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While the Bitcoin network is poised to see significant growth in its Layer-2 (L2) ecosystem, “finding an optimal mechanism to maintain finality” on the network remains an inherent limitation that prevents this from happening, Mithil Thakore, the co-founder and CEO of Velar, has said. Thakore also identified the yet-to-be-optimized “bridging of native Layer-1 (L1) assets to L2 and back” as another obstacle to the L2 ecosystem’s growth prospects.
The Transition From BRC 20 to BRC 420
However, in his written responses to Bitcoin.com News, Thakore acknowledged that preliminary results of solutions such as Bitvm and Drivechains suggest a breakthrough may be on the horizon. The CEO also identified Stacks’ SBTC as one trust-minimized solution to the bridging of L1 assets to L2.
Commenting on the anticipated transition of Bitcoin-based decentralized finance defi from BRC-20 to BRC-420, the Velar CEO said the latter would enable the introduction of “more specialized functionalities such as governance, staking, and compliance.” He added that such features would be tailored to the growing and diversifying needs of the defi market.
Furthermore, Thakore said any such transition from BRC-20 to BRC-420 tokens would signify “a maturation within Bitcoin-based defi, aiming to support more sophisticated financial instruments and platforms.” In the rest of his responses delivered via Telegram, Thakore also touched on what he envisions for Bitcoin’s decentralized finance ecosystem and why he chose to build on the Bitcoin network.
Below are Thakore’s responses to all the questions sent.
Bitcoin.com News (BCN) What leads you to believe that Bitcoin’s decentralized finance (defi) could potentially surpass Ethereum’s defi? What are the key technological advancements that could make this possible??
Mithil Thakore (MT): To understand this, we have to separate the Bitcoin blockchain from bitcoin (BTC) the asset. The Bitcoin blockchain running on a Proof of Work (PoW) consensus mechanism offers an unparalleled level of security and decentralization, which was the foundational ethos of crypto anyway but has been compromised upon along the way.
The second reason is that BTC as an asset class is over 50% of the entire crypto market cap, but was practically untouched until now and was not being used in defi. Key technological breakthroughs facilitating this shift include the advent of ordinals, which introduces a new dimension of utility to Bitcoin, and significant developments in Layer 2 (L2) solutions like Stacks.
This L2 ecosystem will facilitate this $1 trillion worth of value stored in BTC to be utilized in defi applications, bringing significant growth to defi in general. The total value locked across EVM chains including Ethereum today is $90 Billion. Only 10% of BTC value coming to Bitcoin defi through the L2 ecosystem will be enough for Bitcoin defi to overtake Ethereum defi. So, I believe it’s not a question of if, but when it happens.
Stacks, in particular, with its Nakamoto upgrade, promises to reduce block times, thereby drastically enhancing transaction throughput and efficiency. The upgrade, alongside creating synthetic assets like sBTC, offers a non-custodial way to unlock Bitcoin’s liquidity for defi applications.
BCN: According to a recent report by the Spartan Group and Kyle Ellicott, the Bitcoin network could experience significant growth in the Layer-2 ecosystem to address the network’s inherent limitations. While much of the Bitcoin ecosystem is optimistic about Layer-2 solutions, what do you see as the biggest potential risks that could derail their momentum?
MT: In my estimation, the two biggest potential risks that could derail the momentum of Bitcoin L2 solutions are finding an optimal mechanism to maintain finality on the Bitcoin blockchain, and bridging native L1 assets to L2 and bridging them back in a trust-minimized way. Multiple L2s are trying multiple ways to maintain the finality of their chain’s data and bridge it onto Bitcoin L1, some of them maintaining finality through merge mining, which requires dependency on Bitcoin miners. Bitvm and Drivechains are good recent technologies that have emerged, but are still in a very early stage and need more research.
The second and the most crucial risk, in my opinion, is to bridge valuable L1 assets like BTC, ordinals and BRC20 onto L2s and bridge them back, both in a trust-minimized way, while making sure they are not compromised. Multiple L2s are using centralized bridges for now, which is risky and unsustainable, and some are trying different trust-minimized ways. But bridging assets between Bitcoin L1 and L2 is far from optimized as of now and needs more experimentation. SBTC by Stacks is probably the best trust-minimized solution as of now, where validators are incentivised to approve correct bridging transactions and are punished for fraudulent transactions.
BCN: Why did you choose to build Velar on top of the relatively sluggish Bitcoin network over Ethereum or Solana, which are the hot destinations for defi activity today?
MT: Choosing to build Velar on the Bitcoin network, despite its perceived sluggishness compared to Ethereum or Solana, was a strategic decision rooted in Bitcoin’s unmatched security and decentralization. As most crypto enthusiasts might know, Bitcoin’s proof-of-work (PoW) consensus mechanism has stood the test of time, offering a level of security and resilience unmatched by any other blockchain — an aspect that is critical for defi applications that demand high security for users’ assets.
Moreover, as I highlighted earlier, recent innovations, such as Ordinals and the rise of L2 ecosystems on Bitcoin like Stacks, Botanix and BoB to name a few, present new opportunities to overcome Bitcoin’s inherent limitations since they enable smart contract functionality and faster transaction speeds, making it possible to bring complex defi applications to the Bitcoin network.
With Velar, we aim to make BTC more productive by bringing it to defi and allowing holders to earn yield on their BTC holdings, while leveraging Bitcoin’s robustness and growing Layer-2 infrastructure to provide a secure and decentralized platform for defi activities on the Bitcoin network, aligning with our broader vision of an open, decentralized financial system that builds upon the most secure blockchain network available today.
BCN: Bitcoin HODLers, both retail and institutional, who are willing to use their BTC holdings in defi activity today, must rely on the inefficient and risky process of wrapping (WBTC) and transferring it to other chains like Ethereum and Solana. What is the Bitcoin-native and non-custodial solution for these investors?
MT: The way forward for these investors is to engage with L2 solutions built directly atop the Bitcoin network that have finality on Bitcoin. Velar, for instance, utilizes such L2s to enable smart contracts and deploy decentralized apps (dapps) with Bitcoin as the base layer, while also offering a suite of defi tools, including a decentralized exchange (DEX) and perpetual swaps, allowing holders to use their BTC as collateral in a non-custodial manner.
This approach makes it possible to maintain a high level of security and decentralization while enabling new functionalities, such as lending, borrowing, and trading, without the need to wrap BTC into another token on a different blockchain that is not secured by the Bitcoin blockchain.
BCN: Your defi project Velar is preparing to launch a perpetual decentralized exchange. Can you briefly talk about this and how it could benefit the traders and market makers?
MT: For traders, perpetual decentralized exchange (PerpDEX) offers perpetual contracts on the Bitcoin network, allowing them to speculate on asset prices or hedge their positions without an expiration date. This enables them to leverage their investments for higher potential returns. One of the standout features of our platform is its non-custodial nature, ensuring traders retain control over their funds. Not only that, our PerpDEX, built on a scalable L2 infrastructure, promises minimal slippage and quick settlement times, making it an attractive option for novices and veterans alike.
Market makers, on the other hand, can benefit from opportunities to provide liquidity to the ecosystem, earning fees in the process and contributing to a more stable and efficient market. Moreover, the decentralized and transparent nature of PerpDEX significantly reduces counterparty risks, providing a safer environment for liquidity provision. Lastly, our broad suite of services allows market makers to diversify their strategies, tapping into a range of perpetual contracts.
BCN: Could you explain to our readers what BRC-20 and BRC-420 tokens are? Additionally, could you discuss how and why Bitcoin-based defi might transition from BRC-20 to BRC-420?
MT: Simply put, BRC-20 tokens are Bitcoin’s answer to Ethereum’s ERC-20 asset standard, allowing for the creation of fungible assets within the Bitcoin network while facilitating a range of defi-related activities.
That said, BRC-420 tokens introduce more specialized functionalities such as governance, staking, and compliance features tailored to the growing and diversifying needs of the defi market. Moreover, the progression from BRC-20 to BRC-420 signifies a maturation within Bitcoin-based defi, aiming to support more sophisticated financial instruments and platforms. It mirrors the industry’s trend towards complex, nuanced digital products, enhancing Bitcoin’s utility and mass appeal as well as catalyzing innovation and broadening user engagement.
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