Jack Dorsey’s Square wants to build DeFi on BTC—but is it even possible?

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Twitter and Square CEO Jack Dorsey is reportedly planning to jump on the DeFi bandwagon. This week he revealed Square is building an open platform “with the sole goal of making it easy to create non-custodial, permissionless, and decentralized financial services.” There’s a twist, however: Square is attempting to build its DeFi platform on the BTC blockchain.

In April 2021, the Square-led Cryptocurrency Open Platform Alliance (COPA) launched a lawsuit in the British High Court of Justice to challenge Dr. Craig Wright’s copyright claims over the original 2008 Bitcoin white paper. Though the ongoing suit is ostensibly part of COPA’s mission to keep blockchain-related IP open and free for all (or at least, COPA members) to use, Square’s plans for a DeFi platform suggest it has a more commercial motive.

Square is creating a new business (joining Seller, Cash App, & Tidal) focused on building an open developer platform with the sole goal of making it easy to create non-custodial, permissionless, and decentralized financial services. Our primary focus is #Bitcoin. Its name is TBD.

— jack (@jack) July 15, 2021

Other COPA members include Coinbase, Blockstream, BitPay, SatoshiLabs, Kraken, and MicroStrategy. Victory in the suit against Dr. Wright would give extra credibility to any attempt to build DeFi on BTC, which in its current form is poorly suited to the task.

BSV, on the other hand, is ideal for any kind of contract platform, allowing both Layer 2 protocol settlement and contract-related transactions of single satoshis at a fraction of a cent each. The longer BSV is able to prove itself as a stable and secure base protocol for creating applications, and the longer it is able to prove its status as the original Bitcoin (as planned by its creator), the more difficult it will be for BTC to gain any credibility.

There’s also the issue of other intellectual properties COPA members don’t own. Several patents related to Bitcoin and blockchain application development are held by Dr. Wright or nChain. The COPA copyright suit could be just the beginning.

What is DeFi, anyway?

DeFi, which is an industry buzzword describing applications that “decentralize” financial services by “cutting out middlemen” and permitting more people to access the services. It relies on technologies like contracts, stablecoins, non-custodial exchange wallets and tokenized assets. Most DeFi development takes place on Ethereum, which—despite serious scalability problems of its own—has a more flexible programming language that invites more creativity.

These technologies aren’t problematic themselves, but together they are bound by the same regulations and similar constraints as the “traditional” financial system. Any insurance, lending, or bank-like services operating under the DeFi umbrella will be subject to the same laws as existing ones.

The claim DeFi cuts out middlemen is also spurious. Service providers and token issuers still exist, and tokens issued on DeFi platforms are still shares by legal definition.

Despite the popularity of DeFi, or at least the name, whether such apps are even legal or not is yet to be tested. Spreading the services out over multiple apps doesn’t guarantee exemption from regulations. BTC’s new “Taproot” protocol addition was touted as a way to make contract-based applications more possible, but its proponents also praised its benefits for “privacy” and obfuscation of transaction details — something regulators definitely don’t like.

Dr. Wright in particular has a low opinion of DeFi claims, calling the term “utterly nothing more than a scheme to defraud investors” and saying that “decentralization” as a political tool is not what Bitcoin offers, despite the term’s frequent repetition in the blockchain world.

“Computers do not issue DeFi. Computers do not run it. There is no artificial intelligence or computational entity that manages this. Software developers update the process, and the issue is merely a share. People need to start to understand that a token on a Blockchain is no different than a token in a database. The record of a share transaction is a movement of tokens. When you have an Oracle database, the record of the share in that database is a token.”

He also reminded people that decentralized finance was a concept promoted by notorious fraudster Charles Ponzi, and that “the democratization of finance is the catch cry of every single financial criminal in the last 200 years.”

Since Bitcoin’s earliest days, uninformed and inexperienced investors have been losing money to hype over “new” concepts that did little other than skirt existing financial laws. Even the term “smart contract” is overblown, since EDI and electronic transactions in the 1980s and 90s had the same (or far more) computational complexity as today’s examples on Ethereum.

BTC’s elephant in the room: no data capacity or scalability

If DeFi can operate legally, then the advantage of blockchain is the ability to process and store large amounts of data, which the BTC chain can’t do.

Reports covering Dorsey’s announcement quoted blockchain supporters as admitting DeFi app development on BTC “has stalled a little bit,” and that it exists “in principle” with few if any actual examples. It continues to be used as a mostly static asset for speculative price trading, with little practical utility.

Trying to build a DeFi platform on BTC is (if you’ll pardon the pun) like trying to hammer a square peg through a round hole. Bitcoin was originally created to have unbounded scaling and a flexible, Turing-complete scripting language, but BTC Core developers have altered and hobbled the protocol in ways that make it unwieldy, if not impossible.

At 4-7 transactions per second maximum, BTC does not have the data processing capacity to handle DeFi apps. Such a task would need to go to off-chain, “Layer 2” protocols—which BTC needs to handle even ordinary payment transactions. But even by shoehorning in sidechains and other workarounds, could BTC even handle the extra pressure from thousands of Layer 2 settlements? How often would they actually “settle” on the main chain, and how much would it cost?

Any attempt to build DeFi services on BTC will only demonstrate how poorly it performs compared to BSV. Square and its COPA allies are most likely aware of this, so it’s part of their strategy to shove BSV out of the way as quickly and as definitively as possible.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple and
Ethereum—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.