Never in the history of the universe has so much financial opportunity been available to so many. Bitcoin has grown remarkably as a store of value for the people by the people, giving citizens around the world a piece of their economic freedom. At the same time, Satoshi’s mission to make the financial system work for everyone has found expression in the exciting decentralized finance, or DeFi, space.
DeFi has grown from a mere experiment into a multi-billion dollar sector that consists of applications for savings, trading, lending, options, insurance, and other financial functions. This new class of financial application has generated attractive yields while eliminating the need to trust intermediaries. While the central hub of DeFi is on Ethereum, Bitcoin holders also have the opportunity to access DeFi through wrapped Bitcoin tokens. A wrapped Bitcoin token is a token that mirrors the price of Bitcoin and is directly exchangeable for the real thing. At the same time, wrapped Bitcoin tokens are compatible with Ethereum and the DeFi applications built on top of it.
DeFi isn’t very welcoming for newcomers due to their technical nature. That’s why we’ve put together this step-by-step guide to show you how to transform your Bitcoin and Ether into yield-generating assets through DeFi. Specifically, we’ll be wrapping Bitcoin and then depositing wrapped Bitcoin and Ether into Uniswap, one of the leading DeFi platforms. By the end of the guide, you’ll be much more familiar with the world of DeFi, and you’ll have the tools to navigate its technicalities. This tutorial assumes that you have some Bitcoin and Ether on hand with which to experiment. If you don’t have any, rush over to Coinmama to get some ETH and BTC now.
But before we dive straight into the nitty-gritty of earning yield with Bitcoin and Ether, we need to get some crucial concepts out of the way first. We’ll start by explaining what it means to become a Uniswap liquidity provider and move on to wrapping your Bitcoin.
If you’re already familiar with the basics, feel free to skip the intro and get straight down to business.
What is a Uniswap liquidity provider?
Uniswap is a cryptocurrency exchange. You’re probably familiar with a few already. However, Uniswap works quite differently to most of the exchanges you’re used to. An ordinary exchange brings together buyers and sellers to trade with one another. Traders use an orderbook to record the prices at which they wish to buy or sell a token. Once the orderbook matches a buyer and a seller, the trade executes, and the coins change hands. Uniswap does not use an orderbook to match buyers and sellers. Instead, it relies on a unique system known as an automated market maker. An AMM is essentially a smart vault that holds two assets, for example, Bitcoin and Ether, and allows traders to trade with the AMM. For example, say Todd has Ether and wishes to swap it for Bitcoin.- On a regular exchange, he would place a sell order on his Ether, and the exchange would find someone who wants to buy his Ether at his specified price.
- On Uniswap, Todd would send Ether to the ETH-BTC automated market maker instead of finding a counterparty to buy his Ether. The AMM then sends Todd an amount of Bitcoin according to a dynamic exchange rate.