Jade ARdinals CEO says the future of Bitcoin defi includes smart contracts

2024-05-24 03:43:16 ET

Bitcoin is now stepping into the DeFi space with the introduction of BRC-20 tokens and Ordinals. The Taproot upgrade has made this possible by allowing the creation of decentralised applications (DApps) on the Bitcoin blockchain. This change enhances Bitcoin’s potential, enabling it to offer diverse financial services. These include decentralized exchanges, automated loan platforms, and non-fungible tokens (NFTs).

However, challenges remain. Scalability and transaction fees are major concerns. The increased transaction load from

BRC-20

tokens and

Ordinals

could worsen these issues. Solutions like

Layer-2 protocols

and

sidechains

, such as the Lightning Network, Stacks, and Rootstock, are crucial. They help improve transaction throughput and reduce fees, ensuring the network remains efficient. Despite these hurdles, Bitcoin’s move into DeFi shows promise, driven by continuous innovation.

To delve deeper into these developments, Invezz spoke with Nathan, a Jade ARdinals Analyst, to discuss the opportunities and challenges in Bitcoin’s DeFi space.

Impact of BRC-20 Tokens and Ordinals

Invezz: BRC-20 tokens and Ordinals now enable NFTs and fungible tokens directly on the Bitcoin blockchain. How do you see this impacting Bitcoin’s DeFi space in terms of the opportunities and challenges that might arise, especially around scalability and transaction fees?

The integration of BRC-20 tokens and Ordinals into the Bitcoin network is a game-changer for Bitcoin’s DeFi space, but it’s also creating many challenges.

On the opportunity side, developers will be able to build DApps that leverage Bitcoin’s security and decentralization. This unlocks new tokenomics models and user engagement strategies, such as staking, farming, and liquidity management, similar to what we see on Ethereum and Solana.

Still, with these opportunities come challenges. Scalability is a major concern: transaction throughput has been the Achilles heel of Bitcoin’s blockchain, and the addition of BRC-20 tokens and Ordinals could make this issue worse. As more people use the network for these new functions, we might see slower transaction processing times. Increased demand on the network could also lead to higher transaction fees, making it more expensive for users to get their transactions processed quickly.

Then, there is technological complexity: maintaining a fast and efficient system while supporting a large volume of transactions is no small feat. Solutions like Partially Signed Bitcoin Transactions (PSBT) and transaction batching manage these challenges, but they do not fully solve them. I believe that Layer-2 solutions will be more effective here.

Strategies to Tackle Scalability Issues

Invezz: As more people use Ordinals and BRC-20 tokens on Bitcoin, network congestion and rising fees have become significant issues. What strategies or innovations do you think are crucial to tackle these scalability challenges?

First, it’s crucial that we use Layer 2 solutions. The Lightning Network is a good example: it processes instant and low-cost transactions through a network of payment channels that only settle the net results on the Bitcoin blockchain. Similarly, projects like Stacks and RootStock (RSK) add programmability to Bitcoin, allowing for more complex operations and smart contracts to be executed off-chain, and using the main network for settlement.

Another solution is to enhance block efficiency on the main chain. The Segregated Witness (SegWit) protocol upgrade, which separates transaction signatures from transaction data, has already helped increase block size limit and improved transaction throughput. Future developments could also rethink how data is stored and processed within blocks.

Increasing block size or implementing dynamic block size adjustments can help, too. By allowing the block size to scale with network demand, we can accommodate more transactions per block during peak times. Still, it’s crucial to keep this balanced — too much scaling could compromise the network’s decentralization and security.

In addition to the above, transaction batching — where multiple transactions are bundled together into a single transaction — can help reduce the number of individual transactions, easing congestion and lowering fees.

Invezz: There are clear differences between BRC-20 tokens on Bitcoin and ERC-20 tokens on Ethereum, especially when it comes to smart contracts and integration. How do you think these differences will impact Bitcoin’s ability to…