BTCFi is dead?

Author: Kevin, GOAT Network

Of course not. In fact, the era of BTCFi has not even really begun.

Recently, the arguments about BTCFi being "dead" have been rampant in various conferences and social media, especially after a number of BTCFi protocols represented by Babylon performed poorly in the issuance of Tokens.

Although Babylon has indeed created a new narrative path, it has also exposed many structural problems. Its core concept is to use Bitcoin as the underlying asset and export its "digital gold" security as a public product. From the supply-side logic, this is understandable, but in addition to technical feasibility, the key lies in: where is the real demand in the market? Large chains often do not adopt (because this will weaken the value and role of their own native tokens), while small chains may choose, but their market size is limited and difficult to support high valuations. If the value capture of BTC security is just these altcoins, it will not only continue to bring about the selling pressure of these altcoins, but also it will be difficult for this economic model to continue to operate.

Although LST issued based on Babylon has liquidity advantages, its actual value can be captured is limited. At present, LST returns basically rely on the platform itself or third-party token incentives, and lack real and native BTC returns support.

However, this does not mean that the BTCFi track is not working. On the contrary, after a deeper analysis of these phenomena, we should focus on two fundamental problems that have not yet been resolved:

1. How to achieve the security of BTC native?
2. From an economic perspective, how should the source and sustainability of native BTC income be established?

Bitcoin’s “OP Moment”

Just like Ethereum L2 ushered in an explosion after the Optimistic Rollup model was truly completed, Bitcoin also needs its own "OP moment". Due to the limitations of the Bitcoin scripting language and the high requirements for native security by users, realizing "truely native" L2 security is the first pillar for whether BTCFi can be established. The reason why the so-called BTC L2 was not recognized by the mainstream BTC community and the reason why BTCfi could not develop is one of the core reasons.

There are currently two major technical routes that are feasible in the market: OP_CAT and BitVM2.

Although OP_CAT is technically reasonable, it needs to modify the BTC mainnet script instruction set. Considering that this change touches the bottom line of Bitcoin fundamentalism, it is extremely difficult to advance. In addition, as Bitcoin is accepted by more and more public, financial institutions, regulators and even major governments, if its underlying logic is changed, it may lead to a serious decline in its stability and trust.

In contrast, BitVM2 does not need to modify the Bitcoin protocol, and combines the OCP (Optimistic Challenge Process) model with concise logic and stable performance. On the premise of solving the economic model, it has the foundation for wide implementation.

Small spoilers: BitVM2 technology breakthrough comes faster than expected, so stay tuned for our release. We believe that this is the "OP moment" of Bitcoin.

All problems, ultimately, are economic issues ( [It's the economy,

stupid)](https://en.wikipedia.org/wiki/It%27s_the_economy,_stupid)

But security is not the whole, and the real challenge of BTCFi is still the economic model.

The essence of an economic model is supply and demand matching: what value can BTC provide? What practical needs can these values ​​meet? This process of matching the value provided with needs is the process of generating profits. Moreover, in addition to the benefits themselves, we must also pay attention to the cost of obtaining benefits to ensure that they have continuous rather than one-time incentives.

From the supply side, the core value of Bitcoin mainly includes two points:

1. The security brought by its decentralization and strong consensus ;
2. The liquidity value of mainstream crypto assets .

From the demand side, BTC holders generally hope that assets will "make money on their own". But no matter the size of the assets, everyone hopes that BTC can create more profits. This demand is very strong and has a broad foundation. Products developed to meet these needs need to be based on Bitcoin native security, and at the same time, they need to utilize the capital scale, efficiency, arbitrage opportunities, etc. brought by liquidity.

Therefore, L2, which is based on native BTC security, is the starting point for the sustainable development of BTCFi. Combined with the ZK Rollup Bridge, BTC can safely and efficiently introduce the second floor for economic activities. The benefits (such as Gas fees) generated by the transaction volume generated by the second tier should be partially returned to BTC holders as a return on liquidity and security.

If the Gas fee on the second layer is denominated in BTC, this constitutes an extremely pure "native BTC income" model. Before this, BTC had almost no real native income scenarios, except for the capital fee rate in CeFi.

The essence of Babylon's model is to harvest third-party tokens, which are not native or sustainable.

Going further, to achieve continuous benefits, the operating costs of L2 must be effectively controlled.

In the ZK Rollup solution, Sequencer, Prover, Challenger, Operator, Committee and other roles each assume different responsibilities and the profit structure is also different. How to control the overall cost while ensuring the incentive mechanism will determine whether L2 has sustainable operation capabilities.

GOAT Network will soon release a new "Economic Beige Book" to elaborate on our solutions in detail, so stay tuned.

Written at the end

Although the market is still in a period of turbulence, truly valuable products will eventually stand out. We firmly believe that the era of BTC L2 and BTCFi is coming soon.

Based on the architecture of BTC native security, we expect more refined BTCFi products to meet the different needs of BTC holders for profits.

I am very happy to be able to move forward side by side with everyone and lead the innovative exploration of BTC L2 and BTCFi.

LFGOAT!