appeared on AllinCrypto.
Also read: Story launches IP Vault for programmable access to onchain IP data
