Building a Decentralized Ecosystem on Bitcoin: Bitcoin Builders Deep Dive

Jan 10, 2024

The Bitcoin network is the gold standard in blockchain security. Over its decade and a half history, it has never been hacked or compromised, and is the only monetary system that has never allowed counterfeit currency to circulate.

The Bitcoin network’s strengths make it ideal as a payment network. However, the majority of global transactions still operate via antiquated banking technologies such as the SWIFT network, which dates back to 1973.

The solution? Build more on Bitcoin.

For all its strengths, Bitcoin lacks one key component: true utility. It was originally designed as a peer-to-peer transfer network, minus the smart contract functionality that has made networks like Ethereum so popular.

Ethereum sees the highest traffic of any blockchain network due to its robust decentralized ecosystem of Decentralized Apps (dApps) and Decentralized Finance (DeFi) protocols.

The SWIFT network is still the preferred financial payments network with over 11,000 financial institutions (predominantly banks) in more than 200 countries exchanging millions of standardized financial messages to move money securely every day.

The ability to combine such utility with Bitcoin's inherent security and robust network will be a game changer in the crypto industry. And there are projects in the space dedicated to achieving just that.

This article will guide you through the solutions currently available for building a decentralized ecosystem on Bitcoin, and explore the projects using these solutions to expand Bitcoin’s utility.

How to Build on Bitcoin

"Building on Bitcoin" refers to the use of Bitcoin as a foundation layer to develop new technologies and applications. This can include DeFi platforms, dApps, and non-fungible tokens (NFTs).

There are two main approaches developers take when building on Bitcoin:

Building on Layer 1

The first option involves building directly on the Bitcoin blockchain. This was made possible thanks to the Taproot upgrade introduced in November 2021. The upgrade unveiled a new scripting language named Tapscript, which brought smart contract functionality to the Bitcoin network.

Taproot makes Bitcoin a viable option for DeFi, NFT, and dApp development – something that was previously only possible on alternative networks like Ethereum. Developers can now inscribe satoshis (the lowest denomination of BTC) with metadata through a process known as “Ordinal Theory.” This has led to the creation of Bitcoin NFTs and Bitcoin-native assets like BRC-20 tokens.

However, Taproot does come with its limitations. As Tapscript is not compatible with the “Solidity” language used by Ethereum, the majority of existing DeFi applications need to be rebuilt to function on Bitcoin.

Building on Layer 2

Before the Taproot upgrade, the only way to build on Bitcoin was through Layer 2 and Sidechain solutions.

Layer 2 and Sidechain solutions are networks that exist “on top of” or run in parallel to the main Bitcoin network. They leverage Bitcoin’s robust security features whilst enabling the creation and execution of the smart contracts needed to build a decentralized financial ecosystem.

These chains are usually made to be compatible with both the Bitcoin and Ethereum ecosystems, acting as a midpoint between the two networks. All assets on the main Bitcoin blockchain can be moved freely to its Layer 2 and sidechains and vice versa.

As such, Layer 2 solutions are likely to become even more relevant as the Bitcoin ecosystem expands. They will make it easier for developers to create dApps and DeFi applications that can service multiple ecosystems in one place.

Why Build on Bitcoin?

Several factors make Bitcoin an ideal platform for building Decentralized applications:

Unparalleled Security

Bitcoin's blockchain is renowned for its security. It has never been successfully hacked, thanks to its decentralized network of miners and robust cryptographic techniques. Applications built on Bitcoin’s foundation are thus inherently safe and trustworthy.

Global Reach and Liquidity

Bitcoin is the most well-known and adopted cryptocurrency. Building on the network allows projects to tap into its vast global user base, ensuring higher liquidity and widespread adoption.

Decentralization and Censorship Resistance

Bitcoin's decentralized nature ensures that DeFi platforms built on it are resistant to censorship, government interventions, and centralized control. This ensures a truly open and global financial system.

Economic Viability

With a market capitalization exceeding $500 billion, Bitcoin is the most economically viable blockchain. Its scarcity, coupled with increasing demand since its inception, ensures a sense of financial security for those building on it.

Challenges of Building on Bitcoin

Scalability Issues

One of the most significant challenges for Bitcoin is its scalability. The Bitcoin network can only process approximately seven transactions per second, which is insufficient to sustain a large-scale DeFi ecosystem.

Limited Smart Contract Functionality

Bitcoin was not initially designed to support complex smart contracts in the way Ethereum was. While upgrades like Taproot have expanded its capabilities, it still lags behind platforms specifically designed for decentralized applications.

Development Complexity

Building on Bitcoin might require more intricate workarounds to implement certain DeFi functionalities, given its limited scripting language and smart contract capabilities.

What Can Be Built on Bitcoin?

With the Taproot upgrade and the aid of Layer 2 and Sidechain solutions, multiple decentralized solutions can now be constructed on the Bitcoin network. Some of the most promising solutions include:

Bitcoin DeFi

The main selling point of the Taproot upgrade was the potential for Bitcoin to support DeFi, such as Lending and borrowing protocols, Decentralized Exchanges (DEXs), and Yield Farming. However, due to the limitations of the Tapscript language and Bitcoin’s low transaction speeds, it is likely that the majority of Bitcoin DeFi will continue to live on Layer 2s and Sidechains.

Fungible Bitcoin Tokens

With the advent of Ordinal Theory, developers can create Bitcoin-native tokens, such as BRC-20 and ORC-20 tokens. These are the equivalent of Ethereum’s ERC-20 tokens, and can be used for governance and other utilities within the protocols built on Bitcoin.

Bitcoin NFTs

These are unique digital assets that exist on Bitcoin, representing ownership of specific items or content. They are generally associated with digital art, but can also be used for gaming, music, social media, and any use case where a unique identifier is needed.

Bitcoin DAOs

Decentralized Autonomous Organizations (DAOs) on Bitcoin are community-driven entities that allow members to make collective decisions on the governance of protocols on the blockchain. These organizations can manage funds, make decisions, and govern future development direction.

Bitcoin Bridges

Tools that allow assets and data to be freely transferred between Bitcoin and other blockchains. They enhance the interoperability of the Bitcoin network and are especially relevant for Layer 2s and Sidechains.

The Bitcoin Builders Bundle

To optimize your exposure to projects building on Bitcoin, you can invest in Bake’s “Bitcoin Builders” Smart Bundle.

It is designed to provide you with a balanced portfolio of the different projects helping to build Bitcoin’s decentralized ecosystem.

The Bitcoin Builders bundle includes:

DeFiChain (DFI)

DeFiChain stands as the world's largest DeFi blockchain within the Bitcoin ecosystem, boasting a total value locked (TVL) of over $180 million.

Built as a software fork on the Bitcoin blockchain using Merkle roots, DeFiChain acts as a sidechain to Bitcoin that guarantees fast, transparent, and decentralized financial services.

Its unique xVM design also facilitates the integration of multiple virtual machines, enabling developers to create decentralized applications that can interact with multiple blockchains.

This unique design allows dApps built using “siloed” scripting languages, such as Bitcoin’s Tapscript, can now seamlessly interface with dApps built on other networks, such as Ethereum, Polygon, or Polkadot.

DeFiChain’s native token, DFI, makes up 60% of the Bitcoin Builders Smart Bundle.

Stacks (STX)

Stacks is a Layer-2 protocol that allows developers to craft smart contracts and decentralized applications on the Bitcoin network.

Based on the Clarity programming language, which is designed to be secure, predictable, and compatible with Bitcoin, it bridges the gap between Bitcoin's robust security and the growing utility of decentralized applications.

Its native token, STX, was the first SEC-approved token in 2019, marking a significant milestone in regulatory acceptance for the crypto industry.

The STX token makes up 40% of the Bitcoin Builders Smart Bundle.

The Path Ahead

The journey of building on Bitcoin is just beginning. As the foundational blockchain, Bitcoin is poised to be at the forefront of the next wave of decentralized innovations in security, speed, and scalability.

As more tools and platforms emerge, making it easier to build on Bitcoin, we can expect to see a surge in mainstream adoption. This will not only be limited to the crypto-savvy but will extend to regular people seeking decentralized solutions for their everyday needs.

The Bitcoin Builders bundle is one of multiple optimized investment bundles now available on Bake.

DISCLAIMER: Please note that the information on this blog and in any articles posted on this blog is for general information only and should not be relied upon as financial advice. Cake Pte. Ltd., Bake, UAB, and its affiliates (the “Cake Group”) are not licensed financial advisers. You may wish to approach your own independent financial advisor before making any decision to buy, sell or hold any product and/or digital assets mentioned in this blog.

Any views, opinions, references, assertions of fact and/or other statements are not necessarily the views held by the Cake Group. The Cake Group disclaims any liability whatsoever that may arise out of or in connection with such statements. Always do your own research before investing in any financial assets and consult a qualified financial advisor if necessary.



The most transparent way to get cashflow from your cryptocurrencies.

Great! You've successfully subscribed.
Great! Next, complete checkout for full access.
Welcome back! You've successfully signed in.
Success! Your account is fully activated, you now have access to all content.