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Ask CryptoVantage: Why Isn’t Bitcoin Used for DeFi or NFTs?
Let’s be honest, Bitcoin is not the first blockchain you consider when you are referring to Decentralized Finance (DeFi) and Non-Fungible Tokens (NFTs). That is because it is not nearly as advanced as other blockchain networks such as Ethereum, which has reigned supreme over the decentralized finance and NFT landscape for many years.
While Bitcoin does have some limited smart contract functionality, there are several reasons why the king of crypto is currently rarely used for these purposes.
In today’s edition of Ask CryptoVantage, we will explore why DeFi and NFTs are virtually non-existent on Bitcoin itself and whether this could change in the future.
Are Smart Contracts on Bitcoin the Future?
Although Ethereum is still the number one platform for smart contracts, DeFi and NFT projects have started to pop up across other emerging blockchains such as Avalanche, Binance Chain, Algorand, etc. and are effectively challenging Ethereum’s dominance.
There has also been significant development to Bitcoin’s smart contract limitations ever since Bitcoin released a major update called Taproot. This update opens up a path forward to allow smart contracts on the Bitcoin blockchain.
In the past, Bitcoin’s lack of smart contract functionality meant that developers were unable to tap into Bitcoin’s vast amount of liquidity. Until recently that is, because on January 21 of this year, the software engineer Casey Rodarmor, officially launched the protocol, referred to as “Ordinals,” on the Bitcoin mainnet. This will allow for a Bitcoin version of NFTs. Meanwhile, projects such as Stacks and TrustMachines are building applications that make Bitcoin more functional and ensure it can also be used to create Bitcoin-based DeFi applications.
For now, however, other blockchain networks such as Ethereum remain better suited for DeFi and NFTs. However, as technology evolves, Bitcoin may become the driving force behind this new generation of applications.
Critics of these developments are concerned that the rise of Bitcoin NFTs and DeFi applications on Bitcoin, will eventually drown out other types of transactions, and possibly have negative effects on the congestion of the network. Adam Back, chief executive of crypto infrastructure company Blockstream, even said that the coming Bitcoin NFTs are a “sheer waste and stupidity of an encoding.”
Scalability Issues
One of the other main reasons why Bitcoin is not used for DeFi or NFTs is its scalability issue. The Bitcoin network can only process a maximum of 7 transactions per second (TPS), which is far too slow to handle the high volume of transactions that are required for DeFi and NFTs.
This makes it difficult for Bitcoin to compete with other blockchain networks such as Ethereum, Polygon and Solana. Ethereum, for example, currently has a TPS of around 30, while Polygon can process 7,000 TPS. Solana takes it a step further and claims that they can process 65,000 transactions per second at peak, however, the numbers typically average out closer to 3,000 TPS.
Nevertheless, currently, Bitcoin cannot close that gap. For now, the lack of scalability makes Bitcoin utterly impractical for the high-speed transactions that are required for DeFi and NFTs.
High Transaction Fees
Another reason why Bitcoin is less suitable for DeFi and NFTs is its high transaction fees. The cost of using Bitcoin can become quite steep, especially during periods of high network congestion. This makes Bitcoin less cost-effective for micropayment transactions to be carried out on the Bitcoin network.
Bitcoin’s high transaction fees are in stark contrast with many other blockchain networks. Solana, for example, decided early on to keep transaction fees deterministically cheap. For now, it seems that Bitcoin simply can not compete with fast and cheap in the DeFi and NFT race. On the other hand, Ethereum has very high transaction fees but it’s continued to attract attention from the majority of the NFT and DeFi communities.
In conclusion, while Bitcoin has a lot of potential for use in DeFi and NFTs, it is still mostly ill-suited for these applications due to its lack of smart contract functionality, high transaction fees and scalability. Might that change in the future? Perhaps but it’s unlikely. Bitcoin will likely remain focused on its most popular use case: A store of value.
