Exploring the New Potential of BTCFi | How Core's Dual Stake Mechanism Affects the BTC Ecosystem

Host: Joe Zhou, Foresight News Deputy Chief Editor

Guests: Core DAO core contributor Chanel, Crypto Wersearch daily coin research founder Alvin Hung, Cactus product director Alice Du, WaterDrip Capital founder Jademont, independent researcher Ningning, Solv Protocol ecological cooperation director Catherine

Host: Please introduce yourselves, six guests.

Chanel: I am Chanel, mainly responsible for the rise of the Core Chinese community and the ecosystem in the Asia-Pacific region. Recently, the Core Mainnet has been upgraded, and I am very happy to be able to share some views on BTCFi with everyone here.

Alvin Hung: I am Alvin Hung, the daily coin research guy. Daily coin research has its own website, providing project analysis for various tracks, and we have also opened a TG community.

Alice Du: I'm Alice from Cactus. As a Compliance custodian service provider focused on institutional users, Cactus has been the first to support the double stake of Core in Wallet, bringing a safe and convenient BTC stake experience to users in the first place.

Jademont: Hello everyone, I am Jademont, the founding partner of Shuidi Capital. There have been many recent developments in the BTC ecosystem, and I hope to share them with you later.

Catherine: I am a partner of Solv Protocol, mainly responsible for the rise of Solv's ecosystem. Solv is a multi-chain deployed BTC stake platform, currently cooperating with more than a dozen blockchain networks, and has built BTC liquidity pools, including the restake pool of Babylon. At the same time, there are also some product collaborations with Core.

Host: What are your new perspectives on the BTCFi market?

Chanel: Currently, BTC holders hope to have more on-chain profit opportunities, and many BTC projects have developed under this premise. Core's unmanaged stakeBTC, launched in April this year, has achieved quite good results. Our goal is to allow all participants to stake BTC and earn profits with the lowest risk. During our communication with many institutions, partners, and communities, we found that everyone has expectations for the entire BTC market and more profit opportunities. We have made upgrades to two products. The first is unmanaged BTC re-staking. After staking BTC, it can be further staked back to Core, increasing both individual profit opportunities and the overall Annual Percentage Rate. The second is the upcoming LSTBTC, which allows users to stake BTC and stake it to other protocol layers to gain more profit opportunities.

Alvin Hung: Although most of the market's attention during this cycle has been on MEME, we have actually been studying the BTC ecosystem since the beginning of the year. At that time, Merlin brought the first wave of BTC ecosystem, and new assets such as inscription, rune, and Non-fungible Token also emerged. Later, Babylon also set off a trend of stake in BTC again, and we have published some more summarizing articles about Babylon. Among the top 30 Blockchains in TVL, 7 of them are related to the BTC ecosystem, although BTC is not the hottest ecosystem in the market right now, it still carries weight in the market. Whether it's Large Investors or institutions, they have always been involved in the market.

If you didn't hold BTC this year, you might actually feel a bit sad. Bitcoin is obviously the best-performing mainstream asset in this market. Both national governments and large companies have strategies to increase their BTC holdings. I think this is also somewhat influenced by MicroStrategy. When the price of BTC slowly breaks through new highs, the attention on BTCFi will rise again. SUI and Aptos may be relatively outstanding public chains in these months, with decent progress in on-chain Decentralized Finance. SUI is more focused on lending or derivatives, while Aptos is also starting to have some BTCFi projects. Users and funds from these two Move ecosystems will transition to the upcoming Movement. For retail investors, BTCFi may not be the first choice because everyone now prefers protocols that can provide returns in a short period of time. However, for medium to long-term investors, or those who are BTC holders themselves, there are opportunities to look at on-chain returns. Moreover, players originally in the EVM ecosystem are also starting to integrate various BTCFi protocols.

Jademont: Recently, we have been discussing BTCFi with some Western institutions. First of all, the BTCF track is different from the Decentralized Finance on the ETH chain, because the level of participants or the groups involved are different. Over the past year, BTC has risen by about three times, but MicroStrategy's stock has risen by 14 times. MicroStrategy, originally a company purely hoarding BTC, mentioned a few months ago that they want to do BTCFi, which means they want to do something related to Decentralized Finance with the BTC they hold. If more and more players of this level come in, BTCFi will definitely be completely different from the public chain ecosystem we have experienced in the past, or the ETH chain protocol. Including Galaxy, which has expanded its business to Hong Kong, they also attach great importance to the BTCFi zone. They manage a lot of BTC assets and also want to provide value-added services in the BTC ecosystem.

The second point I want to briefly talk about is the necessity of BTCFi development. Have you ever thought about where the biggest crisis in the crypto world is after the rise of BTC, or where the biggest risk of BTC is? In fact, this risk is getting bigger and bigger now, but I see that almost no one discusses it on Chinese Twitter. In fact, it's that the BTC network is becoming increasingly insecure. The security of the BTC network is now guaranteed by Mining Rigs. We know that the BTC network actually has a hidden danger of a 51% Computing Power attack, which means that if you control 51% of the Computing Power, you can attack a specific transaction. Of course, controlling 51% of the Computing Power doesn't mean you can put all of the 21,000,000 BTC in your pocket. Roughly speaking, there are currently Mining Rigs worth over 15 billion USD to ensure the security of the entire network. When the BTC market cap was relatively low, such as below 1 trillion USD, it was generally difficult to transfer more than 10 billion USD in a single transaction. Suppose BTC is at 30,000, at that time BTC is only worth 60-70 billion USD, but if you want to attack the network, you need at least 100 billion USD worth of Mining Rigs. In other words, using 100 billion USD to attack a potential profit of only 60-70 billion USD, you will definitely feel it's not worth it, so BTC is relatively safe. But now, BTC has risen three times, rising to over 90,000, and it may even rise to 100,000, 200,000, 300,000 in the future, while the value of Mining Rigs has not increased. It may still be 100 billion, and using 100 billion in cost to attack a potential target of 180 billion or 200 billion will increase the possibility. At this time, the BTC network will become less secure. How to make the BTC network secure? Simply put, it is to increase Miner income, make on-chain income more, and increase on-chain activities, so that everyone will have the motivation to deploy more Mining Rigs. The cost of Mining Rigs will increase, and the risk of being attacked will drop.

Many people say that BTC L2, BTCFi, are they repeating the route of ETH? In fact, in the BTC circle, people don't attach much importance to the protocol of the ETH ecosystem. The development of the BTC ecosystem is entirely for the protection of the BTC network. So BTCFi is not something that everyone wants or doesn't want to do, but something that has to be done. In addition, with more and more major players, the network security requirements are getting higher and higher, so the future of BTCFi will definitely be very bright.

Ningning: I am Ningning, currently an independent researcher. I used to work at TRON doing some research and listing work. Now I am also involved in a BTC L2 project with Western capital background stake. What impressed me is that they are supported by a mining company listed in the United States. This mining company may also believe that BTC needs some applications and generates some transaction fee income to maintain the current state of the network. BTCHalving has also passed for more than half a year, and the next round of production reduction is about to countdown. If the value of BTC cannot continue to increase costs like now, when the cost of Miner's Computing Power is still pumping exponentially, a problem arises. If the scale of Computing Power continues to rise with the value of the network, and the income of Computing Power cannot continue to rise, when the growth rate of Computing Power starts to decline, the market will become very panic. There will still be a time window of 4 to 8 years before this problem occurs.

But we cannot deny that the whole market is completely sucked in by two things: memes and BTC pump. Not only the BTC ecosystem and the Ethereum ecosystem, but even the prediction market that was popular recently is showing signs of depression.

Of course, some people may also think that the BTC second layer is not established, and it cannot be denied that the market is indeed encountering a relatively low period and bottleneck. I think this is a longer cycle, but in the current market environment, maybe everyone doesn't pay much attention, but I see a lot of partners or developers are still actively developing the Bit layer. For example, the rise of data from Babylon is still very obvious, perhaps because it limits the entire scale, plus the current market situation, which leads to the market's influence not being as great as everyone expected.

The most typical thing in our industry is the cycle, and the other is rotation. When the cycle rotates, maybe the infrastructure construction in this area is more perfect than it is now, and then there will be a more intense explosive rise.

Host: What is the evolution of LST (Liquidity Staking Token) on the Ethereum network, and what are the similarities and differences in its development path compared to the BTCFi track?

Chanel: After staking, I still have Liquidity, and then stake again to get additional returns, which is also the charm of DeFi. Core's focus on development is to launch an LSTBTC product next, which can allow more people to hold on-chain Liquidity.

Alvin: Before the appearance of staking in the Ethereum ecosystem, the EigenLayer ecosystem had a total stake of 15 billion US dollars, with only a portion being liquid staked at that time. They were also one of the earliest protocols to implement liquid staking, and the innovation of LST is quite interesting. For example, some Decentralized Finance activities in this cycle involve using LST products for on-chain collateralized lending and contracts. In the future, similar applications may also appear in BTCFi, thereby increasing the utilization and liquidity of staked or restaked assets. This is also something that the BTCFi protocol needs to consider. In the future, there may be significant integration space between Decentralized Finance and AI agents, providing opportunities for all ecosystems to participate, which is something I am looking forward to.

Jademont: We see an opportunity in the BTC ecosystem, with various BTC assets currently participating in stake or re-stake protocols, a trend that did not exist in the previous bull market or two years ago. Previously, there may have only been WBTC, but now we have simply counted at least five or six, such as TBTC, FBTC, and solvBTC, including BTC on the Lighting Network that many people do not follow. BTC is close to $100,000, but in reality, the entire EVM is very slack because there is not enough new capital, and there are too many choices for new capital. Retail investors actually have very little capital, and it's difficult to push a project to several billion dollars in a PvP, so it's hard to go up. So overall, the Altcoin market is now over $1 trillion. To pump the entire market, it is impossible without several hundred billion or trillions of funds, and it is impossible to rely on retail investors.

And now there are too many options for traditional institutional funds. They can directly buy large amounts of ETFs, buy BTCSpot, or buy stocks of various crypto-related companies. Many US encryption concept stocks have actually outperformed most mainstream AltCoins. But now the altcoin market has another opportunity, such as wrapping on-chain native BTC into EVM-compatible BTC, and then using EVM-compatible wrapped BTC to participate in stake borrowing or LP formation in the Decentralized Finance protocol, or even sell it to buy AltCoins. This is actually a very important deposit channel, which means that many people may not be able to directly buy AltCoins, but they can buy BTC first and then use BTC to buy AltCoins. So if the market for wrapping BTC can reach a volume of, for example, hundreds of thousands of BTC, it will be a significant increase for the AltCoin market, allowing funds to enter the AltCoin market.

Moderator: What are your thoughts on the further development of Core on-chain after the issuance of SolvBTC.CORE?

Catherine: For Solv, we are the recipient of packaged BTC assets, which means we may consider receiving some assets other than packaged BTC. The current competitive landscape is still quite interesting, because cBTC began issuance after some negative information came out for a month, and now it is deploying a multi-chain strategy. Then there are some Decentralized packaged BTCs such as TBTC, which have also gained some traction, as WBTC was absolutely leading before. We are also beginning to see other exchanges with this idea, which is to issue their own packaged BTC.

But we encounter the same problem as the centralized exchanges that package BTC issuance, which is the lack of a truly profitable model. On-chain, it is a public good that cannot be profitable.

So when we communicate with cBTC, we hope they can provide us with some support, but they actually don't have the resources internally because they do this for free and there is no profit in it. It's just a wrapped BTC asset, but the interest rate for borrowing is only 1%, so it's not very cost-effective. Therefore, these wrapped assets rely heavily on protocols that are particularly good at playing Decentralized Finance. For example, if you are accepted by Solv as our underlying asset, you will go from having assets in one or two application scenarios to having assets in 20 application scenarios, and you will also have profits. Apart from solvBTC, we now have 4 LSTs for users to choose from. And LST itself is an asset with high composability.

Jademont: Encapsulated BTC may not necessarily be unprofitable, it may just not be very profitable at the moment. However, once the capital scale grows, it will definitely be profitable. I'm sharing a new trend. There's a project called Ethena that you should know about. It's actually a combination of CeFi and Decentralized Finance. Now, more and more BTCFi are learning from Ethena's gameplay. By encapsulating BTC through custody, financial management can be done while ensuring the safety of the principal, which can actually make money. This is just a platform mindset. In short, after you get encapsulated BTC, you can go do financial management or various value-added services, such as earning 10 points of income, giving users 8 points, and keeping 2 points as profit.

Host: After the Fusion upgrade, Core's BTCstake has joined CORE stake Cactus as a Core institutional partner. What are the prospects for double stake that you see?

Alice Du: Fusion is also the highlight of today, as it brings new application scenarios. First of all, we definitely connected with the service provider of the dual stake institutional custody at the first time. We think that Core's dual stake is a very good innovation and attempt. Core itself comes with an unmanaged BTC stake protocol, which actually utilizes the mechanism of BTC's original chain time lock. Users can enjoy income without worrying about the security of BTC assets. In addition, additional stake can also earn more income rewards.

BTC dual stake can attract more projects to enter the Core ecosystem. And as the native stake of Core progresses, the price of Core will also be very stable. With the promotion of a virtuous cycle, every role in the ecosystem can benefit infinitely. When institutional users want to participate in stake to obtain high returns, they must use a very secure tool and channel. As a professional custody platform, Cactus achieves the highest industry standards in safeguarding Private Keys and in the process of using Private Keys, assisting with security confirmation and preventing blind signatures, helping everyone to enjoy profits while avoiding asset losses.

Host: For BTC holders, security is often paramount. What risks should investors be aware of when participating in the BTCFi project?

Ningning: Because BTC itself cannot deploy Smart Contracts and lacks mutability, we need mechanisms to transfer BTC from the original chain to L2 or other chains. This is a very complex problem. We may have many solutions, such as centralized hosted Wallets, enterprise-grade Multi-signature Wallets, MPC solutions, various Cross-Chain Interaction bridge solutions, and bridgeless Cross-Chain Interaction solutions, etc. Although the absolute leader WBTC has encountered a wave of Crisis of Confidence, it has also been explained to the community and is currently adopted by Aave. From the perspective of the entire industry, many people actually do not like to see a monopoly situation. They still hope for a more complete Decentralization where BTC assets are guaranteed entirely on-chain.

If relying on centralized institutions, institutions or whales may want a more native custody solution, and there are currently some developing solutions, such as the BTVM Cross-Chain Interaction custody proposed by Babylon, EOTS, and Bitlayer, but it takes time to mature the technology and time for popularization.

Chanel: In terms of technological development, everyone has been quite meticulous in the audit, unlike the frequent vulnerabilities of one or two years ago. However, it cannot be denied that BTCLarge Investors, when seeking to profit from Cross-Chain Interaction, not everyone can accept or bear the risk of the Cross-Chain Interaction bridge. Even though on-chain players are quite familiar with these processes, we cannot say that it is without risk. Here, I will take some time to introduce the non-custodial stake of Core.

In simple terms, non-custodial means that the assets will not leave the stakeholder's Wallet. The user can decide how long to lock the assets using a time lock. Then, the user can contribute BTC to the validation Node of the Core chain, and we will provide some Token rewards. This creates a potential profit opportunity. Our non-custodial stake solution has also received wide recognition from institutional partners. In addition, code open source is a crucial aspect that developers and users need to pay special attention to when participating in audits.

Alvin: on-chain applications themselves will have certain risks, because when we decide to withdraw BTC from the exchange and perform more operations on-chain, these operations themselves will bring some additional risks. When using Decentralized Finance or various on-chain protocols, users should pay special attention to phishing websites and common hacker attack methods. Incidents where users' wallet assets are stolen due to clicking on fake websites are very frequent.

Jademont: For the BTC network, BTCFi has no risks, only benefits. However, for users, BTCFi does have risks. BTCFi can be divided into two categories: one is on the BTC network, and the other is through trusted third parties. For projects on the BTC network, there are two that I know of. One is Babylon, developed by a Stanford professor, which has not been launched yet but claims to be able to lock on-chain using decentralization. The other competitor is DRClink, which locks BTC on the BTC network using a smart contract-like method. The risks of these two projects lie in the contracts themselves, but for now, there shouldn't be any issues because they have been tested for over three years since 2021.

Another way is through custody, which I think can be divided into two categories. One is custody by relatively large centralized institutions. Although it is centralized, centralization does not necessarily mean insecurity, because when the institution has a good reputation or the cost of misconduct is high, we can also consider it secure. When the scale is relatively small, it is completely fine to use their custody. But if the scale is large enough, this method may not be as good as the multi-signature method. Multi-signature is a very good solution, it's just how you design it. If all three multi-signatures are controlled by one person, it is definitely not secure. But now there are many Decentralization multi-signature solutions. For example, a project has proposed a protocol that uses a dynamic committee to achieve multi-signature, and this multi-signature may be controlled by several dozen Private Keys. I think this approach is already sufficiently decentralized and can be considered secure.

Host: How will BTCFi develop next?

Ningning: BTCFi mainly consists of two trends. One is to provide economic security for BTC L2, Oracle Machine, and cross-chain bridges through re-staking and obtain native stake rewards. Eigenlayer has been validated in the market, so it will happen again in the BTC ecosystem. The other is to make BTC generate interest through borrowing. One of the biggest differences between BTC and ETH networks is that BTC itself does not have the ability to generate interest. Ethereum can obtain an annual return of about 3% through native stake, which BTC lacks in this area.

Chanel: We are launching dual stake in the hope that they can stake their rewards to our validation Node for the positive development of the entire economic network, without the need for custody of BTC stake. In addition to the issuance of LSTBTC, we hope to attract more AVS to Core and enable more on-chain applications through the encapsulation of BTC assets. Core's layout is not only for retail investors but also for institutional Miners, aiming to align with the entire BTC community. The community as a whole is relatively complex and diverse, and the value of BTC lies in its role as a bridge between TradFi and digital finance, while our layout considers BTC, TradFi, and digital finance as a whole.

Alice Du: Cactus is very optimistic about the prospects of BTCFi. In the past few years, we have observed that BTCFi first appeared on centralized financial platforms, and then many wrapped BTC entered the Decentralized Finance protocol. This trend has become more evident this year. BTCFi has experienced an explosive rise, with a large number of financial activities based on the underlying protocol of BTC emerging. We also believe that with the maturity of technology, BTC will enter more scenarios in a more native way and serve as a foundational asset to build a more robust blockchain financial system.

The development of BTCFi cannot be separated from Large Investors, institutions, Mining Pool, and Computing Power platforms, which are also the main customer groups of Cactus. Their demand is also very strong, especially the Miner customers, who also hope to have some way to earn income or profits without sacrificing BTC control, especially with the BTCHalving factor. Therefore, Cactus is actively layout this year, cooperating with communities such as Core and Babylon, and supporting Core's double stake for the first time. What Miners or Large Investors are most concerned about is security. Through our plugin wallet stake, stake operations can be performed through the blockchain explorer. We will also provide measures such as Address validation, Allowlist validation, review mechanism, hardware signature, etc., to avoid blind signatures or asset loss.

Alvin: The most difficult part of the project is not just about doing the project well, but more importantly, how to gain market follow. A large part of the BTCFi ecosystem consists of institutions, who are looking for higher returns. What retail investors follow is different. At the beginning of the year, there were many new asset issuance methods during the first wave of BTC's boom, such as inscription, rune, and even BTC Non-fungible Tokens, etc. I think these are more interesting in terms of cycles, and it's not as simple as earning profits through on-chain operations using a Wallet.

New assets will also appear on the track, not just deposit assets and earn income. In the future, BTCFi may also combine with AI to create various innovative applications and generate more application scenarios.

Jademont: I think BTCFi is getting closer to an outbreak, mainly for these reasons. First, everyone can see that this round of Bull Market is mainly driven by BTC and MEME's rise. MEME is a PvP market with a relatively small amount of funds. Although they all make a fortune, when the volume of a target reaches several billion dollars, it cannot rise any further. In fact, this is a typical manifestation of lack of liquidity. On the other hand, BTC's liquidity is abundant. When everyone thinks that the price of BTC is relatively high, the shortest path to speculate on other assets with BTC is through BTCFi.

We have been discussing this issue with some foreign institutions before, this round of legalization or regulatory dividends of BTC, allowing many previously illegal BTCs to circulate normally through Wallet. After downloading the BTC Wallet, there may be some ecological things in the Wallet, and there may also be Lighting Network for payment, which means that the BTC ecosystem is more capable of accommodating the wave of traffic brought by BTCFi. Another reason is that from a technical point of view, several representative projects in the BTC ecosystem are also relatively mature. For example, Lighting Network Taproot went online on Mainnet in July, but there were still some minor issues to be fixed. According to our understanding, basically they have been fixed. Including the RGB off-chain calculation and client verification Smart Contract are also very well-developed. I estimate that within the next quarter, at the latest within half a year, I think leading projects of BTCFi will go live, such as Babylon and others are also close to going live. Including the BTC L2 project recently launched by ICP project party, these projects have received huge funding, basically starting from tens of millions of dollars. With so much money in the hands of the project party and the Token about to go live, I believe it will generate great momentum. So I am looking forward to the development of BTCFi in the next quarter.