DeFi renaissance, is BTCFi Summer still far away?

Author: Jessy, Golden Finance

As the regulation of virtual currencies in the United States gradually becomes clearer, DeFi has also become one of the main lines of this bull market.

At present, what people are talking about about DeFi under US supervision refers more to RWA, US dollar stablecoins, PayFi, etc. with real assets on the chain. These practices are generally built on Ethereum and its second layer, or some high-performance new public chains. The relationship between all this and Bitcoin seems to be only encapsulated Bitcoin to participate in financial activities on the chain.

In order to change the embarrassing situation where only encapsulated Bitcoin can participate in on-chain finance, BTCFi came into being. The so-called BTCFi refers to the financial service platform and protocol built around Bitcoin and its ecosystem, combined with decentralized financial technology. , allowing Bitcoin’s financial functions to be expanded.

Specifically, this enables Bitcoin itself to participate in on-chain financial activities, and the originally barren Bitcoin smart contract functionality is enhanced. The Bitcoin ecosystem also has more complex DeFi protocols similar to other public chains such as centralized exchanges, over-collateralized stablecoins, and re-pledge. In addition to BTC itself, some BTC ecology-related assets, such as inscriptions, runes, RGB++, etc., have also participated in DeFi-related activities.

According to DeFiLlama data, the current total TVL of BTC is US$6.545 billion, while the total TVL of Solana is US$8.297 billion, and the total TVL of Ethereum is US$68.31 billion. It can be seen that BTCFi is still a blue ocean and has high development potential.

At present, star projects like Babylon have been born on BTCFi. This project mainly introduces the Bitcoin pledge protocol, allowing users to pledge Bitcoin to another Pos blockchain and obtain income without using third-party custody or bridging solutions. or packaging services. In addition, what other projects are worthy of attention?

Overall development of BTCFi

According to DeFiLlama data, the total TVL of representative projects on the BTCFi track such as Babylon has exceeded US$5 billion. Among them, lending and re-pledge protocols are the two core components of the BTCFi ecosystem, occupying the largest market share.

 BTCFi protocol TVL ranking (data as of December 24, 2024)

According to DefiLlama, the BTCFi market size will grow to approximately US$1.2 trillion by 2030. This year is a year of rapid development for the BTC ecosystem. At the beginning of 2024, the overall TVL of BTC was US$300 million, and by the end of 2024, it had reached US$6.5 billion, an increase of more than 20 times.

In the BTCFi track, lending protocols are one of the most important applications. Traditionally, Bitcoin, as a digital asset, has not participated in the lending market. However, the BTCFi protocol enables Bitcoin to be used as collateral for decentralized lending. Among the more typical projects are Liquidium, Shell Finance, etc.

Then there are stablecoin protocols. The stablecoin protocol in BTCFi uses Bitcoin and its derivative assets (such as Ordinals and Rune) as collateral to issue stablecoins linked to the price of Bitcoin. In practice on stablecoins, there are Shell Finance’s Bitcoin-linked stablecoins, Babylon’s Bitcoin-collateralized stablecoins, and so on.

The re-pledge mechanism is also an innovation in the current BTCFi ecosystem. This year, these projects have also made great achievements in lock-up volume. There are currently many re-pledge agreements in the BTCFi ecosystem. Users can re-pledge already pledged Bitcoin or other crypto-assets to obtain additional rewards. BounceBit and the Lombard Protocol in the Babylon ecosystem are all protocols that support re-pledge.

Introduction to the Head BTCFi Project

Babylon

When it comes to BTCFi, Babylon must be a project that is difficult to ignore. It is the first project in the industry to introduce Bitcoin's own standard Staking, which is essentially a pledge, security and liquidity protocol.

The main innovation is the introduction of Bitcoin's own standard Staking. The technical upgrades achieved through Bitcoin improvement proposals, such as Schnorr signature, Taproot upgrade and Tapscript update, etc., improve the efficiency and privacy of Staking transactions, allowing Bitcoin holders to Investors can lock BTC assets in the Bitcoin main network in the form of command code contracts in the form of self-custody without the need for third-party custody, and output "security consensus services" on many BTC layer 2, and then obtain a wealth of other extensions. income.

TVL currently exceeds US$5 billion and has a rich ecosystem. According to public information, its ecological projects cover 7 categories, including Layer2, DeFi, liquidity staking, wallets and custodians, Cosmos, finality providers and Rollup infrastructure. , a total of 91 projects, including many well-known projects, such as BisonLabs and BSquared Network in the Layer2 field; Kina Finance and LayerBank in the DeFi field 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 a decentralized lending and stablecoin protocol for the Bitcoin ecosystem, allowing holders of Bitcoin and related assets to manage it more flexibly. Assets, access to liquidity.

One of its core functions is a lending service. Users can use Bitcoin, Ordinals NFT, BRC-20, Runes and other Bitcoin ecological assets as collateral to lend out a synthetic asset called BTCX. This process does not require trusting a third party. Through A unique peer-to-protocol lending mechanism is implemented, and Shell Finance serves as the counterparty to the borrower. Unlike traditional lending protocols, Shell Finance charges borrowers a one-time loan fee instead of continuously charging interest through floating interest rates, achieving interest-free instant borrowing and providing unique income opportunities for inscription holders.

The second core function is the issuance of stable coins. Shell Finance is the first decentralized stable currency protocol on the BTC main network. Users can obtain stable coins after mortgaging the above-mentioned Bitcoin ecological assets. The launch of this stable currency has improved the liquidity of BTC's first-tier assets and laid the foundation for the development of BTCFi. In the future, it will be expanded 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, co-creator of the Bitcoin Lightning Network, which can make the contract execution process more private, secure and fully automated. For example, when the value of the pledged asset drops, Automatic liquidation to repay the loan when the critical point is exceeded.

On December 4, 2024, the Shell Finance mainnet has been launched.

Liquidium

An ordinal lending platform based on the Bitcoin blockchain that allows users to lend and borrow native Bitcoin using native ordinal numbers as collateral, eliminating the need for intermediaries or custodians.

This product supports a variety of collaterals, not only supporting Bitcoin Ordinals as collateral, but also planning 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 are performed directly on the first layer of the Bitcoin network. Launched on July 22, 2024, the project token LIQUIDIUM 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 major components. The first is the over-collateralized stablecoin protocol bitUSD, which is benchmarked against DAI. Users can over-collateralize native BTC to the bitSmiley Treasury to mint the stablecoin bitUSD;

The second is the native trustless lending protocol bitLending, which uses point-to-point mode atomic swap technology to achieve transaction matching, and also introduces an insurance system to optimize the traditional loan clearing process;

The third is the innovative derivatives protocol Credit Default Swaps (CDS), which is essentially a risk transfer tool. On the BitSmiley platform, one party (usually the party worried about the risk of debt default) pays a certain fee on a regular basis to another party (the party willing to bear the risk in order to obtain a certain return), similar to an insurance premium. If there is a default event on the agreed basic debt (such as debt arising from related Bitcoin ecological asset lending, etc.), the party bearing the risk must pay compensation to the party paying the fee according to the agreement, so as to manage and hedge the debt default risk. . Operationally, it integrates NFT cutting CDS and uses aggregate 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 of the Bitcoin re-pledge agreement are as follows: The first is self-custody pledge. Through the time lock script, Bitcoin holders can pledge without transferring assets out of their own wallets, avoiding third-party risks. Follow The principle of "not your keys, not your coins" ensures the safety of assets. The second is to use zero-knowledge proof technology, specifically using Stark to implement the proof system. Bitcoin's pledge events are verified off-chain through zero-knowledge proofs to access on-chain information without being connected to the Bitcoin network and without the need for 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 pledge Bitcoin with one click, utilize Chakra's advanced settlement network, and participate in more liquidity income opportunities including the Babylon ecosystem's LST/LRT projects.

Solv Protocol

The core highlight of the Bitcoin staking protocol is to cooperate with leading ecological protocols to provide diverse income scenarios.

SolvBTC launched by this project is the first BTC product that allows self-generated income. Through staking, it creates safe basic income for the originally idle Bitcoin in the user's wallet. SolvBTC captures staking income, restaking income from BTC Layer2, and DeFi income from ETH Layer2, and seamlessly integrates various protocols at the application layer to provide Bitcoin holders with abundant income opportunities. Its income is generated through staking, restaking and trading strategies. Three strategies emerge.

We can understand it as a unified Bitcoin liquidity matrix that aims to unify Bitcoin’s decentralized trillions of dollars of liquidity through SolvBTC. It is equivalent to a revenue aggregator for Bitcoin assets. Whether it is BTCB, FBTC, MBTC... different BTC assets on different chains can be minted into SolvBTC to simplify the user's asset management experience.

This is also equivalent to integrating the liquidity opportunities of different Bitcoin assets. A SolvBTC travels across the chain to form a unified asset pool, bringing more diversified income opportunities to holders.

Bedrock

Bedrock is a multi-asset liquidity re-hypothecation protocol.

In terms of BTCFi, it uses uniBTC supported by babylon for re-pledge. In the Babylon War, Bedrock performed outstandingly and successfully captured 297.8 BTC pledge quota, accounting for nearly 30% of the total initial pledge of Babylon.

Users using this product can pledge wBTC on the ETH chain to Babylon. After staking their WBTC, they will receive a 1:1 certificate - uniBTC. The user's uniBTC can be exchanged for wBTC at any time. Babylon provides core technical support in the process. Users can earn Bedrock and Babylon points by staking wBTC and holding uniBTC. Partnering with Babylon through uniBTC, 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 income infrastructure for Bitcoin, providing institutional-level income products, re-pledge application scenarios and CeDeFi services. Its specific businesses include:

Bouncebit Protocol: Users who deposit BTC and other assets can receive back the corresponding Liquid Custody Token. The assets are managed on the Binance platform through multi-party computing's secure custody account and mirroring mechanism, generating revenue to reward users.

Bouncebit Chain: A Layer 1 blockchain that adopts the equity delegation service proof consensus mechanism and is fully compatible with the Ethereum Virtual Machine. Users can entrust tokens to verification nodes for pledge, and the pledge certificates obtained can be used in DApps on the chain.

Share Security Client: Its logic is consistent with Eigenlayer, allowing the security of Bouncebit Chain to be rented, providing support for Bridge, Oracle, Sidechain and other applications.

Bouncebit will be launched in early 2024, with a total financing of US$7.98 million. In May 2024, its native token is BB and will be listed on Binance.

Lorenzo protocol

A modular Bitcoin L2 infrastructure based on Babylon designed to provide a Bitcoin liquidity financial layer.

Through Babylon's Bitcoin staking and timestamp 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 pledged BTC, unifying the BTC liquidity of different ecology. The holder can redeem the principal after the pledge is completed; YAT has its own re-pledge plan, start and end time, and can be redeemed before expiration. After the transaction is transferred, the holder can receive POS chain rewards. YAT in the same pledge plan is also interchangeable, and its value comes from accumulated income and speculation on future income.

The project supports multiple staking methods, such as rotating and leveraged staking. Circular staking leverages external DEX partnerships, allowing users to stake BTC, borrow more BTC, and increase staking rewards; leverage staking simplifies the process by providing internal liquidity, allowing users to apply maximum leverage with a single click, improving capital efficiency and optimizing Pledge income.

Current problems with BTCFi

The track currently has quite a few projects, and its total TVL will also see explosive growth in 2024. However, the BTCFi track itself has not really caused a stir in the industry.

At present, there are still many problems in the development of this track. First of all, the core problem is that it is often difficult to reach a consensus on some technical upgrades and innovative solutions within the Bitcoin community. This has led to problems related to the Bitcoin ecology. It is difficult to advance the project.

At the technical level, there are also major difficulties. First, the block scalability of Bitcoin itself is insufficient, and it cannot realize automated financial transactions and complex business logic like Ethereum. Moreover, the interoperability between Bitcoin and other blockchains is limited, and most solutions rely on centralized institutions to achieve cross-chain interaction.

Moreover, the transaction fees of BTCFi projects are also high, which greatly increases the cost of participants. For example, Babylon exposed high transaction fee issues during the staking process, including the soaring mining fees caused by the FOMO effect, and the unlocking after staking. And the handling fees for cash withdrawal operations are also higher.

Insufficient liquidity is also a common problem in this track. On the one hand, the liquidity risk of the Wrapped version of BTC still exists. For example, in the Babylon protocol, the Wrapped BTC provided by the nodes participating in the pledge does not completely match the aggregated native BTC liquidity. , which needs to be maintained by the credibility of each aggregation platform. On the other hand, the liquidity provision method for financial activities such as Bitcoin pledge lending is relatively simple, mainly relying on capital lending, and has not yet formed a diversified and efficient liquidity provision mechanism like in the traditional financial market.

It is under this circumstance that the total locked value of the BTCFi project is still small compared to mainstream public chains such as Ethereum. The market acceptance and participation in it is not high, and the development and promotion of the project face greater challenges.

Looking to the future

At present, 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 returns, which is also the reason for ordinary users to participate in BTCFi. A very convenient way.

Looking at the projects mentioned above, you will find that in addition to BTC itself, the current BTCFi ecosystem also has a wide range of asset types to participate in BTCFI. For example, first-level assets based on BTC such as inscriptions and runes; second-level 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 certificates representing pledged BTC; these Asset liquidity expands the scope of BTCFi and makes BTCFi scenarios more and more abundant.

Looking to the future, with the development of technology, such as Layer 2 technology will continue to develop and improve, and solutions such as Rollups will become more mature, bringing significant improvements to Bitcoin's transaction processing capabilities.

With the emergence of reliable cross-chain bridges, it will also enable more secure and efficient asset transfer and interaction between Bitcoin and other blockchain networks. Bitcoin can participate more widely in DeFi applications on different chains.

With the help of solutions such as rsk, avm, bitvm, etc., Bitcoin's smart contract functions will be enhanced to support more complex financial business logic and applications.

The above technological advancements will 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 renaissance of DeFi, we may be able to see BTCFi becoming more closely connected with real finance. For example, the application of stablecoins in the BTCFi ecosystem will continue to expand, which will provide more efficient and efficient cross-border payments and international trade. Low cost solution. For example, the usdi stablecoin supported by rgb++ has a 1:1 dollar-pegged design and aml/kyc compliance requirements, making it an important tool in the international payment field. It is expected to play a major role in global cross-border e-commerce, international settlement and other scenarios in the future. Implemented on a large scale, this will promote the widespread application of Bitcoin in the global financial system.