Bitcoin (BTC): what it is and how it shows up in DeFi

What Bitcoin is

Bitcoin is a digital currency that runs on a public network of computers rather than through a bank or payment company. It launched in 2009. Its ledger, the blockchain, records every transaction, and anyone can run software that checks those records independently. The bitcoin.org explainer describes it as a consensus network that enables a new payment system and a completely digital money.

Bitcoin was designed to do one job carefully: let people send value to each other without a trusted middleman, under rules that are hard to change. The supply schedule is part of those rules. New bitcoin is issued to miners at a declining rate, and the total can never exceed 21 million coins.

Ownership comes down to keys. A private key lets you sign a transaction that moves bitcoin from an address. If someone else gets your key, they can move your coins; if you lose it with no backup, nobody can recover it for you. Our crypto wallets guide covers the basics.

How the network works

Miners bundle pending transactions into blocks and compete to add the next block by doing a large amount of computation, called proof of work. A new block is added roughly every ten minutes on average. Each block builds on the one before, so changing old history would mean redoing all that work, which is what makes confirmed transactions hard to reverse.

• Fees: you attach a fee to each transaction. When many people are transacting, fees rise and low-fee transactions can wait longer.
• Confirmations: each new block on top of yours is one more confirmation. Platforms often wait for several before crediting a deposit.
• Limited scripting: Bitcoin supports simple spending conditions, such as requiring several signatures, but not the general-purpose smart contracts found on networks like Ethereum.
• Layers on top: payment-channel networks and other systems built on Bitcoin aim to make small, fast payments cheaper. Each adds its own rules and risks.

See the full infographic with notes.

How Bitcoin shows up in DeFi

Because Bitcoin’s own network doesn’t run general smart contracts, most DeFi activity involving BTC happens on other blockchains using a wrapped version of it. A wrapped BTC token is meant to represent one bitcoin held somewhere else.

• Custodial wrapping: a company or group holds real bitcoin and issues tokens on another chain. You are trusting that custodian to hold the reserves and honour redemptions.
• Bridge-based wrapping: a smart contract system, often with a group of signers, locks bitcoin and mints tokens elsewhere. You are trusting the bridge’s code and the people or machines that control it.

Once wrapped, BTC can be used like other tokens: as collateral in a lending protocol, in a liquidity pool on a decentralized exchange, or swapped for other assets. Each of those steps adds the risks of that protocol.

Key risks

• Key loss or theft: there is no password reset. See key loss.
• Irreversible mistakes: sending to the wrong address, or on the wrong network, usually can’t be undone.
• Price swings: the CSA warns that crypto assets can be very volatile and that you could lose some or all of your money.
• Fee spikes: at busy times, moving small amounts can cost a large share of their value.
• Wrapping and bridge risk: described above, and the most common way BTC meets DeFi.
• Platform risk: bitcoin held for you on a platform depends on that platform’s custody. See platform failure.

Questions to ask before you use BTC in DeFi

Before moving bitcoin anywhere beyond your own wallet, a few questions sort out most of the risk.

1. Who holds the real bitcoin behind this wrapped token, and can you read their reserve disclosures?
2. How do redemptions work, who can pause them, and what happens to the token if they stop?
3. Which network is the wrapped token on, and what will fees cost to get there and back?
4. If you deposit it in a protocol, what price source does that protocol use, and at what point would you be liquidated?
5. Could you explain each step to a friend? If not, slow down.

Our bridge checklist and protocol risk scorecard turn these into a step-by-step review.

Canadian notes

CDIC does not cover cryptocurrencies, so bitcoin is not deposit-insured anywhere, including on a Canadian platform.

For tax, the CRA treats selling bitcoin, trading it for another crypto asset and spending it as dispositions. Gains are capital gains or business income depending on your facts, and one-half of a capital gain is taxable; a proposed increase to that inclusion rate was cancelled on 2025-03-21. The CRA says mining is, in most cases, carrying on a business. As of 2026-10-30, the CRA has published no guidance specific to wrapping BTC or using it in DeFi.

Your checklist

• Back up your keys or seed phrase offline before holding any meaningful amount.
• Send a small test transaction before a large one.
• Before wrapping BTC, find out who holds the underlying bitcoin and how redemption works.
• Record the date, units and Canadian-dollar value of every disposition.
• Check any Canadian platform on the CSA lists first.

Sources and dates

• How does Bitcoin work? — bitcoin.orgreference
  No date shown on page · checked 2026-10-31. Plain-language explanation of Bitcoin.
• Blockchain bridges — ethereum.orgreference
  No date shown on page · checked 2026-10-31. How bridges move assets between networks, and bridge risks.
• Investor tools — crypto assets — Canadian Securities Administratorsreference
  Page date 2025-10-22 · checked 2026-10-30. Crypto assets can be very volatile and risky; you could lose some or all of your funds.
• Director's decision — Newton Crypto Ltd. (example of platform terms) — Ontario Securities Commissionin force
  Page date 2026-03-25 · checked 2026-10-30. Example terms: $30,000 net 12-month limit for most retail clients on non-specified crypto assets; not applied in AB, BC, MB, QC, SK; BTC, ETH, LTC, BCH, SOL listed as specified.
• What's covered — Canada Deposit Insurance Corporationin force
  No date shown on page · checked 2026-10-30. Up to $100,000 per category per member institution; cryptocurrencies, including stablecoins, are not covered.
• Understanding crypto-assets and your tax obligations — Canada Revenue Agencyin force
  No date shown on page · checked 2026-10-30. Defines crypto-assets; lists dispositions (sell, trade, barter, gift, gamble) and acquisitions including mining/staking rewards.
• Reporting income from crypto-asset transactions — Canada Revenue Agencyin force
  Page date 2025-12-02 · checked 2026-10-30. Business income vs capital gains is case by case; lists business indicators; crypto-to-crypto trades are dispositions; half of a capital gain is taxable.
• Reporting income from crypto-asset mining and staking activities — Canada Revenue Agencyin force
  Page date 2025-11-10 · checked 2026-10-30. Mining is usually a business; staking rewards on a centralized platform are generally income when credited. Silent on self-custody/DeFi staking.
• Prime Minister Carney cancels proposed capital gains tax increase — Prime Minister's Officein force
  Page date 2025-03-21 · checked 2026-10-30. The proposed increase in the capital gains inclusion rate was cancelled; the one-half rate continues.