The Evolution of Bitcoin in DeFi

Bitcoin, the pioneering cryptocurrency, has long been regarded as digital gold - a store of value in the crypto ecosystem. However, as the world of decentralized finance (DeFi) continues to evolve rapidly on smart contract platforms like Ethereum and Solana, questions arise about Bitcoin's relevance and role in this new financial landscape. In this illuminating discussion between Austin and Matt Luongo of Thesis, we delve deep into the complexities of integrating Bitcoin into the world of DeFi, the cultural implications of potential market cap shifts, and the innovative solutions being developed to bridge these seemingly disparate worlds.

Threshold's TBTC: Bridging Bitcoin to Smart Contract Platforms

At the heart of this conversation is Threshold's TBTC, a decentralized solution for bringing Bitcoin onto smart contract platforms. Matt Luongo, the driving force behind this project, explains the genesis of TBTC and its evolution:

"The idea with TBTC is to take what WBTC has done, which is to make Bitcoin composable, and to do it in a way that you're not just calling Mike Belshe. You're not just reaching out to the BitGo trust company, but you actually need to hit up a lot of people to break the guarantees of the system."

This approach aims to provide a more decentralized and trustless method of using Bitcoin in DeFi applications, addressing concerns about centralization and single points of failure that exist with current solutions like Wrapped Bitcoin (WBTC).

The Cultural Divide: Bitcoin Maximalism vs. Smart Contract Innovation

One of the most intriguing aspects of the discussion is the exploration of the cultural divide between Bitcoin maximalists and proponents of smart contract platforms. Luongo, who straddles both worlds, offers a unique perspective:

"Bitcoin taught me to save money. I did not understand how to save money before. I didn't understand like what my place in society was... Bitcoin has taught me a lot. And that culture, not even just the tech, but the actual culture has taught me a ton."

This appreciation for Bitcoin's cultural impact is balanced against the recognition of the innovative potential of smart contract platforms. Luongo argues for a future where both can coexist and complement each other, rather than one replacing the other entirely.

The Flippening: A Cultural Moment or Economic Inevitability?

A significant portion of the conversation revolves around the concept of "the flippening" - the hypothetical moment when another cryptocurrency, likely Ethereum, surpasses Bitcoin in market capitalization. Luongo expresses concern about this potential event:

"The most terrifying thing about the flippening, if that ever happens, it's not, oh my God, my bags or whatever. It's, how does the space work if Bitcoin is not number one? How do we reason about things?"

This perspective highlights the deep-seated belief in Bitcoin's role as the foundation of the cryptocurrency ecosystem. Luongo argues that Bitcoin's position as the top cryptocurrency serves an important purpose in simplifying the narrative for those outside the crypto space:

"A lot of people outside the space think everything is Bitcoin. Every cryptocurrency thing is Bitcoin. Either they think that, or they think that every cryptocurrency thing is a dog-themed scam."

The Technical Challenges of Cross-Chain Interoperability

The discussion delves into the technical challenges of creating interoperability between Bitcoin and smart contract platforms. Luongo explains the evolution of TBTC from version 1 to version 2, highlighting the trade-offs between security, capital efficiency, and decentralization:

"TBTC V1, I might almost say, was perfect. It was incredibly expensive and capital hungry. V2 is much cheaper and easier to use, but now we're slowly having to increase the decentralization and make that number go from 20 to, you know, 200 to 2000."

This evolution demonstrates the ongoing challenges in creating practical, scalable solutions for bringing Bitcoin into the DeFi ecosystem while maintaining the security and decentralization principles that underpin both Bitcoin and DeFi.

The Role of Bitcoin in DeFi's Future

Despite the challenges, Luongo remains optimistic about Bitcoin's role in the future of DeFi. He argues that Bitcoin should be the primary form of collateral in the space:

"I think BTC should be the vulnerable process space. I think that a lot of us have its tendency to think that whoever wins should have the best tech... But instead of trying to convince you the Bitcoin is good collateral, I think it's probably easier to just say, why in the world are we talking about real world assets?"

This perspective challenges the current trend towards tokenizing real-world assets and suggests that Bitcoin's established market presence and inherent digital nature make it a more suitable foundation for DeFi applications.

The Merger of Keep and New Cipher: A Case Study in Decentralized Collaboration

An intriguing subplot in the discussion is the merger between Keep and New Cipher to form the Threshold network. This rare instance of two decentralized networks coming together offers valuable insights into the challenges and opportunities of collaboration in the crypto space:

"If this were a private M&A, there would be board discussions and relationships between shareholders and all of these other components that the market has sort of figured out how to do... But for what we were doing, we had no clue."

Luongo's candid discussion of the merger process highlights the innovative nature of decentralized organizations and the need for new paradigms in governance and collaboration.

The Future of Bitcoin: Relevance and Adaptation

As the conversation wraps up, the focus turns to the future of Bitcoin and its ability to remain relevant in a rapidly evolving crypto landscape. Luongo emphasizes the importance of making Bitcoin useful beyond its store of value proposition:

"I think that's what I really want to see with TBTC is to make that funnel deep and interesting and you know, to basically completely slay this pet rock meme."

This vision of Bitcoin as an active participant in the broader DeFi ecosystem, rather than just a static store of value, represents a potential path forward for the original cryptocurrency to maintain its relevance and importance.

The Interplay Between Freedom and Usability in Cryptocurrency

The discussion touches on the philosophical underpinnings of cryptocurrency, particularly the tension between the ideals of freedom and the practical demands of usability. Luongo reflects on this duality:

"The truth is there's a serious trade off between freedom and, I mean, individual liberty and consequences. And people want to be free to make their own choices, but it is difficult to remember that that means you will suffer the consequences of those choices."

This insight gets to the heart of many debates within the crypto community, highlighting the ongoing challenge of balancing ideological purity with practical adoption and use.

Lessons from the Threshold Merger

The merger between Keep and New Cipher to form Threshold offers valuable lessons for future collaborations in the decentralized space. Luongo shares some key insights:

"Just because you have a decentralized network doesn't mean that someone's not going to step up. And when something needs to get done, there are still people and there are still community members that have to step up and actually do it."

This observation underscores the importance of human initiative and leadership, even in decentralized systems. It also highlights the need for new models of accountability and governance in decentralized mergers:

"If someone else were doing one today, it's kind of remarkable that neither team or community built a lot of accountability into this stone. So we didn't build in any way for either person, either group to earn in. We didn't build like KPIs or milestones or anything like that."

The Potential Impact of TBTC on Bitcoin Adoption

While much of the discussion focuses on the technical and cultural aspects of integrating Bitcoin with DeFi, there's also consideration given to how solutions like TBTC might impact Bitcoin adoption. Luongo suggests that making Bitcoin more useful in DeFi could attract a broader range of users:

"I think what often happens is like you buy Bitcoin on one of these things and then you're like, oh my God, look at all these other tickers. Then you buy all these other things and then slowly you find your way on chain."

By providing more ways to use Bitcoin within the DeFi ecosystem, TBTC and similar solutions could potentially create a more engaging and diverse crypto ecosystem, bridging the gap between Bitcoin maximalists and DeFi enthusiasts.

The Challenge of Maintaining Bitcoin's Relevance

One of the core challenges discussed is how to keep Bitcoin relevant in a world increasingly dominated by smart contract platforms. Luongo argues that solutions like TBTC are crucial for this:

"If you were a Bitcoiner who is afraid that Bitcoin is going to become irrelevant, what we're trying to build is a life raft."

This perspective positions cross-chain interoperability solutions not just as technical innovations, but as strategic moves to ensure Bitcoin's long-term relevance and importance in the broader crypto ecosystem.

The Role of Decentralized Custodial Solutions

A significant portion of the discussion focuses on the importance of decentralized custodial solutions for Bitcoin. Luongo explains:

"Every instance of Bitcoin that exists somewhere else in the world on someone else's network, whether that's Bitcoin on Ethereum, Bitcoin on Solana, Bitcoin on centralized exchanges... Those are all custody versions of Bitcoin."

This reality underscores the need for solutions like TBTC, which aim to provide a more decentralized and trustless way of using Bitcoin on other networks. The goal is to maintain the security and decentralization ethos of Bitcoin while enabling its use in the broader DeFi ecosystem.

The Evolution of TBTC: From V1 to V2

Luongo provides insight into the evolution of TBTC from its first version to the current V2:

"TBTCV1, I might almost say, was perfect. It was incredibly expensive and capital hungry. V2 is much cheaper and easier to use, but now we're slowly having to increase the decentralization and make that number go from 20 to, you know, 200 to 2000."

This evolution highlights the ongoing challenges in creating practical, scalable solutions for cross-chain interoperability while maintaining high levels of security and decentralization.

The Cultural Implications of the Flippening

The potential "flippening" - where another cryptocurrency surpasses Bitcoin in market cap - is discussed as more than just an economic event. Luongo argues it could have significant cultural implications:

"I think if and when, I'll stick with if, I guess, if there is a flippening, I think that the amount that the world is going to need to understand about crypto to differentiate between all of these different assets is pretty incredible."

This perspective suggests that Bitcoin's position as the top cryptocurrency serves an important role in simplifying the narrative for those outside the crypto space.

Bitcoin's Role as Collateral in DeFi

Luongo makes a strong case for Bitcoin as the primary form of collateral in DeFi:

"I think BTC should be the vulnerable process space... Why in the world are we talking about real world assets? Which require all sorts of nonsense to get on chain and obviously can never really be fully natively on chain. When we have Bitcoin, that's twice the size of its next crypto asset that we can pull onto these chains."

This argument challenges the current trend towards tokenizing real-world assets and suggests that Bitcoin's established market presence and inherent digital nature make it a more suitable foundation for DeFi applications.

The Intersection of Bitcoin and Smart Contract Cultures

The discussion highlights the cultural divide between Bitcoin maximalists and proponents of smart contract platforms. Luongo, who has experience in both worlds, offers a unique perspective:

"I have never met a hardcore Bitcoiner... Since 2014, I have never met a hardcoin Bitcoiner that privately didn't play with every single other piece of tech that we all play with."

This observation suggests that the public rhetoric of Bitcoin maximalism may not always align with private behaviors and interests within the community.

The Challenge of Balancing Freedom and Usability

The conversation touches on the philosophical tension between the ideals of freedom that underpin Bitcoin and the practical demands of usability:

"The truth is there's a serious trade off between freedom and, I mean, individual liberty and consequences. And people want to be free to make their own choices, but it is difficult to remember that that means you will suffer the consequences of those choices."

This insight gets to the heart of many debates within the crypto community, highlighting the ongoing challenge of balancing ideological purity with practical adoption and use.

The Potential of Cross-Chain Collaboration

The merger of Keep and New Cipher to form Threshold is discussed as a case study in cross-chain collaboration. Luongo shares insights into the process:

"We had no clue. There were a few things that we kind of made clear, and then we started moving into like larger and larger community discussions."

This experience offers valuable lessons for future collaborations in the decentralized space, highlighting both the challenges and opportunities of bringing different blockchain communities together.

The Future of Bitcoin in a Smart Contract World

As the discussion concludes, the focus turns to the future role of Bitcoin in a world increasingly dominated by smart contract platforms. Luongo envisions a future where Bitcoin remains relevant by becoming more deeply integrated with the DeFi ecosystem:

"I think that's what I really want to see with TBTC is to make that funnel deep and interesting and you know, to basically completely slay this pet rock meme."

This vision of Bitcoin as an active participant in the broader DeFi ecosystem, rather than just a static store of value, represents a potential path forward for the original cryptocurrency to maintain its relevance and importance.

The Importance of Bitcoin's Network Effect

Throughout the discussion, the importance of Bitcoin's network effect is emphasized. Luongo argues that Bitcoin's position as the top cryptocurrency serves a crucial role in the broader adoption of crypto:

"I think that I don't think they hear about the self custody stuff. And I think most people who have touched the space are just used to like losing money on Coinbase or Binance, you know, I just think that if Bitcoin is not number one, whoever is number one, that's a chance for a narrative reset and they better nail it."

This perspective highlights the ongoing importance of Bitcoin's brand recognition and first-mover advantage in driving broader crypto adoption.

The Role of Decentralized Solutions in Bitcoin's Future

The conversation repeatedly returns to the importance of decentralized solutions like TBTC in securing Bitcoin's future relevance. Luongo explains:

"If you're a Bitcoiner, what I'm trying to offer, what we are trying to offer, what threshold wants to offer is a way to make your money useful."

This emphasis on utility and interoperability suggests that the future of Bitcoin may depend on its ability to integrate with and contribute to the broader DeFi ecosystem.

The Potential for Cross-Chain Innovation

The merger of Keep and New Cipher to form Threshold is presented as an example of the potential for cross-chain innovation in the crypto space. Luongo shares:

"We heard about another team that was considering launching a incredibly decentralized Bitcoin backed token. And that was the new Cypher tune... And when we heard that this team was considering doing this token, I started getting concerned."

This concern ultimately led to collaboration rather than competition, highlighting the potential for cooperative innovation in the crypto space.

The Challenge of Decentralized Governance

The discussion of the Threshold merger highlights the challenges of decentralized governance in the crypto space. Luongo notes:

"If someone else were doing one today, it's kind of remarkable that neither team or community built a lot of accountability into this stone. So we didn't build in any way for either person, either group to earn in. We didn't build like KPIs or milestones or anything like that."

This observation underscores the need for new models of accountability and governance in decentralized organizations and collaborations.

The Importance of User Experience in Crypto Adoption

While much of the discussion focuses on technical and cultural aspects, the importance of user experience in driving crypto adoption is also touched upon. Luongo shares an anecdote about trying to buy a house with Bitcoin:

"I wanted to buy a house and all I had was Bitcoin. And that's what got me to start TBTC. So I said, I have Bitcoin and I'd like to, can I get a house now?"

This personal experience highlights the real-world challenges that still exist in using cryptocurrencies for everyday transactions, underscoring the need for solutions that make crypto more practical and user-friendly.

The Potential for Bitcoin in DeFi

Despite the challenges, Luongo remains optimistic about the potential for Bitcoin in DeFi. He argues:

"I think BTC should be the vulnerable process space. I think that a lot of us have its tendency to think that whoever wins should have the best tech... But instead of trying to convince you the Bitcoin is good collateral, I think it's probably easier to just say, why in the world are we talking about real world assets?"

This perspective challenges current trends in DeFi and suggests that Bitcoin's established market presence and digital nature make it an ideal foundation for future DeFi applications.

The Role of Community in Crypto Innovation

Throughout the discussion, the importance of community in driving crypto innovation is emphasized. Luongo shares:

"So Victor and then a few other shared community members reached out and they actually broke their call between me and McLean."

This anecdote highlights how community members can play a crucial role in facilitating collaboration and innovation in the decentralized space.

The Future of Decentralized Finance

As the conversation concludes, the focus turns to the future of decentralized finance and Bitcoin's role within it. Luongo envisions a future where Bitcoin becomes more deeply integrated with the DeFi ecosystem:

"I think that's what I really want to see with TBTC is to make that funnel deep and interesting and you know, to basically completely slay this pet rock meme."

This vision of a more interconnected and interoperable crypto ecosystem, with Bitcoin playing a central role, offers an exciting glimpse into the potential future of decentralized finance.

In conclusion, this wide-ranging discussion between Austin and Matt Luongo offers valuable insights into the challenges and opportunities facing Bitcoin in an increasingly smart contract-dominated world. From the technical innovations of TBTC to the cultural implications of the potential flippening, the conversation highlights the complex interplay between technology, culture, and economics in the rapidly evolving crypto space. As solutions like TBTC continue to develop and mature, they may play a crucial role in bridging the gap between Bitcoin and the broader DeFi ecosystem, ensuring Bitcoin's continued relevance and importance in the future of finance.

Facts + Figures

• TBTC is a decentralized solution for bringing Bitcoin onto smart contract platforms, developed by Threshold.
• The concept of "the flippening" refers to the hypothetical moment when another cryptocurrency surpasses Bitcoin in market capitalization.
• TBTC V1 required 150% collateralization in ETH for custodians.
• TBTC V2 uses a 51 of 100 system, relying on an "honest majority" assumption.
• The merger of Keep and New Cipher to form the Threshold network is a rare instance of two decentralized networks combining.
• Bitcoin's market cap is approximately twice the size of the next largest crypto asset.
• The discussion suggests that 75-90% of ordinals users were Ethereum users first, based on survey data from at least 5,000 respondents.
• The Threshold merger did not include traditional M&A elements like KPIs or milestones for accountability.
• The ability to exit the merged network by downgrading to original tokens was built into the Threshold merger, but has rarely been used.
• Luongo argues that Bitcoin should be the primary form of collateral in DeFi, rather than tokenized real-world assets.
• The conversation touches on the cultural divide between Bitcoin maximalists and proponents of smart contract platforms.
• The discussion highlights the tension between the ideals of freedom in cryptocurrency and the practical demands of usability.
• The merger process for Threshold involved community discussions and proposals from both the Keep and New Cipher sides.
• Luongo suggests that making Bitcoin more useful in DeFi could attract a broader range of users to the crypto ecosystem.
• The conversation emphasizes the importance of Bitcoin's network effect and brand recognition in driving broader crypto adoption.

Questions Answered

What is TBTC and how does it work?

TBTC is a decentralized solution developed by Threshold for bringing Bitcoin onto smart contract platforms. It works by creating a tokenized representation of Bitcoin that can be used in DeFi applications on other blockchains. The latest version, TBTC V2, uses a 51 of 100 system relying on an "honest majority" assumption to secure the Bitcoin, making it more capital efficient than its predecessor while still maintaining a high degree of decentralization.

What are the cultural implications of "the flippening"?

The flippening refers to the potential event where another cryptocurrency surpasses Bitcoin in market capitalization. According to Matt Luongo, this could have significant cultural implications for the crypto space. He argues that it would require the world to develop a much more nuanced understanding of cryptocurrencies, potentially complicating the narrative for those outside the space who currently view "crypto" and "Bitcoin" as synonymous.

How did the merger between Keep and New Cipher to form Threshold occur?

The merger between Keep and New Cipher to form Threshold was a unique process in the decentralized space. It began with informal discussions between the project leaders, facilitated by community members. The process then moved to larger community discussions and proposals from both sides. Unlike traditional M&A, there were no formal KPIs or milestones set for accountability. The merger also included the ability for token holders to exit by downgrading to their original tokens, though this option has rarely been used.

Why does Matt Luongo believe Bitcoin should be the primary form of collateral in DeFi?

Luongo argues that Bitcoin should be the primary form of collateral in DeFi because of its established market presence and purely digital nature. He questions the trend of tokenizing real-world assets, pointing out that these can never be fully native to the blockchain. In contrast, Bitcoin is already a large, liquid digital asset that can be more easily integrated into DeFi protocols without the complexities associated with real-world asset tokenization.

How does TBTC aim to keep Bitcoin relevant in a smart contract world?

TBTC aims to keep Bitcoin relevant in a smart contract world by making it more useful and integrated with the DeFi ecosystem. By providing a way for Bitcoin to be used in smart contract platforms like Ethereum and Solana, TBTC allows Bitcoin holders to participate in DeFi activities without selling their Bitcoin. This increased utility could help maintain Bitcoin's relevance and importance as the crypto space continues to evolve towards more complex financial applications.

What are the main challenges in creating cross-chain interoperability for Bitcoin?

The main challenges in creating cross-chain interoperability for Bitcoin include balancing security, capital efficiency, and decentralization. Early solutions like TBTC V1 were highly secure but capital intensive, requiring 150% collateralization. The current version, TBTC V2, improves capital efficiency but introduces new challenges in maintaining a high level of decentralization. There's also the ongoing challenge of building trust in these systems within both the Bitcoin and DeFi communities.

How does the Bitcoin community view projects like TBTC?

According to Luongo, the Bitcoin community's view of projects like TBTC is mixed. While some "hardcore" Bitcoiners may publicly criticize such projects, Luongo suggests that many privately experiment with and use various DeFi applications. The reception largely depends on how well these projects can maintain Bitcoin's principles of decentralization and security while providing added utility.

What lessons can be learned from the Threshold merger for future decentralized collaborations?

Key lessons from the Threshold merger include the importance of community involvement in the process, the need for clear communication and transparency, and the challenges of implementing accountability measures in decentralized systems. The experience also highlighted the potential for collaboration over competition in the crypto space, and the need for new models of governance and decision-making in decentralized organizations.

How might solutions like TBTC impact Bitcoin adoption?

Solutions like TBTC could potentially impact Bitcoin adoption by making Bitcoin more useful in the broader DeFi ecosystem. By allowing Bitcoin holders to participate in DeFi activities without selling their Bitcoin, these solutions could attract a wider range of users to both Bitcoin and DeFi. This increased utility and integration could help maintain Bitcoin's relevance and potentially drive further adoption as the crypto space continues to evolve.

What is the relationship between freedom and usability in cryptocurrency, according to the discussion?

The discussion highlights a tension between the ideals of freedom that underpin Bitcoin and the practical demands of usability. Luongo points out that there's a trade-off between individual liberty and consequences, noting that while people want the freedom to make their own choices, this also means accepting the potential negative outcomes of those choices. This tension is at the heart of many debates within the crypto community, as projects strive to balance ideological purity with practical adoption and use.