Comprehensive Interpretation of BTCFi: From Lending to Staking, Establish Your Own Mobile Bitcoin Bank

Summary

As Bitcoin's position in the financial market becomes increasingly solidified, the BTCFi (Bitcoin Finance) sector is rapidly emerging as the forefront of cryptocurrency innovation. This research report provides an in-depth analysis of several key tracks in BTCFi, including stablecoins, lending services, staking services, re-staking services, and the combination of centralized and decentralized finance.

The report first introduces the scale and growth potential of the BTCFi market, emphasizing the impact of institutional investor participation on the market. It then explores in detail the core areas such as stablecoin mechanisms, lending platforms, and staking services. It highlights how key projects like Babylon leverage the security of Bitcoin to provide staking services for other PoS chains.

In addition, the research report also discusses the CeDeFi model, which combines the security of centralized finance with the flexibility of decentralized finance to provide users with a more convenient financial service experience.

Finally, by comparing the security, yield, and ecological richness of different asset classes, the unique advantages and potential risks of BTCFi relative to other areas of crypto finance are revealed. As the BTCFi sector continues to develop, it is expected to see more innovations and capital inflows, further solidifying Bitcoin's leadership position in the financial field.

BTCfi Track Overview

BTCFi (Bitcoin Finance) is like a mobile Bitcoin bank, encompassing a series of financial activities centered around Bitcoin, including Bitcoin lending, staking, trading, futures, and derivatives. According to market data, the BTCFi market size reached approximately $10 billion in 2023. It is expected that by 2030, the BTCFi market will reach a scale of $1.2 trillion.

In the past decade, the BTCFi market has shown significant growth potential, attracting more and more institutional participation from firms such as Grayscale, BlackRock, and JPMorgan. The involvement of institutional investors has not only brought in a substantial influx of capital, increasing market liquidity and stability, but it has also enhanced the maturity and regulatory compliance of the market.

This article will delve into several popular areas in the current cryptocurrency financial market, including Bitcoin lending, stablecoins, staking services, re-staking services, and CeDeFi. Through a detailed introduction and analysis of these fields, we will understand their operational mechanisms, market development, major platforms and products, risk management measures, and future development trends.

BTCFi Track Segmentation

1. Stablecoin

Stablecoins are a type of cryptocurrency designed to maintain a stable value. They are typically pegged to fiat currencies or other valuable assets to reduce price volatility. Stablecoins achieve price stability through backing by reserve assets or algorithmic adjustments to supply, and are widely used in scenarios such as trading, payments, and cross-border transfers.

Classified by degree of centralization, they can be divided into centralized stablecoins (represented by USDT, USDC, FDUSD) and decentralized stablecoins (represented by DAI, FRAX, USDe). Classified by collateral type, they can be divided into fiat/physical collateral, crypto asset collateral, and under-collateralized.

In the BTC ecosystem, the stablecoin projects worth paying attention to are mainly decentralized stablecoins. Here are a few representative projects:

Project One, Bitsmiley Protocol

The first native stablecoin project in the BTC ecosystem. Users can over-collateralize native BTC on the BTC network to mint the stablecoin bitUSD. The project has completed multiple rounds of financing.

Operating mechanism:

• Based on the Fintegra framework
• Composed of the decentralized over-collateralized stablecoin bitUSD and a native trustless lending protocol.
• bitUSD is based on bitRC-20 and can be compatible with BRC-20.
• Adopt a CDP mechanism similar to MakerDAO

Project Progress:

• Alphanet will be launched on BitLayer on May 1, 2024.
• Launch a liquidity incentive program with the Merlin community

Project Two, Bamk.fi (NUSD)

The Bamk.fi protocol is the issuer of NUSD (Nakamoto Dollar), which is a synthetic dollar on Bitcoin L1.

Operating mechanism:

• Phase 1: NUSD supports USDe 1:1
• Phase 2: Supported by delta-neutral Bitcoin positions
• The current minting method is 1:1 minting with USDT.

Project Three, Yala Labs

Yala has built its own modular infrastructure, allowing its stablecoin $YU to flow freely across various ecosystems.

Core Product:

• Over-collateralized stablecoin $YU
• Metamint: Core component of $YU
• Insurance Derivatives

Operating mechanism:

• Users can mint $YU in various ecosystems through Metamint.
• Collaborate with Babylon to achieve multiple earnings

Project Progress:

• Supported by a first-line fund
• The testnet is about to go live.

Project Four, Satoshi Protocol

The first CDP stablecoin protocol in the BTC ecosystem, based on the BEVM ecosystem.

Operating mechanism:

• Users can mint the USD stablecoin $SAT by depositing assets such as BTC and LST with a minimum collateral ratio of 110%.
• There is a stable pool mechanism to ensure system stability.

Project Progress:

• Completed multiple rounds of financing
• Developing a Rune stablecoin based on the Bitcoin mainnet
• The $OSHI airdrop points activity is in progress.

Project Five, BTU

The first decentralized stablecoin project in the Bitcoin ecosystem, using a Collateralized Debt Position (CDP) model.

Operating mechanism:

• A decentralized stablecoin fully backed by Bitcoin
• No need for cross-chain bridges, complete all operations within the Bitcoin network.
• Adopt a decentralized CDP model

Project Progress:

• Supported by multiple investment institutions

2. Lending track

Bitcoin Lending (BTC Lending) is a financial service that allows individuals to obtain loans by using Bitcoin as collateral or to earn interest by lending out Bitcoin. This model provides liquidity for Bitcoin holders while offering investors a new channel for returns.

The main risk management measures include controlling the collateral ratio and loan-to-value ratio (LTV), supplementing collateral and margin calls, and a forced liquidation mechanism, among others.

The following introduces several representative projects:

Project 1, Liquidium

Liquidium is a P2P lending protocol that operates on Bitcoin, supporting the borrowing and lending of native Bitcoin using native Ordinals and Runes assets as collateral.

Operating mechanism:

• Achieve lending through PSBT and DLC technology
• Support for lending of Ordinals and Runes assets
• Using rune form token LIQUIDIUM•TOKEN

Project Progress:

• Completed multiple rounds of financing
• As of September 3, 2024, the total transaction volume of the agreement reached approximately 2400 BTC

Project Two, Shell Finance

A stablecoin protocol based on BTC L1 that supports using BTC, Ordinals NFTs, Runes, BRC-20, and ARC-20 assets as collateral to obtain $bitUSD.

Operating Mechanism:

• Based on PSBT and DLC technology
• Adopt a Peer-to-Pool solution

Project Progress:

• The testnet has not been launched yet.

3. Staking track

Staking is typically recognized for its characteristics of safety and stable earnings. In the BTCFi field, Staking has introduced the concept of shared security, providing a new dimension for the modular track.

The following introduces a representative project:

Project One, Babylon

Babylon is a Bitcoin staking protocol that allows for locking Bitcoin on the Bitcoin mainnet to provide security for other POS consumption chains.

Operation mechanism:

• Achieve Remote Staking through UTXO
• Implement staking, unstaking, and forfeiture functions using OP_CTV and OP_CSV
• The overall architecture is divided into the Bitcoin layer, the Babylon layer, and the PoS chain demand layer.

Project Progress:

• Completed multiple rounds of financing, with a total amount exceeding $96.8 Million
• The Mainnet will be launched in Q2 2024.
• We have started collaborating with multiple popular restake projects and initiated the pre-staking process.

4. Restaking track

ReStaking is the act of using liquid-staked token assets to stake with validators on other networks and blockchains to earn more rewards. Through ReStaking, investors can earn rewards from both the original network and the ReStaking network.

The following introduces several representative projects:

Project One, Chakra

Chakra is the BTC liquidity financial layer based on Babylon, utilizing zero-knowledge proof technology.

Operating mechanism:

• Provide a highly modular Bitcoin settlement network
• Enhance economic security through the finality provided by the Babylon network.
• Optimize performance using Parallel VM.

Project Progress:

• Supported by multiple investment institutions.
• Launch of Devnet in May
• Launched the Babylon pre-staking event in collaboration with Binance Web3 wallet.

Project Two, Bedrock

Bedrock is a multi-asset liquidity re-staking protocol that supports assets such as ETH, IOTX, and BTC.

Operating mechanism:

• Provide institutional-level services
• Support staking uniBTC on the ETH chain to Babylon
• Collaborate with multiple DeFi protocols

Project Progress:

• TVL reached over 200 million USD at its peak.
• Jointly launched a staking activity with Binance

Project Three, Lorenzo protocol

Lorenzo is the BTC liquidity financial layer based on Babylon.

Operating mechanism:

• Tokenize the staked Bitcoin into LPT and YAT
• Provide infrastructure for exchanging LPT and YAT

Project Progress:

• Achieve ecological strategic cooperation with Bitlayer
• As of July 16, 2024, the TVL is $70M

5. Decentralized Custody

With BitGO, the entity behind wBTC, announcing the handover of wBTC control, discussions have arisen in the market regarding the security of Bitcoin's wrapped form. Below are several decentralized custody solutions:

• tBTC: Supports cross-chain from BTC to ETH, can be used on DeFi platforms like Curve Finance.
• FBTC: A new type of synthetic asset across the entire chain, pegged 1:1 with BTC, supporting the circulation of BTC across the entire chain.
• dlcBTC: Bitcoin non-collateralized on Ethereum, using Discreet Log Contracts (DLCs) technology.

6. CeDeFi

CeDeFi combines the characteristics of centralized finance (CeFi) and decentralized finance (DeFi). In the BTCFi space, the CeDeFi model allows users to lock Bitcoin in a third-party custodian and then perform various financial operations on the CeDeFi platform.

The following introduces several representative projects:

Project 1, Solv Protocol

The Solv protocol is a unified Bitcoin liquidity matrix designed to consolidate the fragmented liquidity of Bitcoin through SolvBTC.

Operating mechanism:

• Support multi-chain deployment
• Provide two staking options: SolvBTC Ethena and SolvBTC Babylon
• Adopt over-the-counter settlement solutions

Project Progress:

• Completed multiple rounds of financing
• The points system is running and may become a reference for future airdrops.

Project Two, Bouncebit

Bouncebit is a BTC Restaking chain, fully compatible with EVM, featuring CeDeFi product design.

Operating mechanism:

• Introduce Mainnet Digital and Ceffu's MirrorX technology
• Supports converting pure BTC into a more flexible form
• Provide three types of income: CeFi income, node operation rewards, and on-chain ecosystem income

Project Progress:

• Mainnet launch in May
• As of July 16, 2024, $BB market cap $201M, FDV $968M, mainnet TVL $310M

Project Three, Lorenzo protocol

Lorenzo is a BTC liquidity financial layer based on Babylon.

Operating mechanism: