If you do not know what is DeFi and How does Bitcoin DeFi work? , this article is for you. DeFi is the movement that leverages decentralized networks to transform old financial products into trustless and transparent protocols that run without intermediaries.
What is DeFi?
Decentralized Finance (DeFi) is an emerging financial technology based on secure distributed ledgers similar to those used by cryptocurrencies. The system removes bank and institutional control over money, financial products and financial services.
How is DeFi different from Bitcoin?
Bitcoin is a decentralized digital currency that runs on its own blockchain and is primarily used as a store of value, while DeFi is a term that describes financial services built on public blockchains such as Bitcoin and Ethereum The concept of, for example, enabling users to earn interest or borrow against their cryptocurrency holdings. DeFi consists of various applications for financial services such as trading, lending, and derivatives.
How does Bitcoin DeFi work?
Bitcoin DeFi works in different ways, depending on the blockchain it is deployed on.
Bitcoin DeFi built on Ethereum:
If you want to use Bitcoin on Ethereum, Bitcoin holders need to use a token such as Wrapped Bitcoin (WBTC). Wrapped Bitcoin is essentially a 1:1 representation of Bitcoin that can be used on other blockchains. On Ethereum, Wrapped Bitcoin (WBTC ) ERC-20 tokens can be used on DeFi platforms just like any other asset on the Ethereum blockchain.
Anyone who holds Bitcoin can convert Bitcoin to WBTC and then borrow stablecoins from WBTC using platforms such as DAOMaker. These stablecoins can then be reinvested back into the DeFi ecosystem.
So I hope now you know how does Bitcoin DeFi work and what is DeFi. Like all other new decentralized blockchain networks traded in cryptocurrencies, DeFi is risky, especially when you use new technology designed to disrupt established institutions like centralized banks.
