DeFi revival What are BTCFi's prospects?
Jessy, Golden Finance
With the gradual clarification of virtual currency regulations in the US,DeFiIt has also become one of the main lines of this bull market.
Currently, what people are talking about is DeFi under US regulation, more referring to RWA, US dollar stablecoins, PayFi, etc. with actual assets on the chain. These practices are generally based on Ethereum and its second layer, or some new high-performance public chain. It seems that the only relationship between all of this and Bitcoin is encapsulated bitcoins to participate in financial activities on the chain.
In order to change the awkward situation where only encapsulated bitcoins could participate in on-chain finance, BTCFi came into being. The so-called BTCFi refers to financial service platforms and agreements built around Bitcoin and its ecosystem, combined with decentralized financial technology, to expand the financial function of Bitcoin.
Specifically, this allows Bitcoin itself to participate in on-chain financial activities, and the originally poor Bitcoin smart contract function has been enhanced. The Bitcoin ecosystem also has more complex DeFi protocols such as centralized exchanges similar to other public chains, overcollateralized stablecoins, and re-staking. Moreover, in addition to BTC itself, some BTC ecosystem related assets, such as inscriptions, runes, RGB++, etc., also participated in DeFi-related activities.
According to DeFilLama data, the current total TVL of BTC is 6.545 billion US dollars, whileSolanaThe total TVL is $8.297 billion, and Ethereum's total TVL is $68.31 billion. As can be seen, BTCFi is still a blue ocean and has high potential for development.
Currently, star projects such as Babylon have sprung up on BTCFI. The project mainly allows users to stake bitcoins on another Pos blockchain and receive benefits by introducing a Bitcoin staking agreement without using third-party hosting, bridging solutions, or packaging services. Other than that, what other projects are worth watching?
BTCFiOverall development
pursuantDeFiLlamaAccording to the data, the total TVL of the representative projects of the BTCFI circuit, such as Babylon, has exceeded 5 billion US dollars. Among them, borrowing and repledge agreements are two core components of the BTCFi ecosystem and occupy the largest market share.
BTCFi protocol TVL ranking (data as of December 24, 2024)
According to DeFilLama's forecast, the BTCFi market will grow to around $1.2 trillion by 2030. This year was a year of rapid development of the BTC ecosystem. At the beginning of 2024, the overall TVL of BTC was 300 million US dollars, and by the end of 2024, it had reached 6.5 billion US dollars, an increase of more than 20 times.
In the BTCFi circuit, lending protocols are one of the most important applications. Traditionally, Bitcoin, as a digital asset, does not participate in the lending market. However, the BTCFi protocol allows Bitcoin to be used as collateral for decentralized borrowing. Typical projects include Liquidium, Shell Finance, etc.
Then there's the stablecoin protocol. The stablecoin protocol in BTCFi uses Bitcoin and its derivatives (such asOrdinalsand Rune) as collateral to issue stablecoins linked to the price of Bitcoin. In terms of stablecoins, there are Shell Finance's bitcoin-linked stablecoins, Babylon's stablecoins that use Bitcoin as collateral, etc.
The re-staking mechanism is also an innovation in the current BTCFi ecosystem. This year, these projects have also achieved significant results in terms of hedging volume, and there are currently quite a few re-staking agreements in the BTCFi ecosystem. Users can restake bitcoins or other crypto assets that have already been pledged to receive additional rewards. For example, Bounce Bit and the Lombard Protocol in the Babylon ecosystem are all protocols that support re-staking.
headBTCFiProject introduction
Babylon
When it comes to BTCFi, Babylon must be a project hard to ignore. It is the first project in the industry to introduce Bitcoin's own standard staking, which is essentially a staking, security, and liquidity protocol.
The main innovation is the introduction of Bitcoin's own standard staking, and technical upgrades achieved through Bitcoin improvement proposals, such as Schnorr signatures, Taproot upgrades, and Tapscript updates, etc., have improved the efficiency and privacy of staking transactions, allowing Bitcoin holders to lock BTC assets in the form of instruction code contracts in the form of self-escrow to the Bitcoin main network in the form of instruction code contracts and output “secure consensus services” on many BTC layer2. Get rich benefits from other extensions.
Currently, the TVL exceeds 5 billion US dollars, and it has a rich ecosystem. According to public data, its ecosystem projects cover 7 categories including Layer 2, DeFi, liquidity collateral, wallets and custodians, Cosmos, ultimate providers, and Rollup infrastructure, with a total of 91 projects, including many well-known projects, such as BisonLabs and BSquared Network in the Layer 2 field; Finance and Kina in the DeFi field LayerBank, etc.; Bedrock, Chakra, Lombard, etc. in the field of liquidity staking. These projects have formed a huge ecosystem around Babylon and promoted the diversified development of the Bitcoin ecosystem.
Shell Finance
It is the first decentralized lending and stablecoin protocol built on the Bitcoin layer. It aims to provide decentralized lending and stablecoin protocols for the Bitcoin ecosystem, so that holders of Bitcoin and related assets can manage assets and obtain liquidity more flexibly.
One of its core functions is a lending service. Users can use Bitcoin ecosystem assets such as Bitcoin, Ordinals NFTs, BRC-20, and Runes as collateral to lend a type of synthetic asset called BTCX. This process does not require trusting a third party, is achieved through a unique peer-to-protocol lending mechanism, and Shell Finance acts as a counterparty to the borrower. Unlike traditional loan agreements, Shell Finance charges borrowers a one-time loan fee instead of continuing to charge interest through variable interest rates, enabling instant interest-free loans, providing unique income opportunities for inscription holders.
The second core function is stablecoin issuance. Shell Finance is the first decentralized stablecoin protocol on the BTC main network. Users can obtain stablecoins after pledging the above Bitcoin ecosystem assets. The launch of this stablecoin has enhanced the liquidity of BTC's first-tier assets, laying the foundation for the development of BTCFi. In the future, it will also expand to UTXO model networks such as Bitcoin Fractal to further expand usage scenarios.
Technically, it uses discreet log contract (DLC) technology and PSBT technology. The former was proposed by Tad Gredryja, the cocreator of the Bitcoin Lightning Network, which can make the contract execution process more private, secure, and fully automated, such as automatic liquidation to repay loans when the value of pledged assets falls below a critical point.
On December 4, 2024, the Shell Finance mainnet went live.
Liquidium
An ordinal lending platform based on the Bitcoin blockchain that allows users to use native ordinal numbers as collateral to lend and borrow native bitcoins, thereby eliminating the need for intermediaries or custodians.
The product supports a variety of collateral. It not only supports Bitcoin Ordinals as collateral, but also plans to support BRC-20 tokens, etc., providing users with more choices and further expanding the application scenarios of Bitcoin assets.
Technically, it is based on the Bitcoin network, and all lending operations proceed directly on Bitcoin's first layer network. The project token LIQUIDIUM was launched on July 22, 2024, and is the first governance token of the rune token standard on Bitcoin. The token aims to decentralize the Liquidium protocol and facilitate community participation in its governance.
bitSmiley
The project has three components. The first is bitUSD, an overcollateralized stablecoin protocol. Against DAI, users can overcollateralize the native BTC to bitSmiley Treasury to mint the stablecoin bitUSD;
The second is BitLending, a native trustless lending protocol, which uses peer-to-peer atomic exchange technology to achieve transaction matching, and also introduces an insurance system to optimize the traditional loan settlement process, which is insufficient;
The third is the innovative derivatives agreement Credit Default Swaps (CDS), which is essentially a risk transfer tool. On the BitSmiley platform, one party (usually the party concerned about the risk of debt default) regularly pays a fee to the other party (the party willing to take that risk to obtain a certain return), similar to an insurance premium. If an agreed underlying debt (such as a debt situation arising from related Bitcoin ecosystem asset loans, etc.) occurs, the party bearing the risk must pay compensation to the party that paid the fee in accordance with the agreement to manage and hedge the risk of debt default. Operationally, it integrates NFTs to cut CDS and uses aggregated bidding methods to improve market efficiency and fairness.
Currently, its token SMILE has been listed on multiple exchanges, such as Bybit, Gate.io, Bitget, Matcha, etc.
Chakra
The technical innovations in the Bitcoin re-pledge agreement are as follows: The first is a self-custodial pledge. Through a time-locked script, Bitcoin holders can pledge assets without transferring them out of their wallets, avoiding third party risks, and following the “not your keys, not your coins” principle to ensure asset safety. The second is to use zero-knowledge proof technology, specifically using Stark to implement the certification system. Bitcoin staking events are verified off-chain through zero-knowledge proof to access on-chain information, no connection to the Bitcoin network, and no trusted settings, which enhances security compared to Snark.
By integrating decentralized Bitcoin liquidity, Chakra provides a more secure and smooth settlement experience. Users can easily stake Bitcoin with just one click, take advantage of Chakra's advanced settlement network, and participate in more liquidity opportunities, including Babylon's LST/LRT project.
Solv Protocol
The core highlight of the Bitcoin pledge agreement is to cooperate with leading ecological agreements to provide various revenue scenarios.
SolvBTC, launched by the project, is the first BTC product that allows self-generated income. Through staking, it creates a secure underlying income for bitcoins that were originally idle in users' wallets. SolvBTC captures staking revenue from BTC Layer 2, and DeFi revenue from ETH Layer 2, and seamlessly integrates various application-layer protocols to provide Bitcoin holders with rich revenue opportunities. The revenue is generated through the three strategies of staking, restaking, and trading strategies.
We can understand it as a unified Bitcoin liquidity matrix, which aims to unify Bitcoin's scattered trillion-dollar liquidity through SolvBTC. An income aggregator equivalent to a Bitcoin asset. Whether it's BTCB, FBTC, MBTC... different BTC assets on different chains can be minted into SolvBTC, simplifying the user's asset management experience.
This is also equivalent to integrating the liquidity opportunities of different Bitcoin assets. One SolvBTC travels across the chain to form a unified asset pool, bringing more diverse income opportunities to holders.
Bedrock
Bedrock is a multi-asset liquidity repledge protocol.
On the BTCFi side, it uses UniBTC supported by Babylon for re-staking. In Babylon War, Bedrock performed well and successfully seized 297.8 BTC staking credits, accounting for nearly 30% of Babylon's initial staking total.
Using this product, users can use wBTC to stake on Babylon on the ETH chain, and after staking their WBTC, they will get a 1:1 certificate - uniBTC, and the user's uniBTC can be exchanged for wBTC at any time. Babylon provided core technical support in the middle. Users can get Bedrock and Babylon points by staking wBTC and holding UniBTC. Through UniBTC's partnership with Babylon, Bedrock provides liquidity staking services to support Babylon's PoS chain. By minting UniBTC, we ensure the stability and security of the Babylon chain and further expand Bedrock products to the BTC chain.
Bouncebit
It is committed to creating revenue infrastructure for Bitcoin, providing institutional-level yield products, re-staking application scenarios, and CeDeFi services. Its specific businesses include:
Bancebit Protocol：When users deposit assets such as BTC, they can get back the corresponding Liquid Custody Token. The assets are managed on the Binance platform through secure escrow accounts and mirror mechanisms calculated by multiple parties to generate revenue and give back to users.
Bancebit Chain：Using the Stake Delegation Service Proof-of-of-Stake consensus mechanism and fully compatible with the Ethereum virtual machine, users can entrust tokens to verification nodes for staking, and the obtained proof of staking can be used in dApps on the chain.
Share Security Client：The logic is consistent with Eigenlayer, which allows the security of Bancebit Chain to be leased to support applications such as Bridge, Oracle, and Sidechain.
Bancebit went live in early 2024, with a total funding of $7.98 million. In May 2024, its native token, BB, went live on Binance.
Lorenzo protocol
A Babylon-based modular Bitcoin L2 infrastructure designed to provide a liquid financial layer for Bitcoin.
Through Babylon's Bitcoin staking and time-stamping protocols, it lays the foundation for a scalable and high-performance Bitcoin application layer, enhances Bitcoin's scalability, and enables functions such as smart contract execution.
The project has an innovative token system, including liquid principal tokens (LPT, such as stBTC) and yield accumulation tokens (YAT). StBTC is anchored 1:1 with the staked BTC to unify BTC liquidity in different ecosystems, and holders can redeem the principal amount after the staking ends; YAT has its own re-staking plan, start and end time, and can be traded and transferred before expiration. Holders can receive POS chain rewards, and YAT with the same staking plan can also be interchangeable, and its value comes from cumulative earnings and speculation on future returns.
The project supports a variety of staking methods, such as supporting revolving and leveraged staking. Circular staking uses external DEX partnerships to allow users to stake BTC, borrow more BTC, and increase staking rewards; leveraged staking streamlines the process by providing internal liquidity, and users can apply maximum leverage with a single click, improving capital efficiency and optimizing staking returns.
presentlyBTCFiExisting problems
The track currently has quite a few projects, and its total TVL also exploded in 2024, but the BTCFi track itself has not really sparked a trend in the industry.
Currently, there are still many problems in the development of this circuit. First, the core problem is that discussions within the Bitcoin community on some technical upgrades and innovative solutions are often difficult to reach consensus, which makes it difficult to advance projects related to the Bitcoin ecosystem.
At the technical level, there are also major difficulties. First, Bitcoin's own block scalability is insufficient, making it impossible to automate financial transactions and complex business logic like Ethereum. Furthermore, interoperability between Bitcoin and other blockchains is limited, and most solutions rely on centralized institutions to achieve cross-chain interaction.
Furthermore, the BTCFi project also has high transaction fees, which has greatly increased the costs for participants. For example, Babylon revealed high transaction fee issues during the staking process, including the sharp rise in miner fees due to the FOMO effect, as well as high processing fees for unlocking and withdrawal operations after staking.
Insufficient liquidity is also a common problem on this circuit. On the one hand, the liquidity risk of the Wrapped version of BTC still exists. For example, in the Babylon protocol, Wrapped BTC provided by staking nodes does not exactly match the liquidity of its aggregated native BTC, and needs to be maintained by the reputation guarantees of various aggregation platforms. On the other hand, the liquidity provision method for financial activities such as Bitcoin pledged loans is relatively single. It mainly relies on capital borrowing, and has not yet formed a diversified and efficient liquidity provision mechanism like in traditional financial markets.
It is in this situation that the total locked value of the BTCFi project is still small compared to mainstream public chains such as Ethereum. The market's acceptance and participation in it is not high, and the development and promotion of the project faces great challenges.
Looking to the future
Currently, exchanges such as Binance and OKX have cooperated with Babylon, Chakra, Bedrock, B², Solv Protocol, etc. to carry out a series of pre-staking, farming and other activities. User participation can achieve high profits. This is also a very convenient way for ordinary users to participate in BTCFi.
Looking at the projects mentioned above, you will find that in addition to BTC itself, the current BTCFI ecosystem already has a wealth of asset types to participate in BTCFI. For example, first-tier BTC-based assets such as inscriptions and runes; second-tier assets based on the BTC network, such as rgb++ and taproot assets; wrap/stake assets such as WBTC on the ETH chain and various LST or LRT vouchers representing staked BTC; the liquidity of these assets has expanded the scope of BTCFi and has also made BTCFi's scene richer.
Looking forward to the future, with the development of technology, such as Layer 2 technology, which will continue to develop and improve, solutions such as Rollups will become more mature, bringing significant improvements to Bitcoin's transaction processing capabilities.
With the advent of reliable cross-chain bridges, it will also enable safer and more efficient asset transfers and interactions between Bitcoin and other blockchain networks. Bitcoin can participate more widely in DeFi applications on different chains.
With solutions such as rsk, avm, bitvm, etc., Bitcoin's smart contract function will be enhanced to support more complex financial business logic and applications.
These technological advancements will all provide stronger technical support for decentralized financial services in the Bitcoin ecosystem, and enable more flexible financial products such as pledges, loans, and derivatives transactions.
With the revival of DeFi, we may be able to see BTCFi becoming more closely linked to actual finance. For example, the application of stablecoins in the BTCFi ecosystem will continue to expand, which will provide more efficient and low-cost solutions for cross-border payments and international trade. For example, the USDI stablecoin, which is supported by rgb++, has a 1:1 design anchored to the US dollar and aml/kyc compliance requirements, making it an important tool in the field of international payments. It is expected to be implemented on a large scale in global cross-border e-commerce and international settlement scenarios in the future, which will promote the widespread application of Bitcoin in the global financial system.
