Unlocking Decentralized Finance for Bitcoin: Velar’s Perpetual DEX Vision

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Summary

The November 1, 2024 episode of the Built on Bitcoin podcast, Mithil Thakore, CEO and Co-Founder of Velar, discusses Velar’s pioneering approach to non-custodial, Bitcoin-native DeFi. Through a perpetual DEX, Velar aims to provide secure yield opportunities and decentralized price discovery, leveraging Bitcoin’s Layer 2 solutions for scalability and efficiency. Thakore highlights Velar’s goal to shift Bitcoin’s trading volume away from centralized exchanges, building a sustainable, decentralized financial infrastructure.

Take-Home Messages

1. Non-custodial yield for Bitcoin: Velar’s perpetual DEX provides Bitcoin holders with a way to earn yield securely, responding to rising distrust in centralized custodians.
2. Bitcoin Layer 2 scalability: Velar relies on Layer 2 (L2) technology to enable decentralized financial applications on Bitcoin, maintaining the integrity of Bitcoin’s proof-of-work.
3. Institutional interest in DeFi: Velar’s platform addresses demand from institutional investors who seek yield on Bitcoin without the risks associated with centralization.
4. Proof-of-Work security: By building on Bitcoin’s proof-of-work, Velar provides DeFi with a tested, secure foundation that ensures decentralization.
5. Decentralized price discovery: Velar’s approach aims to transition Bitcoin price discovery from centralized exchanges to decentralized platforms, promoting resilience and autonomy.

Overview

The November 1, 2024 episode of Built on Bitcoin begins with Mithil Thakore describing Velar’s founding vision: to provide Bitcoin holders with a secure, non-custodial way to earn yield in decentralized finance. Velar’s perpetual DEX addresses growing skepticism of centralized custodians by enabling Bitcoin trading without forfeiting control over assets. Built on Bitcoin’s Layer 2 (L2) solutions, including Stacks and BOB, Velar’s infrastructure is scalable and secure, adhering to Bitcoin’s proof-of-work principles.

Thakore explains the pivotal role of Bitcoin L2s in scaling Bitcoin DeFi. He frames Bitcoin’s Layer 1 (L1) network as the “real estate” governing the city, while Layer 2s offer flexibility and expanded access for DeFi applications. This dual-layer approach preserves Bitcoin’s integrity while making it feasible to trade and earn yield, moving Bitcoin beyond its “store of value” label. Velar's non-custodial DEX, which offers perpetual futures, presents a solution for traders seeking leveraged positions without centralized custodians.

A significant component of Velar’s roadmap is enabling decentralized price discovery for Bitcoin. Currently, centralized exchanges dominate Bitcoin’s price setting, creating a dependency that conflicts with Bitcoin’s decentralized ethos. Velar’s perpetual DEX aims to shift this process to a decentralized landscape, aligning with Bitcoin’s foundational ideals of non-custodial finance. By expanding across multiple Bitcoin L2s and integrating low-latency technology, Velar positions itself as a future leader in Bitcoin DeFi.

Looking forward, Velar’s multi-pronged roadmap includes further L2 integrations, an advanced launchpad to support new Bitcoin-native projects, and enhancements to meet the trading requirements of high-frequency institutional investors. These efforts aim to establish a decentralized financial infrastructure on Bitcoin, capable of accommodating both retail and institutional demand for yield and trading security.

Stakeholder Perspectives

• Bitcoin Holders: Seek yield generation methods that avoid centralized custodians, especially given recent exchange collapses and trust issues.
• Institutional Investors: Interested in DeFi solutions that provide yield on Bitcoin without centralization risks, with a focus on platforms that support high-volume trades.
• Bitcoin Layer 2 Developers: Support scalable DeFi by enhancing security and finality on Layer 2, aligning with Bitcoin’s core principles.
• Regulators: Face pressure to develop frameworks addressing decentralized yield products and their associated risks in Bitcoin’s evolving DeFi landscape.

Implications

Velar’s decentralized yield generation offers a robust alternative to centralized exchanges, appealing to both retail and institutional investors cautious about custodial risks. Should Bitcoin Layer 2 solutions achieve reliable scalability and finality, Bitcoin DeFi could attract significant institutional capital, catalyzing the ecosystem’s growth. This shift to a decentralized model may also prompt regulatory changes that consider non-custodial yield platforms.

Transitioning Bitcoin price discovery to a decentralized framework aligns with Bitcoin’s foundational vision, reducing dependency on centralized exchanges and enhancing resilience across financial markets. Velar’s approach could set a precedent for future DeFi infrastructure on Bitcoin, which may strengthen Bitcoin’s role as a secure and decentralized financial backbone.

Future Outlook

Bitcoin DeFi holds transformative potential for finance, with decentralized platforms like Velar positioned to replace centralized exchanges as hubs for yield generation and price discovery. Velar’s commitment to Layer 2 integrations and low-latency infrastructure could attract high-frequency traders and institutional investors, creating a scalable, decentralized alternative to traditional finance.

In the coming years, as technical hurdles such as low-latency requirements are overcome, Bitcoin DeFi may become a viable, resilient fallback for global financial infrastructure. Velar’s roadmap includes expanding its perpetual DEX across multiple L2s, establishing decentralized price discovery as a standard for Bitcoin and paving the way for a robust financial ecosystem aligned with Bitcoin’s decentralized ideals.

Information Gaps

1. How can decentralized exchanges provide institutional investors with secure yield opportunities on Bitcoin while minimizing risk? Institutional interest in secure yield is a significant driver for DeFi on Bitcoin. Decentralized solutions must address the custodial risks that have hindered traditional adoption, enabling secure yield without compromising Bitcoin’s decentralization principles.
2. How reliable are Bitcoin Layer 2 solutions in ensuring asset security, and what improvements are needed to strengthen user trust in these systems? Layer 2 security is foundational to Bitcoin DeFi adoption. Research into the reliability and limitations of Bitcoin’s L2s is crucial for establishing secure, scalable solutions that uphold Bitcoin’s security standards and encourage broader adoption.
3. How can Bitcoin’s proof-of-work model offer security advantages over proof-of-stake for DeFi applications, and what are the long-term implications of this? Bitcoin’s proof-of-work consensus is a unique security feature for DeFi, potentially setting it apart from other ecosystems. Further exploration is needed to determine if proof-of-work can sustain the needs of decentralized finance, especially under large-scale institutional use.
4. What solutions can improve latency on Bitcoin Layer 2 platforms to support high-frequency trading, and how important is this improvement for institutional adoption? Latency is a critical issue for institutional-grade DeFi on Bitcoin, impacting trade execution precision. Research into low-latency infrastructure on Bitcoin’s L2s could position Bitcoin as a viable option for institutional trading platforms, fostering growth in the DeFi sector.
5. How might Bitcoin’s DeFi ecosystem achieve decentralized price discovery to reduce reliance on centralized platforms, and what are the necessary technical steps? Decentralized price discovery is essential for Bitcoin’s alignment with decentralization. Understanding the technical requirements to enable price discovery on decentralized platforms can support a shift from centralized exchanges, reinforcing Bitcoin’s foundational values.

Broader Implications

Institutional Adoption of Non-Custodial Yield on Bitcoin

Institutional demand for non-custodial yield on Bitcoin reflects a broader shift away from traditional custodial systems. As decentralized options like Velar's DEX grow, institutional investors may increasingly choose Bitcoin for its security and autonomy. This could drive greater Bitcoin adoption in institutional finance, especially if regulatory frameworks evolve to accommodate decentralized finance.

The Strategic Role of Bitcoin Layer 2 in DeFi

Bitcoin Layer 2 solutions hold the potential to redefine scalability in decentralized finance. With Layer 2s enabling low-latency, high-frequency transactions, Bitcoin could attract a diverse range of DeFi applications, from high-volume institutional trading to retail investing. This scalability directly supports Bitcoin’s expansion as a decentralized financial infrastructure, positioning it as a resilient alternative in the global financial landscape.

Bitcoin’s Proof-of-Work as a Security Model for Finance

Bitcoin’s proof-of-work (PoW) consensus model offers a robust security framework, presenting an alternative to proof-of-stake (PoS) in decentralized finance. As PoW remains proven in decentralized environments, its application in DeFi could influence future financial protocols seeking long-term stability. This model underscores Bitcoin’s role as a secure, scalable backbone for decentralized finance, fostering confidence among both individual and institutional investors.