The addition of smart contract capabilities on the Bitcoin network has the potential to increase DeFi’s adoption and liquidity.
One year after the Bitcoin soft fork, taproot support is still crawling across the industry, according to sources quoted by Cointelegraph. This suggests that the world’s largest cryptocurrency has the potential to unlock innovation and wider adoption of Web3 solutions.
Alex Miller, CEO of the Web3 developer platform Hiro, remarked that Bitcoin is the optimal framework to build out Web3 capabilities because “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.”
The Taproot upgrade, which took place in November 2021, paved the way for speeding up Bitcoin (BTC) network-based decentralised financial services. It helps with block storage by reducing the size of complex transactions taking place on the network and with privacy by allowing for more efficient validation of multi-signature scripts.
DFINITY, the foundation behind the Internet Computer blockchain, is one of the companies working to unlock Bitcoin’s potential. “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,” said Dominic Williams, founder and chief scientist at DFINITY.
A Layer-2 where smart contracts can hold, send, and receive BTC natively without the need for third parties or blockchain bridges was one of the targets of hackers in 2022, and on December 5 Internet Computer announced its mainnet integration with the Bitcoin network. According to the firm, Bitcoin will be used by nearly all DeFi applications built on Internet Computer’s blockchain due to its high liquidity.
Smart contract adoption in organisations: a possible future
Users who wish to take part on DeFi can do so by sending Bitcoin to the cryptocurrency’s smart contract address and then withdrawing the funds instantly. You’ll be able to say things like, “Happy Birthday!” in a chat window soon. Williams remarked, “You can say, ‘Here are 100,000 satoshis!’ using an entirely on-chain Web3 service like Open Chat.
In addition to bolstering confidence in Bitcoin and other cryptocurrencies, Alex Miller argues that enabling Web3 on the Bitcoin blockchain will do the same for DeFi applications.
“The recent implosion of centralised entities like FTX will continue to propel interest in truly decentralised 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. For this reason, Bitcoin is the most natural platform for DeFi transactions, given its long history as a pioneer in decentralised trust.
Miller argues that Bitcoin’s smart contract features could be useful for decentralised autonomous organisations (DAOs), though he predicts that the expansion will be driven primarily by DeFi. People want assurance that the blockchain they put their money and effort into will still be around in a few years, and Bitcoin has a history of success in this regard.
Bitcoin will always stand apart from other assets when it comes to the focus of developers and investors during bear markets. Looking ahead to 2023, I anticipate that DeFi will be our ecosystem’s primary driver of expansion.
Since its inception nearly 14 years ago, the cryptocurrency community has driven multiple hard and soft forks in Bitcoin. Bitcoin Enhancement Proposal (BIP) 119 describes the Covenants, which would limit the addresses to which a user can send their funds via a whitelist. This feature may be implemented in upcoming updates.