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Can Bitcoin Handle Permissionless Liquidations?
- Sep 30
- 7 min read
Updated: Oct 6
Examining block times, sidechains, and proposals shaping Bitcoin’s role in automated markets
Bitcoin has established itself as the settlement layer for trillions of dollars in value, with each block averaging ten minutes and fees typically hovering around one dollar under normal conditions. At the same time, permissionless liquidations in DeFi markets on Ethereum are executed in seconds and rely on continuous automation. The contrast raises a fundamental question: can Bitcoin ever accommodate that same level of liquidation activity without compromising its design?
Recent stress tests on Ethereum show that liquidation volumes can climb into billions of dollars during sharp price swings, triggered automatically by smart contracts with minimal delay. Bitcoin, by contrast, processes transactions in batch intervals and prioritizes security over speed. This creates a tension between the requirements of liquidation systems and the inherent pace of Bitcoin’s base layer.
Sidechains such as Rootstock and Liquid, and second-layer solutions like Lightning, are working to narrow this gap. Proposed Bitcoin upgrades, including OP_CAT and OP_CTV, aim to expand scripting flexibility. Still, the liquidity depth on these systems remains limited compared to Ethereum’s DeFi infrastructure. This tension between the demand for immediacy and Bitcoin’s deliberate settlement process makes the topic both urgent and unresolved.
Bitcoin’s Pace Versus Liquidation Speed
Bitcoin confirms a block roughly every ten minutes, though the average confirmation time fluctuates. In early 2025 it reached as high as nineteen minutes, the longest on record. For everyday transfers this delay is tolerable, but for liquidation events it creates a major bottleneck.
Liquidations in decentralized markets often trigger within seconds. When the value of collateral drops below a defined threshold, automated contracts liquidate the position to protect lenders and maintain stability. During sharp market downturns, Ethereum has processed billions of dollars in liquidations in a matter of hours, all without manual intervention.
Bitcoin’s architecture was not designed for this kind of near-instant enforcement. Transactions wait to be included in a block, and inclusion depends on fee priority. When activity spikes, users compete by raising fees, which can slow down lower-priority transactions and add extra cost. In moments of market stress, this creates a mismatch between the need for immediate liquidation and Bitcoin’s deliberate settlement cycle.
This contrast is not a flaw in design. Bitcoin was built for security and finality, while liquidation systems demand constant rebalancing and speed. That tension defines the debate: whether Bitcoin can ever serve as the backbone for permissionless liquidation, or whether such activity must remain anchored to faster, programmable environments.
Sidechains and Second Layers
Because Bitcoin’s base layer processes blocks in intervals that stretch into minutes, developers have turned to sidechains and second-layer systems to introduce speed and programmability. These environments allow activity that would be impractical directly on Bitcoin to operate with faster confirmation times and richer contract logic.
The Liquid Network is one example. It operates as a Bitcoin sidechain that supports quicker settlements and confidential transactions. As of 2025, Liquid holds fewer than 4,500 BTC bridged into its system, which shows progress but also underlines the liquidity challenge when compared to Ethereum’s DeFi markets that handle billions of dollars in daily collateral. Liquid enables token issuance, trading, and lending, yet its limited pool restricts how far permissionless liquidation models can scale.
Rootstock takes a different approach by offering an Ethereum-compatible environment pegged to Bitcoin. Projects like Sovryn use Rootstock to provide lending, borrowing, and liquidation features with logic similar to Ethereum-based protocols. Activity on Rootstock demonstrates that Bitcoin-linked lending is possible, but adoption remains niche compared to DeFi ecosystems built on Ethereum.
Stacks represents another pathway by introducing a smart contract layer anchored to Bitcoin security. Platforms such as Alex have created decentralized markets with lending and liquidation mechanics that settle back to Bitcoin. Stacks brings programmability closer to Bitcoin but, like Liquid and Rootstock, faces the same hurdle of liquidity depth.
Lightning Network adds further nuance. In 2025 it surpassed 14,000 nodes and processed over 100 million transactions at fees often measured in cents. While Lightning is well suited for fast payments, it does not natively manage collateral or liquidation logic. Its role is better seen as a channel for settlement after liquidation events rather than the environment where they occur.
Together, these systems show that Bitcoin can host permissionless liquidation activity indirectly, but at limited scale and with constraints tied to liquidity pools, adoption, and interoperability. They demonstrate potential, yet highlight how far Bitcoin remains from hosting liquidations at the speed and depth that DeFi on Ethereum currently delivers.
Upgrades That Could Change the Equation
While sidechains and second layers extend Bitcoin’s reach, discussions inside the Bitcoin community are also focused on how to expand the scripting capabilities of the base protocol itself. Two proposals stand out: OP_CAT and OP_CTV.
OP_CAT reintroduces an opcode that concatenates elements in a script. Though simple in form, it allows developers to create more flexible spending conditions by combining data in ways not currently possible on Bitcoin. The opcode was originally part of early Bitcoin releases but disabled for safety reasons. Renewed interest in OP_CAT comes from its potential to support contract-like behavior that could make liquidation logic easier to design.
OP_CTV (short for CheckTemplateVerify) introduces covenants, which allow a transaction to restrict how the outputs it creates can be spent in the future. With this, a contract could define a path for funds if certain conditions are met. In the context of liquidations, it could enforce a rule that collateral moves to a predefined address if market prices fall to a set level, without requiring trust in an external party.
Both proposals are under discussion and testing. Their adoption depends on consensus across the Bitcoin community, a process that historically takes years. The conservative approach to changes in Bitcoin is intentional, with a focus on minimizing risks to security and decentralization.
If these upgrades are eventually adopted, Bitcoin would gain new tools for building more advanced financial contracts. That does not automatically solve the speed problem, but it would give developers the building blocks to design liquidation models that anchor more directly to Bitcoin’s security rather than relying entirely on sidechains or external protocols.
Where Permissionless Liquidations Could Work and Where They Fail
The debate over Bitcoin’s ability to handle permissionless liquidations is not black and white. Some use cases appear technically possible, while others highlight structural limits that are unlikely to be solved without major changes.
Practical Scenarios
Collateral handled on sidechains or specialized protocols: When liquidation logic runs outside of Bitcoin’s base layer and only the final settlement reaches Bitcoin, the process can function without disrupting block space. This approach mirrors how Sovryn on Rootstock or Alex on Stacks currently operate.
Low volume liquidation markets: In smaller ecosystems with fewer participants, the pressure on block space is limited. This reduces the risk of congestion, keeping costs manageable and allowing liquidations to finalize within sidechain environments.
Conditional scripts with covenant support: If upgrades like OP_CTV are adopted, liquidation rules could be coded directly into transaction templates. These rules would enforce predictable outcomes without requiring constant external monitoring.
Problematic Scenarios
High frequency liquidation waves: During rapid market downturns, thousands of liquidations may need to trigger in seconds. Bitcoin’s block intervals and fee competition make this impractical on the base layer.
Cross-asset collateral systems: Complex DeFi positions involving multiple tokens or assets require dynamic logic. Bitcoin scripts, even with upgrades, are unlikely to handle such intricate dependencies without external infrastructure.
Mass liquidation stress events: When entire markets unwind simultaneously, liquidity demands can exceed what Bitcoin-linked protocols currently provide. Ethereum has demonstrated the ability to process billions of dollars in liquidations in a short period. Bitcoin-connected systems remain far smaller in scale.
This contrast underscores an important reality. Bitcoin can anchor liquidation outcomes but struggles to serve as the live execution environment for them. Sidechains and off-chain systems can bridge the gap, yet their liquidity depth and adoption remain far from the levels seen in Ethereum-based protocols.
The Balanced Verdict
Bitcoin, in its current state, cannot deliver permissionless liquidations on the same scale and speed seen in Ethereum-based DeFi markets. Its design favors settlement finality over instant reaction. A block time that averages ten minutes, confirmation delays that can stretch to nineteen minutes during congestion, and fees that climb sharply in peak demand create natural limits.
The reality is straightforward. Bitcoin can anchor liquidation outcomes, providing the final layer of security and settlement. But the execution layer, where rapid decisions are needed, is better suited to systems designed for speed and programmable logic. That division of roles may ultimately define how permissionless liquidations tied to Bitcoin evolve.
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