DeFi on bitcoin? Meet OpenDEX

As the number one cryptocurrency continues to grow, a fresh product on the market seeks to bring decentralised finance (DeFi) to bitcoin in the form of OpenDEX.

Bitcoin holders who might not want to transfer their tokens to the ethereum blockchain are now able to get in on the DeFi farming craze, albeit in a somewhat complex way.

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Litecoin & Bitcoin: Source: Coindesk

Introducing the concept to the gigantic bitcoin ecosystem, OpenDex is a new decentralised exchange protocol that allows bitcoin, litecoin and ethereum holders to provide liquidity for exchanges without having to transfer the value of their assets off their native blockchains. This means that “wrapped bitcoin” (WBTC) products on ethereum might soon become obsolete, and DeFi-style returns could be secured by other means.

In fact, OpenDEX markets itself as the first step towards a better standard for DEX’s within the fragmented landscape of competing exchanges like Uniswap and Balancer. To this end, OpenDEX is looking to create an open community of liquidity providers to agree on common standards over time.

A BTC Lightning solution to compete with ETH?

The DEX is built using bitcoin’s Lightning Network and Connext – a peer-to-peer micropayments protocol for cross-chain transactions. By putting the two together, the founders created a peer-to-peer micropayments protocol for cross-chain transactions, resulting in near-instant trade settlement. This is contrary to most decentralised exchanges that can only move at the speed of blockchain transactions.

Typically, in order for a DEX to succeed, a large and decentralised liquidity pool is required. As such, OpenDEX is targeting market makers or other users that could provide enough liquid assets that would facilitate the flow of transactions while enabling price discovery.

Liquidity providers will be able to connect to centralised exchanges and take advantage of arbitrage opportunities, generating profit via the price-differential between centralised exchanges and decentralised exchanges. Of course, as the technology and speed for decentralised exchanges improves, such opportunities would eventually fade.  The OpenDEX announcement claims premiums of up to 3% on arbitrage trades, which can happen dozens of times a day during significant price swings. 

Why does non-custodial DeFi matter?

Instead of locking up bitcoin in synthetic assets on ethereum like WBTC, OpenDEX enables cross-chain trades where assets remain native to the underlying chain. Put simply, this cuts out the middle-man completely, allowing users to participate in a decentralised exchange protocol without trusting a custodian or intermediary.

As with most DeFi protocols, the stated intention is to reduce trust and counterparty risk on behalf of the user. As such, more measures that improve this aspect are clearly better than procedures which circumvent it.

Lightning Network sets record highs

While Sushi coins and other food tokens rise and fall on Uniswap, a variety of data underscores increasing Lightning network activity, which has dramatically increased since 2018.

Indeed, bitcoin’s Lightning network exceeded all time highs earlier week as the total capacity held in the protocol’s payment channels – often referred to as “total valued locked” (TVL) – hit $12.4 million.

The cryptocurrency’s appreciation has probably helped to boost lightning’s TVL, with the number one crypto appreciating over 30% since July.

Effectively, bitcoin’s Lightning Network is picking up speed at an unprecedented rate, and innovative products that seek to build on DeFi within the bitcoin ecosystem are on the path to stress test the network’s fundamental progress.

Putting it all together

Clearly, there’s a growing yearning for bitcoin, ethereum, litecoin and crypto holders to do something with their stacks. The emergence of DeFi is an answer to potentially earning passive income in a budding decentralised trading ecosystem. However, while some protocols trade-off security for ease of access, bitcoin-based OpenDEX prioritises the latter while setting a slightly higher barrier to entry.

Lightning Network usage: Source: DeFi Pulse

Evidently, one should expect to see bitcoin’s chain broadening its horizons across the decentralised finance landscape; bearing in mind that the lightning network’s original intention was to replace your wallet. In the not to distant future, it appears that the use-cases for Lightning will increase dramatically now that the Ethereum-test net has tested the waters.

Is this the grand awakening bitcoin needs to propel its usage into another dimension? Time will tell, but one can’t help but be excited at the possibilities.

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