07 Dec 2023
Top DeFi Projects on Stacks and the Bitcoin Economy
Adding functionality to Bitcoin is one of the biggest opportunities in crypto right now. DeFi projects on the Stacks blockchain seem best positioned to capitalize on this. Here's an overview of the more promising ones!
With the Bitcoin ETF, Bitcoin halving, an early crypto bull market, and lots of exciting innovations like Ordinals around Bitcoin, it’s hard not to be bullish on the Bitcoin Economy. While the Bitcoin maximalists may try to tell you otherwise, Bitcoin will need bustling layers of financial applications built on top and around it to ever have a chance of becoming a globally meaningful asset.
A leader and pioneer in the Bitcoin Economy sector is Stacks. Stacks is a layer 2 for Bitcoin that is anchored to the Bitcoin blockchain, but a stand-alone protocol that brings the flexibility of Ethereum-style smart contracts to Bitcoin. This enables applications for things like DeFi and NFTs, with the ultimate goal of making Bitcoin much more than something you simply buy and store. We have some big expectations for the Stacks ecosystem going forward, as providing a financial layer for Bitcoin is a huge gap in the market. Here are the top projects doing this on Stacks you should look into before everyone else does.
If you're looking for a one-stop-shop for all things Bitcoin DeFi, look no further than Alex. Alex is the leading project on Stacks that offers a full suite of DeFi products, including a Decentralized Exchange for swapping Stacks tokens, liquidity pools that offer rewards, a launchpad for both Stacks and Ordinals projects, and a bridge that links the Stacks blockchain to other chains like Ethereum, Binance Smart Chain, and soon, Bitcoin.
StackingDAO is a relatively new project that brings capital efficiency to $STX stakers. It does this through a relatively new innovation in crypto called Liquid Staking. Through this, stakers can enjoy both the staking rewards while also being able to continue using their assets in DeFi instead of having the assets locked inside a staking contract. With StackingDAO, this means that you stake your STX tokens in their protocol, receive stSTX in return that keeps earning that sweet Bitcoin yield while you can still use the stSTX in other Stacks DeFi dapps.
Currently, the project is on testnet, onboarding users to its private beta and having its code audited. So far, there's no information yet on whether the project will have its own token. However, most liquid staking protocols on other blockchains like Lido, Stride, and Benqi do have a native token that comes with governance and in some cases even a revenue-sharing mechanism. As the market is clearly telling us, people still love Bitcoin, and Stack's unique feature is that you can earn BTC by staking STX. Being able to use this staked STX in other DeFi protocols while still earning BTC is a product that's simply too valuable to ignore.
Always wanted a loan that pays itself back? Arkadiko, a veteran protocol in the Stacks ecosystem, offers a unique approach to decentralized finance. It allows STX holders to collateralize their assets and mint USDA, a stablecoin soft-pegged to the US Dollar. This innovative mechanism enables users to create self-paying loans, leveraging yield from PoX (Proof of Transfer) and STX-collateralized Vaults.
Besides its stablecoin offerings, Arkadiko also facilitates token swaps in a trustless, permissionless environment, allowing users to deposit tokens into liquidity pools on its decentralized exchange and earn rewards, including DIKO tokens. Arkadiko operates as a Decentralized Autonomous Organization (DAO), governed by its native token, $DIKO, which allows for staking yields. Despite market fluctuations (the USDA stablecoin lost its peg and still hasn't recovered, which any user must seriously take into account when issuing a loan), the dedication of the Arkadiko team and the protocol's deep integration within the ecosystem suggest promising growth prospects, especially with a stable stablecoin.
The Velar Protocol is a multi-faceted DeFi platform on the Stacks blockchain, designed to fully leverage Bitcoin's potential in decentralized finance. The platform includes features such as a Uniswap-inspired DEX, a trading platform, and an IDO launchpad, and plans to introduce governance, a cross-chain bridge, and a perpetual derivatives exchange in future updates.
Velar is currently in beta and has outlined a multi-phase development roadmap, including Velar v1: Dharma, v2: Artha, v3: Kama, and v4: Moksha, indicating a progression of features and capabilities, bringing one feature after the other from testnet to mainnet. The Velar Token ($VELAR) is central to the protocol’s economy, with its distribution including 35% for community rewards, 20% for the treasury, 20% for founders and the team, and 5% for advisors. With the project's strong backing and first to market with perpetuals on Stacks, Velar is one to keep a close eye on.
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The Zest Protocol addresses a critical issue in the Bitcoin economy: the underutilization of Bitcoin, largely left idle in cold storage, hindering economic growth. As an on-chain, open-source lending and borrowing platform built on the Bitcoin blockchain, Zest Protocol leverages smart contracts to enhance transparency and auditability. It features two distinct pool types: Earn pools, where users yield returns on their Bitcoin, and Borrow pools, for borrowing against Bitcoin holdings. This design allows Bitcoin holders to safely access liquidity without selling their assets, reducing the need for trust in centralized finance (CeFi) platforms or custodians.
Having earned recognition as one of the best Bitcoin loan platforms by Blockworks in 2023, Zest Protocol's journey began with a testnet launch in 2022. The team's collaboration with Hiro Systems and significant contributions to sBTC and the Stacks Nakamoto release highlight their commitment to innovation. With successful smart contract audits under its belt, the Zest team is now gearing up for a market launch. They are actively securing partnerships with Bitcoin liquidity providers, borrowers, and preparing for a closed launch. Engagements with institutional players and large Bitcoin holders at various global events underscore their efforts to expand Zest Protocol's influence in the DeFi space.
The UWU Protocol is a pioneering Stacks project that revolves around two primary components: UWU Cash and UWU Share (xUWU). UWU Cash is an over-collateralized stablecoin, "soft pegged" at $1.00 and backed by $1.50 worth of STX tokens, ensuring its stability and partial resistance to volatility. On the other hand, UWU Share (xUWU) serves as a utility token, capturing and distributing 100% of the protocol's fees to its holders bi-weekly. This distribution is facilitated through a Fee Claim smart contract, enabling holders to claim their dues each period, with unclaimed fees rolling over to the next.
Uwu is currently in beta, welcoming early users to test the protocol. While there are other crypto-backed stablecoin projects on Stacks, the 100% revenue-sharing mechanism of Uwu could turn out to be a strong competitive advantage. However, the protocol also comes with its fair share of risk, with its stablecoin being backed by the highly volatile asset STX, which has been subject to 30% up-and-down swings in a day periodically. This could lead to a wave of liquidations of Uwu users when the STX price decreases rapidly, or potentially lead to the depegging of the project's stablecoin. That being said, the protocol offers a valuable product for long-term STX holders, and a revenue-sharing asset is always something interesting in crypto.
Hermetica is a unique yet complex project that aspires to bring an additional yield to Bitcoin holders, all while they keep custody over their digital assets. It offers a platform where users can engage in activities like earning, trading, and increasing their Bitcoin holdings while maintaining full custody of their assets.
The core of Hermetica's appeal is its Hermetica Earn vault, which operates on an innovative European Reverse Knock-out (ERKO) option strategy. This strategy creates a mechanism for generating yield by setting specific price barriers for Bitcoin, within which payouts occur if the closing price of Bitcoin falls within these barriers. The strategy ensures profitability if Bitcoin's price moves within a 1% to 20% range above or below a predetermined strike price. The design of the strategy emphasizes capital protection and limits the maximum risk per trade to 1% per month, effectively managing downside risk. This approach has proven successful, as evidenced by backtest data showing an average annualized return of 6.5% on Bitcoin over a six-year period.
Positioning itself as “the Decentralized Exchange for Bitcoiners”, Bitflow Finance is a protocol for bringing Bitcoin Economy liquidity and swapping together under one roof. It offers a secure and transparent platform for trading Bitcoin and stablecoins from various Bitcoin layer 2’s like Stacks and Rootstock without custodial risk, enabling users to trade BTC procuct like sBTC and xBTC in a decentralized manner. Additionally, Bitflow supports Bitcoin-based stablecoin trading with optimized liquidity for lower slippage and fees.
Users can deposit BTC and stablecoins to earn real yield. The platform also allows for single-sided liquidity provision. Bitflow is open source, including its smart contracts and front-end, ensuring transparency and community involvement. It is backed by both the Stacks Foundation and the Bitcoin Frontier Fund and currently in beta. We for one can’t wait for the public launch of this project.
If you’re reading this, you are early to the Stacks ecosystem. While both $STX and $ALEX prices have been performing well, this activity generally still takes place on centralized exchanges while the most interesting stuff happens on-chain. Admittedly, Stacks is not very user-friendly at the moment, with transactions taking 20-30 minutes to be processed. This is set to change with the upcoming Nakamoto upgrade, which should reduce transaction processing speeds to 5 seconds. Additionally, sBTC is also set to unlock Bitcoin on Stacks without having to rely on a centralized party, creating a significant opportunity to attract a percentage of the hundreds of billions of Bitcoin’s market value.
Stacks is the current market leader in the Bitcoin Layer 2 space, and the DeFi projects described in this article hold substantial potential. We hope this overview will help you kickstart your DeFi journey on Stacks and the Bitcoin Economy. Soon, there will be much more to do with your Bitcoin as Stacks and its ecosystem projects enter a new phase!
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