Starting from 2021, Bitcoin holders will be able to utilize their coins in the DeFi market by wrapping them into PolkaBTC, the new Polkadot product.
Supported by blockchain interoperability solution Interlay, the new product will heavily influence the decentralized finance ecosystem.
As announced in a new Polkadot blog post, the product was heavily tested by Interlay in the past months.
Now, the team seeks to prepare the product for launch in Q1 2021. PolkaBTC is funded via grant from the Web3 Foundation and was heavily prepared this year to compete with leading Bitcoin wrapping projects such as the Ren Protocol and WBTC.
At the time of writing, WBTC is the third-largest DeFi protocol according to market data aggregator DeFi Pulse.
Now higher than the lending and borrowing protocol Aave, WBTC hosts $1.2 billion in Bitcoin collateral. WBTC experienced exponential growth starting from July this year, with investors locking up ten times more in assets in 90 days.
Another competitor, RenVM only had $30 million in locked assets on July 20. Today, the Ren Protocol hosts around $350 million in collateral.
Both of these cases indicate that there is a higher demand for wrapping Bitcoins and using them in the DeFi markets.
Holders are incentivized to join the ever-growing sector as they have the opportunity to earn an additional source of passive income. First, Bitcoin holders earn a passive income simply from investing. Secondly, they can earn even more as they provide liquidity to protocols by wrapping their coins.
Why are Polkadot and PolkaBTC good for DeFi?
Now, Polkadot challenges the sector by building their own product. When deployed in 2021, holders will have a 1:1 ratio for their Bitcoin-backed minted asset.
PolkaBTC stands out from the previously mentioned wrapped coins as it is the only product that is truly interoperable. Backed by the XCLAIM network, users can freely use PolkaBTC on any DeFi protocol.
The cross-chain interoperability network provides a decentralized and censorship-resistant solution. The value of PolkaBTC is ultimately based on these two inherent features. Even in the case that a DeFi vault maliciously uses your locked assets, Polkadot will reimburse you from the vault’s own vault.
Additionally, PolkaBTC will boost the adoption of the DOT token as users will initially have to mint the wrapped asset using DOT. However, the team plans to create a more inclusive offering by extending the minting support to other stablecoins and tokens.
Polkadot launching PolkaBTC will be heavily bullish for both DeFi and the crypto market as a whole.
A fully decentralized, transparent, and trustless ecosystem for providing liquidity via Bitcoin will result in more market activity. Since Bitcoin maximalists refuse to participate in anything that resembles with centralization, a protocol like Polkadot will offer them a safe and permission-less environment to wrap their coins.
A possible DeFi rally in the making?
If successful, we expect to see liquidity migration from WBTC and the Ren Protocol. Likewise, Bitcoin DeFi protocols will take a larger market share compared to Ethereum.
More holders will become interested in liquidity providing platforms. If done correctly, we can expect Bitcoin to fuel the exponential growth that decentralized finance had this year.
Moreover, this may in return be bullish for Bitcoin as well since users will buy more Bitcoin to participate in these DeFi protocols.
We saw a similar reaction this year when the first yield farming platforms appeared. Users rushed to purchase Ethereum to participate in projects like Uniswap. This caused a chain reaction where ETH demand rallied the rest of the market.