Nation-state Attacks on Bitcoin are Inevitable, Can DeFi on Bitcoin Neutralize Them?
Powerful nation states such as China have continued to increase their scrutiny of decentralized and permissionless cryptocurrencies such as Bitcoin (BTC). Until fairly recently, mainland China had been the world’s leading hub for Bitcoin mining, however, the nation’s government proceeded to ban all such activities earlier this year. Chinese authorities have also banned transactions involving Bitcoin and other digital currencies such as Ethereum (ETH).
Meanwhile, in the US, Gary Gensler of the Securities and Exchange Commission (SEC) has referred to crypto as the “Wild West,” due to lack of proper regulations (among other issues). It’s clear now that governments across the globe feel threatened by permissionless cryptocurrencies and could go to great lengths to preserve the fiat-based monetary system in order to maintain their sovereignty.
Despite ongoing efforts from nation-states to prevent or discourage people from using Bitcoin and other digital assets, crypto adoption has been rising steadily according to a recent report from Coin Metrics . As mentioned in their report, dated October 5, 2021, the cryptocurrency market managed to turn back around in Q3, after crashing briefly in Q2 of this year. The report revealed that BTC and ETH both were able to close the last quarter in the green with BTC surging by 32.55% and ETH going up by 43.82%.
DeFi Could Protect Bitcoin from Nation-States
Prices continue to surge with Bitcoin again becoming a trillion dollar asset (in terms of market cap) at the time of writing. In addition to surging crypto prices, many more people are aware of digital currencies, even if they have not yet directly invested in them. Decentralized finance (DeFi) has also emerged as a fast-growing crypto segment with many new protocols such as Aave and Compound providing innovative ways of lending and borrowing, without needing third-parties to finalize transactions.
If the DeFi space continues to mature, then it could start to protect Bitcoin from nation-state attacks, because truly decentralized platforms are almost impossible to shut down. Since they are not controlled by any one entity, there’s no single or centralized point of failure. Anyone can access decentralized protocols, because they exist in the form of open-source code that can be run without permission on any computer.
Authorities might keep targeting Bitcoin as long as it remains just a store of value or an alternative to fiat. But they’ll be far less likely to attack it when it becomes the backbone of a decentralized financial ecosystem where regular people access financial services such as lending, borrowing, yield farming, and much more. That is to say nation-states will be more careful in their approach if Bitcoin becomes an integral part of our economy with trillions of dollars worth of value locked in Bitcoin-based DeFi.
Even though governments don’t want to give up control of money to a system they can’t control, they might not be able to stop the individual users or organizations that want to engage in crypto-based transactions. Instead of trying to stop people directly, governments are working on their central bank digital currency (CBDC) projects because they’re hoping that consumers will be eager to transact with bank-issued virtual currency. CBDCs are being promoted for their ease-of-use and convenience, but they might enable even greater financial surveillance since all transactions would be traceable on digital ledgers.
Building DeFi on Top of Bitcoin
Unlike Ethereum, the OG cryptocurrency doesn’t have the smart contract functionality. But innovative Layer-2 solutions such as Portal have emerged to build DeFi on top of the Bitcoin network.
Portal , a Coinbase-backed startup is a self-hosted Layer-2 wallet and cross-chain DEX (decentralized exchange) built on Bitcoin that “makes atomic swaps between Bitcoin and other digital assets fast, secure, and private.” It recently secured $8.5 million in capital via an investment round in order to create a self-sovereign and “uncensorable” DeFi platform on Bitcoin. It retains the peer-to-peer nature and security of the Bitcoin network while opening up new possibilities for users.
According to Brian Johnson from Republic Capital, also an investor in Portal, interoperability is a “necessity for blockchain to bridge into the mainstream finance world.” He pointed out that Republic Capital invested in Portal with this “future in mind.” He added that “utilizing Bitcoin’s security as an anchor, [they] believe the Portal and its team are in a unique position to build one of the leading bridges in DeFi.”
As explained by its creators, Portal offers the speed and liquidity of centralized platforms with the “trust minimization guarantees of Bitcoin.” From spot markets to options, peer-to-peer lending and borrowing, “all using on-chain, peer to peer contracts and without third party custody or control, Portal unlocks Bitcoin’s potential to actually decentralize finance.”
At the center of Portal is its Layer 2 and Layer 3 tech, known as Fabric, which is an open-source application for launching censorship-resistant layers on top of the Bitcoin base layer. Fabric has been specifically designed to enable the completely private, off-chain execution of “smart contracts” for asset issuance, P2P swaps, staking, liquidity, and derivatives.
Governments Could Soon Launch Major Attack on Bitcoin
It’s only a matter of time before more governments throughout the world start launching an all-out assault on Bitcoin, the flagship cryptocurrency, which has become one of the best store-of-value instruments ever created.
But if crypto industry participants can build a censorship-resistant DeFi ecosystem right on top of the Bitcoin protocol, then it could potentially prevent nation-states from being able to launch successful attacks on it. If the DeFi ecosystem continues to grow at this pace, then it might soon become an unstoppable force.
Many analysts believe that DeFi could be the key to achieving self-sovereignty for everyone that Bitcoin had promised.