Bitcoin DeFi is coming, but it’s not really on Bitcoin.
A decentralized exchange built on the Liquid network is opening for early access on Monday.
Called TDEX, the project has announced its entry into an Open Alpha stage. It’s being built by Sevenlabs — a firm that provides consulting and white-labeling services in addition to its current work.
The exchange provides a fairly unique twist to the Automated Market Makers currently dominating on-chain exchange volume. The TSWAP protocol used by the exchange focuses on ad-hoc atomic swaps, a way of conducting a trade between two counterparties without intermediaries.
Unlike AMMs, there are no mathematical formulas involved that would force a particular exchange price. As Claudio Levrini, CEO of Sevenlabs, told Cointelegraph, “TDEX leaves to the liquidity provider full control on using a fixed price strategy or add external price feeds and custom trading logic.” The flipside of this is that providing liquidity on the platform is likely to be more involved than on platforms like Uniswap.
Atomic swaps are often proposed as a decentralized method for exchanging assets on Bitcoin and other UTXO blockchains. While adoption has been limited so far, the Taproot and Schnorr proposals could allow simpler mechanisms through Adaptor signatures.
Adam Back, CEO of Blockstream, said that “TDEX is an exciting example of the increasing number of DeFi solutions emerging on Liquid — or as we like to call it, LiFi.”
But the relative level of centralization on Liquid has been the subject of criticism in the past, especially in the context of introducing concepts traditionally associated with Ethereum like non-fungible tokens.
Liquid is a Bitcoin sidechain that relies on a federation of “functionaries” to both ensure a peg to Bitcoin and validate the network. These functionaries are business entities tied to Bitcoin, primarily exchanges. The federation and design of the peg system present a significant point of trust in the network, as an incident in June briefly made Blockstream the sole controller of 870 BTC in network reserves.
Some in the Bitcoin community often push for creating “Bitcoin DeFi” that could open the network to the world of decentralized trading and lending which, until now, has primarily been seen on Ethereum.
Atomic Loans is currently among the only projects that uses native Bitcoin as collateral for borrowing, though it uses Ethereum for the rest of its logic. Other “Bitcoin DeFi” projects include MoneyOnChain, a MakerDAO analog on RSK, and now, TDEX.
None of these projects are built natively on Bitcoin, primarily due to smart contract limitations. These same limitations make it difficult to create trustless bridges to the blockchain, forcing sidechains to adopt federated peg mechanisms.
But demand for Bitcoin in DeFi is clearly strong, as evidenced by the success of WBTC. There is more Bitcoin locked on Ethereum than in Liquid and the Lightning Network combined. It remains to be seen if demand for DeFi on Liquid will be as strong.