Abstract

As Bitcoin (BTC) solidifies its position in the financial markets, the field of BTCFi (Bitcoin Finance) is rapidly becoming a frontier of cryptocurrency innovation. BTCFi encompasses a range of Bitcoin-based financial services, including lending, staking, trading, and derivatives. This report delves into various critical segments of BTCFi, examining stablecoins, lending services, staking services, restaking, and the intersection of centralized and decentralized finance.

The report begins with an introduction to the size and growth potential of the BTCFi market, highlighting how the participation of institutional investors contributes to market stability and maturity. It then provides a detailed discussion of stablecoin mechanisms, including different types of centralized and decentralized stablecoins and their roles within the BTCFi ecosystem. In the lending sector, the analysis focuses on how users can obtain liquidity through Bitcoin lending while evaluating key lending platforms and products.

In the area of staking services, the report emphasizes crucial projects like Babylon, which utilize the security of Bitcoin to provide staking services for other Proof of Stake (PoS) chains, creating yield opportunities for Bitcoin holders. Restaking further unlocks the liquidity of staked assets, offering users additional income sources.

Additionally, the report explores the CeDeFi model, which combines the security of centralized finance with the flexibility of decentralized finance, providing users with a more convenient financial service experience.

Finally, the report compares the security, yield, and ecological richness of different asset classes, revealing the unique advantages and potential risks of BTCFi compared to other areas of cryptocurrency finance. As the BTCFi sector continues to evolve, it is expected to attract more innovations and capital inflows, further solidifying Bitcoin’s leadership in the financial domain.

Keywords: BTCFi, stablecoins, lending, staking, restaking, CeDeFi, Bitcoin Finance

Overview of the BTCFi Sector

Squirrels collect acorns before hibernating, storing them in a hidden and safe place; pirates bury their plundered treasures in soil known only to themselves; and in today’s society, people deposit cash into fixed-term accounts, seeking not just a return of less than 3% annually but also a sense of security. Now imagine you have a sum of cash, you are optimistic about the cryptocurrency market but wish to avoid significant risks while seeking assets with higher ROI, leading you to choose BTC, dubbed “digital gold.” You aim to hold BTC long-term rather than engage in unnecessary trading that could lead to losses due to price fluctuations. At this point, you need a mechanism that allows you to utilize your BTC, unlocking its liquidity and value, akin to DeFi on Ethereum. This not only enables you to hold your assets long-term but also generates additional income by leveraging the liquidity of your assets multiple times, making it worthwhile to explore the myriad strategies and projects available.

BTCFi (Bitcoin Finance) functions as a mobile Bitcoin bank, encompassing a range of financial activities centered around Bitcoin, including lending, staking, trading, futures, and derivatives. According to data from CryptoCompare and CoinGecko, the BTCFi market reached approximately $10 billion in 2023. Predictions from Defilama estimate that by 2030, the BTCFi market will expand to a staggering $1.2 trillion, encompassing Bitcoin’s total value locked (TVL) within the decentralized finance (DeFi) ecosystem as well as the market size of Bitcoin-related financial products and services. Over the past decade, the BTCFi market has exhibited significant growth potential, attracting increasing participation from institutions such as Grayscale, BlackRock, and JPMorgan, all of whom have begun exploring the Bitcoin and BTCFi markets. The involvement of institutional investors not only brings substantial capital inflows, enhancing market liquidity and stability, but also raises the maturity and regulation of the market, providing BTCFi with higher recognition and trust.

This article will delve into several trending areas within the current cryptocurrency financial market, including Bitcoin lending (BTC Lending), stablecoins, staking services, restaking services, and the integration of centralized and decentralized finance, known as CeDeFi. Through detailed introductions and analyses of these sectors, we will explore their operational mechanisms, market developments, key platforms and products, risk management strategies, and future trends.

Part Two: Segmentation of the BTCFi Sector

1. Stablecoin Sector

Introduction

• Stablecoins are cryptocurrencies 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 asset backing or algorithmic supply adjustments and are widely used in trading, payments, and cross-border transfers, allowing users to benefit from blockchain technology while avoiding the extreme volatility of traditional cryptocurrencies.
• In economics, there is a concept known as the “impossible trinity”: a sovereign nation cannot simultaneously achieve a fixed exchange rate, free capital movement, and an independent monetary policy. Similarly, within the context of crypto stablecoins, there exists a similar impossible trinity: price stability, decentralization, and capital efficiency cannot all be realized at the same time.
• Stablecoins are classified based on their degree of centralization and collateral types, which are two relatively intuitive dimensions. Among the currently mainstream stablecoins, those can be divided into centralized stablecoins (represented by USDT, USDC, FDUSD) and decentralized stablecoins (represented by DAI, FRAX, USDe) based on their degree of centralization. When classified by collateral type, they can be divided into fiat/physical collateral, crypto asset collateral, and under-collateralized.
• According to data from DefiLlama on July 14, the total market capitalization of stablecoins is reported to be $162.37 billion. In terms of market capitalization, USDT and USDC dominate the market, with USDT leading significantly, accounting for 69.23% of the total stablecoin market. DAI, USDe, and FDUSD follow closely behind, ranking 3rd to 5th in market capitalization. The remaining stablecoins currently represent less than 0.5% of the total market capitalization.
• Centralized stablecoins are mostly fiat/physical collateralized, essentially representing real-world assets (RWA) backed by fiat or other tangible assets. For example, USDT and USDC are pegged 1:1 to the US dollar, while PAXG and XAUT are pegged to gold prices. In contrast, decentralized stablecoins are generally backed by crypto assets or are uncollateralized (or under-collateralized). DAI and USDe are backed by crypto assets, which can be further subdivided into fully collateralized or over-collateralized categories. Uncollateralized (or under-collateralized) stablecoins are typically referred to as algorithmic stablecoins, represented by FRAX and the former UST. Compared to centralized stablecoins, decentralized stablecoins have a smaller market capitalization and a slightly more complex design, yet several standout projects have emerged. Within the BTC ecosystem, it is important to pay attention to decentralized stablecoin projects, so the mechanisms of these stablecoins will be discussed below.

Top 10 Stablecoins by Market Capitalization on July 14, 2024, Source: Coingecko

Market Share of the Top 10 Stablecoins by Market Capitalization on July 14, 2024, Source: DefiLlama

Decentralized Stablecoin Mechanisms

• Next, we will discuss the Collateralized Debt Position (CDP) mechanism represented by DAI (over-collateralization) and the contract hedging mechanism represented by Ethena (equal collateralization). Additionally, there are algorithmic stablecoin mechanisms, which will not be detailed here.
• CDP (Collateralized Debt Position) represents a mechanism in decentralized finance for generating stablecoins through the collateralization of crypto assets. First pioneered by MakerDAO, it has since been applied in various DeFi and NFTFi projects across different categories.
  • DAI is a decentralized, over-collateralized stablecoin created by MakerDAO, aiming to maintain a 1:1 peg with the US dollar. Its operation relies on smart contracts and a decentralized autonomous organization (DAO) to uphold its stability. The core mechanisms include over-collateralization, collateralized debt positions (CDPs), liquidation mechanisms, and the role of the governance token MKR.
  • CDP is a key mechanism within the MakerDAO system for managing and controlling the generation of DAI. In MakerDAO, CDPs are now referred to as Vaults, but their core functionality and mechanism remain the same. The detailed operation of CDPs/Vaults is as follows:
    i. Generating DAI: Users deposit their crypto assets (e.g., ETH) into MakerDAO’s smart contract to create a new CDP/Vault, which then generates DAI based on the collateralized assets. The generated DAI represents a portion of the user’s debt, with the collateral serving as security for the debt.
    ii. Over-Collateralization: To prevent liquidation, users must maintain a collateralization ratio higher than the system’s minimum (e.g., 150%). This means that if a user borrows 100 DAI, they must lock collateral valued at least 150 DAI.
    iii. Repayment / Liquidation: Users need to repay the generated DAI along with a stability fee (priced in MKR) to redeem their collateral. If users fail to maintain sufficient collateralization, their collateral will be liquidated.
• Delta represents the percentage change in the price of a derivative relative to the price of the underlying asset. For example, if a certain option has a delta of 0.5, when the price of the underlying asset rises by $1, the option price is expected to increase by $0.50. A delta-neutral position is an investment strategy that offsets price risk by holding a certain amount of the underlying asset and derivatives. The goal is to achieve an overall delta value of zero in the portfolio, thus maintaining the value of the position during fluctuations in the underlying asset’s price. For instance, for a certain amount of spot ETH, one might buy an equivalent amount of ETH short perpetual contracts.
  Ethena tokenizes delta-neutral arbitrage trades involving ETH by issuing stablecoins USDe, which represent the value of delta-neutral positions. Therefore, their stablecoin USDe has the following two sources of income:
  • Staking rewards
  • Basis spreads and funding rates
  • Ethena achieves equal collateralization and additional returns through hedging.

Project 1: Bitsmiley Protocol
Project Overview

• The first native stablecoin project in the BTC ecosystem.
• On December 14, 2023, OKX Ventures announced a strategic investment in the stablecoin protocol bitSmiley on the BTC network, which allows users to mint the stablecoin bitUSD by over-collateralizing native BTC. At the same time, bitSmiley encompasses lending and derivatives protocols, aiming to provide a new financial ecosystem for Bitcoin. Previously, bitSmiley was selected as a premium project at the BTC hackathon co-hosted by ABCDE and OKX Ventures in November 2023.
• On January 28, 2024, it was announced that the first round of token financing was completed, led by OKX Ventures and ABCDE, with participation from CMS Holdings, Satoshi Lab, Foresight Ventures, LK Venture, Silvermine Capital, and individuals from Delphi Digital and Particle Network. On February 2, LK Venture, a Hong Kong-listed company under Blueport Interactive, announced on platform X that it had participated in the first round of financing for bitSmiley through the Bitcoin network ecosystem investment management fund BTC NEXT. On March 4, KuCoin Ventures tweeted to announce a strategic investment in the Bitcoin DeFi ecosystem project bitSmiley.

Operating Mechanism

• bitSmiley is a Bitcoin-native stablecoin project based on the Fintegra framework. It consists of the decentralized over-collateralized stablecoin bitUSD and a native trustless lending protocol (bitLending). bitUSD is based on bitRC-20, a modified version of BRC-20, and is compatible with BRC-20, with the addition of Mint and Burn operations to meet the needs for minting and burning stablecoins.
• In January, bitSmiley launched a new DeFi inscription protocol called bitRC-20. The first asset, OG PASS NFT, is also known as bitDisc. bitDisc is divided into two levels: Gold Card and Black Card, with Gold Cards allocated to Bitcoin OGs and industry leaders, totaling fewer than 40 holders. Starting February 4, Black Cards will be made available to the public through whitelist activities and public minting activities in BRC-20 inscription format, which temporarily caused congestion on the blockchain. Subsequently, the project team stated that they would compensate for unsuccessful inscriptions.
• The operational mechanism of the $bitUSD stablecoin: It is similar to that of $DAI. Users first over-collateralize, and then the bitSmileyDAO on L2 issues a Mint bitRC-20 message to the BTC mainnet after receiving oracle information and consensus verification.

Image source: https://github.com/bitSmiley-protocol/whitepaper/blob/main/BitSmiley_White_Paper.pdf

• The logic of liquidation and redemption is similar to MakerDAO, and liquidation takes the form of a Dutch auction.

Source: https://github.com/bitSmiley-protocol/whitepaper/blob/main/BitSmiley_White_Paper.pdf

Project Progress & Participation Opportunities

• BitSmiley launched its Alphanet on BitLayer on May 1, 2024. The maximum loan-to-value (LTV) ratio is set at 50%, which is relatively low to prevent user liquidation. As the adoption of bitUSD increases, the project team will gradually raise the LTV ratio.
• BitSmiley and the Merlin community will introduce an exclusive liquidity incentive grant starting May 15, 2024, to enhance the liquidity of bitUSD. The detailed rules are as follows:
  • BitSmiley will offer up to 3,150,000 $BIT tokens as rewards to Merlin community members. Rewards will be unlocked based on user activity within the Merlin community. The first season runs from May 15, 2024, to August 15, 2024.
  • Reward Mechanism: Incentives will be awarded for achieving minting targets for bitUSD and for adding liquidity to the bitUSD pool on bitCow. The details of the liquidity incentive scheme are illustrated in the image below. The liquidity incentives will be distributed based on the bitPoints earned by users on the Merlin chain—users with more points will receive greater token rewards.

Source: https://medium.com/@bitsmiley/exclusive-liquidity-incentive-grant-details-bitsmiley-x-bitcow-alpha-net-on-merlin-chain-3f88c4ddb32d

Project 2: Bamk.fi (NUSD)
Project Overview

• The Bamk.fi protocol is the issuer of NUSD (Nakamoto Dollar), a synthetic dollar on Bitcoin L1. NUSD circulates on both the BRC 20-5 byte and Runes protocols (currently equivalent).

Operational Mechanism

• The project is designed in two phases. In Phase 1, NUSD is supported 1:1 by USDe, allowing holders of NUSD to accumulate BAMK in each block (the earlier you hold NUSD, the more BAMK you can earn). In Phase 2, NUSD will be fully backed by delta-neutral Bitcoin positions, yielding native returns, referred to as “Bitcoin Bonds,” while also enabling minting and redemption based on BTC. However, the current minting method available on the official website is a 1:1 minting with USDT.
• The mentioned project token, BAMK, is in rune form, with the rune code BAMK•OF•NAKAMOTO•DOLLAR, minted on April 21, 2024. It has a maximum supply of 21,000,000,000 (21 billion). Of this, 6.25% of the supply has been allocated as rewards to all NUSD holders. Simply purchase NUSD and store it in your wallet to start accumulating BAMK tokens. Each block between 844,492 and 886,454—totaling 41,972 blocks—will accumulate 31,250 BAMK, distributed proportionally based on the user’s NUSD holdings divided by the total NUSD TVL at that block height.

Project 3: Yala Labs
Project Overview

• Yala utilizes its self-built modular infrastructure to facilitate the free and secure flow of its stablecoin, $YU, across various ecosystems, unlocking BTC liquidity and injecting significant capital into the entire crypto ecosystem.

Core Products:

• Overcollateralized Stablecoin $YU: This stablecoin is generated through the over-collateralization of Bitcoin, and the infrastructure is based not only on Bitcoin’s native protocol but can also be deployed freely and securely across EVM and other ecosystems.
• Metamint: A key component of $YU that allows users to conveniently mint $YU using native Bitcoin across different ecosystems, thereby injecting Bitcoin’s liquidity into these ecosystems.
• Insurance Derivatives: Offering comprehensive insurance solutions within the DeFi ecosystem, creating arbitrage opportunities for users.

Operational Mechanism

• To facilitate users’ use of $YU across various ecosystems, the Metamint solution was launched. Users can easily mint $YU on any target chain using either native Bitcoin or wrapped BTC on EVM as collateral. To lower the barrier to entry, users do not need to manually wrap their Bitcoin; simply pledging BTC will automatically generate the wrapped BTC required for minting $YU on the target chain in the background.
• Through this smooth asset conversion solution, users can participate in DeFi protocols across ecosystems, including cross-chain yield farming, staking, and other DeFi activities, opening up new earning opportunities. This multi-chain solution significantly enhances users’ potential for greater returns. Unlike traditional stablecoin companies that concentrate profits, Yala returns system-generated fees to core $YU holders, ensuring users directly benefit from the ecosystem’s growth.

Features & Advantages

• Using Bitcoin as the primary collateral while enjoying the security and resilience of the Bitcoin network.
• Users can engage in various DeFi activities with $YU to earn returns.
• Yala adheres to a user-centric decentralized governance structure, with revenues returned to core users.

Project Updates & Participation Opportunities

Through partnerships with outstanding projects, Yala provides users with various earning opportunities while ensuring security. For instance, by collaborating with Babylon, Yala users can over-collateralize BTC and mint the stablecoin $YU, then further stake these collateralized assets on the Babylon platform to achieve multiple yields. Since the Babylon staking protocol does not require third-party custodianship, this integration ensures user asset security while enhancing yields.

Yala’s roadmap focuses on building a robust liquidity layer that connects Bitcoin to outstanding Layer 1 and Layer 2 ecosystems in the market. To ensure security and optimal user experience, Yala will gradually launch its mainnet and testnet in phases:

• Testnet V0: $YU stablecoin issuance, Pro mode, and oracles.
• Testnet V1: Light mode of $YU stablecoin with meta yields.
• V1 Release: Insurance module and security upgrades.
• V2 Launch: Governance framework initiation.

With the testnet launch approaching, Yala has secured support from leading funds; specific institutions and valuation details will be announced in upcoming financing news.

Project 4: Satoshi Protocol
Project Overview

• Satoshi Protocol is the first CDP stablecoin protocol in the BTC ecosystem, based on the BEVM ecosystem.
• Satoshi Protocol announced the completion of its seed round financing on March 26, 2024, led by Web3Port Foundation and Waterdrip Capital, with participation from BEVM Foundation, Cogitent Venture, Statoshi Lab, and others. On July 9, 2024, it announced the completion of $2 million in financing.

Operational Mechanism

• The protocol allows Bitcoin holders to unlock liquidity from their assets through low-interest rates. Satoshi Protocol is a multi-chain protocol, with its stablecoin SAT featuring a highly compatible multi-token standard mechanism. It currently has two tokens: the USD-pegged stablecoin SAT and the utility token OSHI that incentivizes ecosystem participants. Users can mint the USD stablecoin $SAT by depositing BTC and other BTC-based yield-generating assets at a minimum collateralization rate of 110%, enabling participation in trading, liquidity pools, lending, and other scenarios to earn returns.
• In the Satoshi Protocol, users must maintain at least a 110% collateralization ratio when building positions to avoid liquidation. For example, when borrowing 100 SAT, users must lock BTC worth more than 110 SAT as collateral. If the BTC price drops, causing the collateral’s value to fall below the 110% collateralization ratio, the protocol will initiate liquidation.
• The stable pool is the core mechanism of the Satoshi Protocol, designed to settle debts from liquidated positions by providing liquidity, ensuring the system’s stability. When under-collateralized positions (below 110% collateralization) are liquidated, SP uses SAT to settle debts and acquires the liquidated BTC collateral. Users participating in the stable pool can purchase these BTC collaterals at a discount, while the protocol uses the SAT obtained from liquidations to repay debts.

Project Updates & Participation Opportunities

• The latest announcement indicates that Satoshi Protocol is developing a runes-based stablecoin on the Bitcoin mainnet. Additionally, through collaborations with projects like Omini Network, it aims to bridge the Bitcoin and Ethereum ecosystems to realize the vision of a “full-chain stablecoin” solution.
• Currently, a point airdrop campaign for $OSHI is underway, where users can earn points by voting for the project in the BVB plan, depositing collateral to borrow $SAT, providing liquidity, and referring others. $OSHI will be distributed later based on points.

Project 5: BTU
Project Overview

• BTU is the first decentralized stablecoin project in the Bitcoin ecosystem, utilizing a collateralized debt position (CDP) model that allows users to issue stablecoins based on BTC assets. BTU offers a more secure and trustless stablecoin solution, addressing liquidity issues faced by Bitcoin holders in the existing DeFi ecosystem through seamless decentralized design.

Operational Mechanism

1. Bitcoin-Backed Stablecoin: BTU is a decentralized stablecoin fully backed by Bitcoin. Users can directly mint stablecoins by locking BTC within the BTU protocol without transferring their assets off-chain or relinquishing control over their BTC. This design ensures decentralization while avoiding risks associated with traditional centralized exchanges or custodians.
2. No Cross-Chain Bridges Required: Unlike other solutions that rely on cross-chain bridges, BTU completes all operations within the Bitcoin network, eliminating the need for users to transfer BTC across chains. This design removes potential third-party risks that may arise during cross-chain processes, further enhancing the security and control of users’ assets.
3. Asset Proof Without Transactions: BTU introduces a mechanism for proving BTC holdings without the need for transactions, allowing users to validate their assets without moving their Bitcoin. This trustless and seamless design provides a new level of security for users in the decentralized finance ecosystem.
4. Decentralized CDP Model: BTU adopts a decentralized collateralized debt position (CDP) model, allowing users full autonomy over when to issue or redeem BTU stablecoins. The protocol design ensures that users’ BTC can only be utilized with their consent, maintaining a high level of decentralization and control.
5. Enhancing Liquidity and Leverage: BTU is the first protocol to map BTC on the Bitcoin network, increasing its liquidity and leverage. Through this mechanism, BTC holders can bring their assets into the DeFi ecosystem without sacrificing decentralization, providing greater flexibility and investment opportunities.
   • BTU unlocks Bitcoin’s liquidity, offering BTC holders a trustless, decentralized way to participate in the DeFi ecosystem. Traditionally, BTC holders have faced challenges when trying to engage in DeFi or on-chain financial activities without relying on centralized exchanges or custodians. BTU opens new possibilities for Bitcoin holders, enabling them to safely issue stablecoins, enhance liquidity, and maintain control over their BTC.
   • This innovative decentralized stablecoin solution not only provides BTC holders with more financial options but also drives new growth potential for the DeFi ecosystem. By unlocking Bitcoin’s liquidity, BTU could facilitate the emergence of a new generation of DeFi applications and protocols, further expanding the user base and use cases of the DeFi market.
   • BTU’s infrastructure is designed with a focus on decentralization and security. Since it operates entirely within the Bitcoin network, BTU eliminates the need for cross-chain bridges or third-party custodians, significantly reducing centralized risks. BTU’s decentralized model ensures seamless integration with the existing Bitcoin ecosystem without introducing additional technical or security risks.

Project Progress & Participation Opportunities

• The project has secured investment support from Waterdrip Capital, Founder Fund, and Radiance Ventures.

2. Lending Sector

Overview

• Bitcoin lending (BTC Lending) is a financial service that allows users to obtain loans by using Bitcoin as collateral or to earn interest by lending Bitcoin. Borrowers deposit their Bitcoin into a lending platform, which offers loans based on the value of the Bitcoin. Borrowers pay interest, while lenders earn returns. This model provides liquidity for Bitcoin holders and offers new revenue streams for investors.
• The collateralized loans in BTC Lending are similar to traditional mortgages. If a borrower defaults, the platform can auction the collateralized Bitcoin to recover the loan. BTC Lending platforms typically implement the following risk management measures:
  1. Collateralization Ratio and Loan-to-Value Ratio (LTV): Platforms set an LTV threshold. For instance, if Bitcoin is valued at $10,000, a loan of no more than $5,000 would correspond to an LTV of 50%. This creates a buffer for Bitcoin price fluctuations.
  2. Supplemental Collateral and Margin Calls: If Bitcoin’s price drops, borrowers must provide additional collateral to lower the LTV. If they fail to do so, the platform may enforce liquidation.
  3. Liquidation Mechanism: When borrowers cannot meet margin calls, the platform will sell a portion or all of the collateralized Bitcoin to repay the loan.
  4. Risk Management and Insurance: Some platforms establish insurance funds or partner with insurance companies to provide additional protection.
• Between 2013 and 2017, Bitcoin gradually gained acceptance as a new asset class. Early lending platforms like Bitbond and BTCJam emerged and primarily lent through a P2P model. From 2018 to 2019, the cryptocurrency market experienced rapid growth, leading to the rise of more platforms such as BlockFi, Celsius Network, and Nexo. The DeFi concept facilitated the rising of decentralized lending platforms.
• From 2020 to the present, the COVID-19 pandemic has caused turbulence in global financial markets, drawing attention to cryptocurrencies as safe-haven assets. The demand for BTC Lending surged, and the scale of lending expanded rapidly. Major platforms continually innovated, introducing various financial products and services, such as flash loans, liquidity mining, and cryptocurrency reward credit cards, attracting more users.
• The BTC Lending sector has become an important part of the cryptocurrency market, servicing major cryptocurrencies like Bitcoin and Ethereum, and lending products that include collateralized loans, deposit accounts, and unsecured loans. Platforms profit through interest rate spreads and fees. Popular platforms like Aave offer flash loans and liquidity mining rewards, MakerDAO provides the DAI Savings Rate (DSR), and Yala offers DeFi yields based on stablecoins. The next section will introduce popular products in the BTC Lending sector.

Project 1: Liquidium

Overview

• Liquidium is a P2P lending protocol operating on Bitcoin, enabling users to use native Ordinals and Runes assets as collateral for borrowing and lending native Bitcoin.
• On December 11, 2023, Liquidium completed a $1.25 million Pre-Seed funding round, with participation from Bitcoin Frontier Fund, Side Door Ventures, Actai Ventures, Sora Ventures, Spicy Capital, and UTXO Management.
• On July 18, 2024, Liquidium raised $2.75 million in a Seed funding round, led by Wise 3 Ventures, with participation from Portal Ventures, Asymmetric Capital, AGE Fund, and Newman Capital.

Operational Mechanism

• The platform completes Bitcoin lending in a secure and non-custodial manner using Partially Signed Bitcoin Transactions (PSBT) and Discreet Log Contracts (DLC) on Bitcoin L1. Currently, it supports lending for Ordinals and Runes assets (BRC-20 is in testing).
• Tokenomics: The LIQUIDIUM TOKEN in rune format was launched on July 22, 2024, with a total supply of 100 million. The initial airdrop has been completed. As of September 3, the market price of LIQUIDIUM TOKEN is approximately $0.168, with a market cap of $2 million.
• According to Geniidata, as of September 3, the total transaction volume on the protocol reached approximately 2,400 BTC, with the majority being Ordinals and a small portion being Runes assets. The peak transaction volume occurred in April-May, with an average daily trading volume of around 15-20 BTC for Ordinals assets. With the launch of Runes, there was a new peak in daily active users (DAU) and trading volume, followed by a gradual decline. In August and September, trading volume dropped to an average of 5-10 BTC per day.

Project 2: Shell Finance

Overview

• Shell Finance is 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.

Operational Mechanism

• Similar to Liquidium, it utilizes PSBT and DLC technology for native Bitcoin lending. PSBT allows for secure and collaborative transaction signing, while DLC enables conditional and trustless contract execution based on verified external data.
• Unlike Liquidium’s P2P model, Shell Finance adopts a Peer-to-Pool approach to maximize utilization.
• The testnet has yet to be launched.

3. Staking Sector

Overview

• Staking is commonly recognized for its secure and stable yield-generating characteristics. When users stake tokens, they typically receive certain access privileges, perks, or reward tokens over time in exchange for locking their coins, which can be withdrawn anytime and anywhere. Staking occurs at the network level and is entirely aimed at securing the network. Ethereum’s proof-of-stake (PoS) mechanism is the most typical example of staking, with over 565,000 validators holding the standard 32 ETH, which today is worth more than $32 billion. The assets staked are usually tied to DeFi liquidity, yield rewards, and governance rights. Tokens locked in a blockchain network or protocol yield returns, which are utilized to provide critical services to users.
• Currently, the concept of shared security brought by staking adds a new dimension to the modular sector, harnessing the potential of “digital gold and silver.” Narratively, it releases liquidity worth trillions of market cap and serves as a key core in the path to future scalability. Recent Bitcoin staking protocol Babylon and Ethereum restaking protocol EigenLayer, which secured significant funding of $70 million and $100 million respectively, clearly indicate that top VCs recognize the value of this sector.
• At this stage, the sector is mainly divided into two factions: 1. Layer 1 chains with sufficient security that function as rollup layers; 2. Creating an alternative with security comparable to Bitcoin/Ethereum but with better performance. For example, Celestia aims to create a secure, decentralized, and high-performance data availability (DA) layer through a pure DA functional architecture and low gas costs. The disadvantage of this approach is that it requires time to achieve a certain level of decentralization and lacks legitimacy. In contrast, newly emerging projects like Babylon and EigenLayer represent a more neutral stance. Their advantage lies in inheriting legitimacy and security while also granting the main chain assets greater application value—creating shared security services through PoS, leveraging the asset value of Bitcoin or Ethereum.

Project 1: Babylon

Overview

• Babylon is a layer 1 blockchain founded by Stanford University’s Professor David Tse. The project’s mission is to bring Bitcoin’s unparalleled security to all PoS blockchains without incurring any additional energy costs. The team consists of researchers from Stanford University, experienced developers, and seasoned business advisors.
• Babylon is a Bitcoin staking protocol, with its core component being a PoS public chain compatible with Cosmos IBC. It allows Bitcoin to be locked on the Bitcoin mainnet to provide security for other PoS consumer chains while earning staking rewards on the Babylon mainnet or PoS consumer chains. Babylon enables Bitcoin to leverage its unique security and decentralization features to economically secure other PoS chains, facilitating the rapid initiation of other projects.

Source: https://www.rootdata.com/zh/Projects/detail/Babylon?k=MjgwNQ%3D%3D

• The Babylon team consists of 32 technical personnel and advisors, showcasing strong technical capabilities. Among the advisors are Sunny Aggarwal, co-founder of Osmosis Lab, and Sreeram Kannan, founder of EigenLayer, who serves as a strategic advisor. As of June 1, 2024, Babylon has disclosed multiple rounds of funding, with a total amount exceeding $96.8 million. The following table illustrates that, compared to other Bitcoin Layer 2 projects, Babylon’s funding amount is relatively high, with numerous institutional backers.

Operational Mechanism

• In terms of operation, Babylon’s mechanism is aligned with Ethereum’s restaking protocol, EigenLayer. “Bitcoin + Babylon” can be seen as analogous to “Ethereum + EigenLayer.” However, since Bitcoin does not support smart contracts, Babylon has an additional step compared to EigenLayer, which is also the most challenging step: making non-stakable Bitcoin stakable before proceeding to restake it.
• Babylon leverages UTXOs to implement staking contracts, a process known as Remote Staking. This means that the security of BTC is transmitted to the PoS chain through an intermediary layer, while cleverly integrating existing opcodes. The specific steps to implement the contract can be broken down as follows:
  a. Locking Funds
  Users send funds to an address controlled by a multi-signature scheme. Using OP_CTV (OP_CHECKTEMPLATEVERIFY), which allows the creation of predefined transaction templates ensuring that transactions can only be executed under specific structures and conditions, the contract specifies that these funds can only be spent if certain conditions are met. Once the funds are locked, a new UTXO is generated to indicate that these funds have been staked.
  b. Condition Verification
  By invoking OP_CSV (OP_CHECKSEQUENCEVERIFY), which allows for the setting of a relative time lock based on the transaction’s sequence number, it ensures that the funds cannot be withdrawn for a specified period. When combined with OP_CTV mentioned above, it enables staking and unstaking (where the staker can spend the locked UTXO once the staking period is met), as well as slashing (where, in the event of malicious behavior by the staker, the UTXO is forcibly spent to a locked address and rendered unspendable, similar to a black hole address).

Source: https://docs.babylonchain.io/assets/files/btc_staking_litepaper-32bfea0c243773f0bfac63e148387aef.pdf

c. State Updates
Whenever users stake or withdraw their staked funds, the creation and spending of UTXOs come into play. New transaction outputs generate new UTXOs, while old UTXOs are marked as spent. This ensures that each transaction and flow of funds is accurately recorded on the blockchain, guaranteeing transparency and security.

d. Reward Distribution
Based on the amount staked and the duration of staking, the contract calculates the rewards owed and distributes them by generating new UTXOs. These rewards can be unlocked and spent after meeting specific conditions set in the script.

• The overall architecture of Babylon can be divided into three layers: Bitcoin (serving as a timestamp server), Babylon (a Cosmos Zone) as the intermediary layer, and the demand layer for PoS chains. Babylon refers to the latter two as the Control Plane (the Babylon itself) and the Data Plane (the various PoS consumption chains).

• Validators on each PoS chain download Babylon blocks and check whether their PoS checkpoints are included in the Bitcoin-validated Babylon blocks. This allows PoS chains to detect discrepancies, such as if Babylon validators create an unavailable block checked by Bitcoin and falsely claim the PoS checkpoints contained within that unavailable block.
• Consequently, there are slashing rules, meaning that if validators do not withdraw their stake upon detecting an attack, they can be slashed for having conflicting PoS blocks with double signatures. Malicious PoS validators may thus fork the PoS chain while allocating Bitcoin timestamps for blocks on the standardized PoS chain. In the view of later PoS clients, this will shift the standard PoS chain from the top chain to the bottom chain. Although this represents a successful security attack, it results in the slashing of the stakes of malicious PoS validators, as they have conflicting blocks with double signatures but have not yet withdrawn their staked assets.

Source: https://docs.babylonchain.io/assets/files/btc_staking_litepaper-32bfea0c243773f0bfac63e148387aef.pdf

Project Progress & Participation Opportunities

• In February 2023, Babylon launched its BTC timestamping testnet. In July, it achieved a BTC staking proof of concept (PoC) and plans to launch the BTC staking testnet in Q4.
• In Q2 of 2024, Babylon will go live on the Mainnet, and during Q3 and Q4 of 2024, it will introduce Data Availability, which is currently in testnet 4. Users participating in the testnet will receive project points as incentives, which can be exchanged for governance token airdrops once the Mainnet is launched.
• The Mainnet is expected to launch soon. As of August 1, 2024, Babylon has started partnerships with popular restaking projects such as Chakra, Bedrock, Solv Protocol, and pStake to initiate pre-staking processes. Users can already participate in Babylon’s pre-staking through these projects and receive corresponding shares, making it an excellent time to get involved. After the Mainnet launch, users will also be able to stake on the Mainnet and earn governance tokens, enjoying annualized returns from the staking network at any time.

1. Restaking Sector

Introduction

• Building on staking, ETH introduced the concept of restaking for the first time. ReStaking allows liquid staked token assets to be used for staking with validators on other networks and blockchains, earning additional yields while enhancing the security and decentralization of the new networks. Through ReStaking, investors can achieve double returns from both the original network and the ReStaking network. Although ReStaking enables stakers to gain higher yields, it also carries risks related to smart contracts and fraudulent validator staking behaviors.
• In addition to accepting original assets, ReStaking networks also accept other assets such as LSD tokens and LP tokens, enhancing network security. This approach releases unlimited liquidity sources for the DeFi market while still generating real income for protocols and their users. Revenue for both ReStaking and standard networks comes from security rentals, validators, and fees generated by dApps, protocols, and layers. Participants staking on the network will receive a portion of the network’s revenue and may also gain inflation rewards in the form of native tokens.
• Many BTC holders stake their BTC in projects like Babylon and Bedrock to achieve considerable annual yields and governance tokens. Early participants can realize substantial returns and long-term benefits. However, their BTC loses other applications’ value when staked. So, how can new liquidity be released to add more value to their BTC? Since BTC liquidity can’t be increased, the focus shifts to releasing the liquidity from LSD obtained through staking. Users can engage in restaking the asset receipts acquired from staking BTC, earning fivefold returns: annual staking yields, governance tokens obtained from staking, annual restaking yields, and governance tokens obtained from restaking.

Project 1: Chakra

Overview

• Chakra is an innovative modular settlement infrastructure utilizing zero-knowledge proof technology to ensure trustless security and efficiency. By integrating decentralized Bitcoin liquidity, Chakra offers a more secure and seamless settlement experience. Users can easily stake Bitcoin with one click, leveraging Chakra’s advanced settlement network to participate in more liquidity yield opportunities, including LST/LRT projects within the Babylon ecosystem.
• Chakra is significantly supported by the Starknet ecosystem. In March 2024, it was officially announced that Chakra secured early investments from institutions such as StarkWare and CoinSummer, as well as numerous crypto whales and miners.

Operational Mechanism

• Chakra facilitates the free flow of BTC derivative assets between major public chains by providing a highly modular Bitcoin settlement network, injecting liquidity into DeFi protocols and addressing the liquidity and interoperability issues of Bitcoin within the current blockchain ecosystem. At the same time, Chakra helps Layer 2 solutions, decentralized exchanges (DEXs), and DeFi protocols bypass the complexities of building Bitcoin settlement infrastructure, avoiding resource waste and security risks associated with redundant settlement system development.
• By leveraging the finality provided by the Babylon network, Chakra enhances economic security and prevents settlement errors caused by consensus attacks. Chakra efficiently aggregates zero-knowledge proofs for Layer 2 state and liquidity settlements, ensuring frictionless cross-chain circulation of Bitcoin assets. The Parallel VM designed and implemented by the Chakra team optimizes performance through multithreading, achieving over 5,000 transactions per second (TPS) with 4 threads, and even reaching up to 100,000 TPS in a high-configuration environment with 64 threads.

Project Progress

• In May, Chakra launched its Devnet, encouraging developers to co-build an application ecosystem and establishing strong connections with multiple local communities within Starknet. Subsequent initiatives will include a series of developer education activities and Devnet incentives, supported by Starknet. In June, during the simultaneous launch of the testing network activities for Chakra and Babylon, Chakra consistently ranked as the top Finality Provider across the Babylon ecosystem, contributing 41% of the staking users on the entire network.

• From August 1 to August 7, 2024, Chakra launched a pre-staking campaign in collaboration with the Binance Web3 wallet. Participants were offered dual rewards, including potential gains from Babylon and ChakraPrana, with future opportunities to earn rewards in other ecological tokens within the settlement system. The campaign has concluded, with a total of 48,767 users participating in the staking.

Project 2: Bedrock

Overview

• Bedrock is a multi-asset liquidity restaking protocol supported by a non-custodial solution designed in partnership with RockX. Bedrock leverages its universal standards to unlock liquidity and maximize value for PoS tokens (such as ETH and IOTX) and existing liquid staking tokens (referred to as uniETH and uniIOTX).
• Bedrock provides users with institutional-level services, surpassing a total staking value of $200 million as of May 2, and has built the first liquid staking Bitcoin (uniBTC) on Babylon.

The TVL to date:

Source: https://defillama.com/protocol/bedrock#information

• TVL exceeded US$200 million at its peak, and there are signs of rising again. In addition, the project has also carried out in-depth cooperation with ecological protocols such as Pendle, Karak, Celer, zkLink, etc., highlighting its influence in the DeFi ecosystem.

Source: https://www.rootdata.com/zh/Projects/detail/Bedrock?k=MTI1OTM%3D

• Bedrock has secured investments from renowned institutions such as OKX Ventures, Waterdrip Capital, and Amber Group. On May 2, 2024, OKX Ventures announced it would lead the investment in Bedrock. OKX Ventures founder Dora Yue stated, “With the rapid development of DeFi, the total on-chain staking value has exceeded $93.4 billion, of which 48% comes from the liquidity restaking sector. Our investment in Bedrock aims to accelerate liquidity restaking solutions. We hope to provide diverse and secure asset management options for community users. We look forward to the gradual maturation and systematization of DeFi use cases, promoting the sustainable development of the Web3 industry.”

Operational Mechanism

• Bedrock utilizes uniBTC, supported by Babylon, for restaking. Users can stake wBTC on Babylon via the ETH chain, receiving a 1:1 certificate—uniBTC—in return for their wBTC. Users’ uniBTC can be redeemed for wBTC at any time. Babylon provides the core technical support. By staking wBTC and holding uniBTC, users can earn points from both Bedrock and Babylon. Through the collaboration with Babylon using uniBTC, Bedrock offers liquidity staking services to support Babylon’s PoS chain. Minting uniBTC ensures the stability and security of the Babylon PoS chain while further expanding Bedrock’s products to the BTC chain.

Source: https://www.bedrock.technology/

• From August 1 to August 7, 2024, Bedrock and Binance jointly launched a staking activity. Starting August 1st, users will receive 21x Bedrock Diamond rewards per coin per hour simply by holding uniBTC in their wallet, with an additional 3x boost for Binance Web3 wallet users.

Source: https://docs.bedrock.technology/bedrock-lrt/bedrock-diamonds

1. Decentralized Custody

• Recently, BitGO, the entity behind wBTC, announced that it would relinquish control over wBTC, sparking discussions in the market about the security of WBTC.

WBTC

• WBTC is the earliest and most widely used form of wrapped Bitcoin, bridging Bitcoin assets to the Ethereum ecosystem and utilizing Ethereum’s DeFi scenarios to unlock Bitcoin’s liquidity. However, this ERC-20 token form of wrapped Bitcoin poses issues of centralized management, leading to user concerns over asset security and transparency. MakerDAO voted to halt new lending against WBTC, resulting in the burning of over $30 million worth of WBTC within a week. Interest has increased in competing products like tBTC and Coinbase’s new product, cbBTC.

tBTC

• tBTC can be minted when crossing from BTC to ETH. Users can exchange WBTC for tBTC and subsequently redeem it back for native BTC, either securing it or continuing to use tBTC as collateral in DeFi. tBTC has a strong adoption rate in DeFi, with significant use cases in Curve Finance. Besides being actively traded in major stable and volatile pools, tBTC can also be minted into crvUSD stablecoin.

FBTC

• FBTC is a new type of synthetic asset that is 1:1 pegged to BTC and supports omnichain circulation of BTC. Initially, FBTC will be launched on ETH, Mantle, and BNB chains, with plans for expansion to more networks, allowing users to earn yield in DeFi scenarios with FBTC.
• Key advantages of FBTC include:
  1. FBTC will utilize multi-party computation (MPC) for custodial services.
  2. The minting, burning, and cross-chain bridging of FBTC are managed by a TSS (Threshold Signature Scheme) network operated by the FBTC Security Council and security firms.
  3. The proof of reserves for FBTC can be queried in real-time and is monitored and verified by security firms.
  4. Locked FBTC can be scheduled to access underlying BTC as collateral or participate in Babylon staking.
  5. It is built by well-established entities within the blockchain ecosystem and Bitcoin financial institutions, gaining the trust of numerous miners and builders.
  6. Governance tokens are used as incentives.

dlcBTC

• dlcBTC is a non-custodial representation of Bitcoin on Ethereum, enabling Bitcoin holders to participate in DeFi protocols while retaining full ownership of their assets. It employs discreet log contracts (DLCs) to lock Bitcoin in a multi-signature UTXO, with one key held by the user and another distributed across a decentralized network. The minted dlcBTC tokens can serve as collateral in various DeFi platforms (such as Curve and AAVE).
• Unlike wBTC and other bridged assets (like tBTC and BTC.B), dlcBTC locks Bitcoin on-chain while eliminating the need for intermediaries or custodians, prioritizing user sovereignty. dlcBTC is protected by the total hash power of the Bitcoin network, eliminating the need for users to send their Bitcoins to third-party deposit addresses.
• Compared to wBTC, dlcBTC has the following advantages:
  1. Self-wrapping: dlcBTC is self-wrapped by the depositor (dlcBTC merchant), locking BTC within the DLC. This self-wrapping means that the DLC can only pay the original depositor, thus preventing the theft of BTC during hacks or confiscation by government actions.
  2. Fully automated: Minting or burning wBTC can take 3-12 hours due to manual steps in the BitGo custodial process. In contrast, dlcBTC is fully automated and can complete minting or burning in 3-6 BTC block confirmations.
  3. Flexible fees: Since DLC.Link is not a custodian, dlcBTC incurs lower overhead, allowing for more competitive minting and burning fees.

1. CeDeFi

Introduction

• CeDeFi is a financial service that combines characteristics of centralized finance (CeFi) and decentralized finance (DeFi). The conclusion of DeFi Summer prompted reflections on the urgent need for mechanism innovation to eliminate the hassles of manual operations and interactions with liquidity mining pools, while also breaking through the algorithmic limitations of underlying pools. Following Ethereum’s transition to PoS, Lido’s success has propelled an active asset management model that generates yield by staking native ETH to obtain stETH, thereby releasing liquidity while earning interest. In this process, users have shifted from directly interacting with liquidity pools to entrusting their assets to professional asset management institutions (centralized), which embodies the essence of CeDeFi.
• In the CeDeFi model, users lock Bitcoin in a third-party custodian’s independent over-the-counter settlement network, separate from exchanges. These Bitcoins are then mapped to tokens on the exchange at a 1:1 ratio. Users can utilize these tokens for various operations on CeDeFi platforms, such as conducting interest rate arbitrage trades between different markets. The actual Bitcoins are securely stored in a cold wallet isolated from the exchange. Only necessary fund flows occur between the custodian platform and exchange accounts, ensuring the security of user assets.
• As of June 13, 2024, approximately 28% of the total ETH supply is staked (33 million / 120 million), with about 29% staked through Lido (10 million / 33 million). This indicates that the liquidity of Bitcoin, valued in the trillions, remains unreleased, which is a clear impetus for the emergence of CeDeFi.
• The sources of yield in CeDeFi typically include fee arbitrage, staking rewards, restaking returns, and protocol-generated income (such as anticipated airdrops). Fee arbitrage refers to exploiting the differences in funding rates between CeFi and DeFi systems to engage in interest rate arbitrage trades for profit. CeDeFi arbitrage strategies combine the security of CeFi with the flexibility of DeFi, allowing users to arbitrage through delta-neutral interest rates.

Project 1: Solv Protocol
Overview

• The Solv Protocol is a unified liquidity matrix for Bitcoin, aimed at consolidating the fragmented trillions of dollars in Bitcoin liquidity through SolvBTC.
• Launched in 2021, it secured seed round funding and has since completed four funding rounds totaling over $11 million (including a strategic round from Binance Labs with undisclosed amounts). The project’s contracts have been audited by several reputable firms.

Operational Mechanism

• SolvBTC serves as the liquidity layer for Bitcoin and is currently live on Ethereum, BNB Chain, Arbitrum, and the Merlin Chain. As of July 16, 2024, the protocol has a total value locked (TVL) of 20,224 BTC, approximately $1.22 billion.
• By staking SolvBTC, users can earn either SolvBTC Ethena (SolvBTC.ENA) or SolvBTC Babylon (SolvBTC.BBN).
  • SolvBTC Ethena utilizes Bitcoin as collateral to borrow stablecoins, which are then used to mint and stake USDe on Ethena. This process primarily generates returns from two main sources: financing obtained from Ethereum staking and Delta hedging derivatives positions. Additionally, users can earn token incentives from both Solv and Ethena.
  • SolvBTC.BBN will not initially generate returns, but it is designed to prepare for the launch of Babylon’s mainnet, expected by the end of July. The allocation of 500 BTC for both the first and second epochs has already been claimed.
• Solv Protocol collaborates with digital asset custodians such as Copper, Ceffu, Cobo, and Fireblocks. These custodians provide “over-the-counter settlement” solutions, enabling Solv to delegate assets to centralized exchanges or withdraw them without transferring the actual assets.
• Technical Framework: The Solv technical architecture revolves around the Liquidity Verification Network (LVN), a framework designed to provide secure liquidity verification for digital assets, with a primary focus on Liquid Staking Tokens (LST). The first asset supported by LVN is SolvBTC. Currently, Solv Guard has been launched as the foundational security module of LVN, ensuring the integrity and security of all operations within the network by supervising and managing the permissions of asset managers.
  
  Source: https://docs.solv.finance/solv-documentation/getting-started-2/liquidity-validation-network

Project Progress & Participation Opportunities

• The Solv points system is currently operational and will serve as a reference for future airdrops.
  • Total XP = Base XP + Boost XP + Referral XP
  • Users can enhance their base points by staking (Base XP = (XP earned per dollar deposited) x (holding time)). Additionally, they can earn multipliers for Boost XP by reaching certain thresholds or participating in community activities.
• On July 16, the community announced that the third epoch of SolvBTC.BBN is set to launch.

Project 2: Bouncebit
Overview

• Bouncebit is a BTC restaking chain fully compatible with EVM, featuring a CeDeFi product design that utilizes Liquidity Custody Tokens (LCT) for restaking and on-chain farming.
• On February 29, 2024, Bouncebit announced the completion of a $6 million seed funding round, led by Blockchain Capital and Breyer Capital, with participation from CMS Holdings, Bankless Ventures, NGC Ventures, Matrixport Ventures, DeFiance Capital, OKX Ventures, and HTX Ventures. On the same day, OKX Ventures and HTX Ventures announced strategic investments in Bouncebit. On April 11, Binance Labs also announced an investment in Bouncebit.

Operational Mechanism

• Bouncebit utilizes Mainnet Digital and Ceffu’s MirrorX technology to implement regulated custody guarantees, mapping assets to exchanges and enabling BTC to earn yields within MPC wallets. The chain employs a mixed PoS mechanism combining BTC and Bouncebit for verification.
• Bouncebit supports the seamless conversion of pure BTC into more flexible forms, such as BTCB on the BNB Chain and Wrapped Bitcoin (WBTC). Users can deposit their BTC into secure custody services accessible via EVM networks, thereby bridging these assets to the Bouncebit platform. This process allows for the accumulation of on-chain yields without direct interaction with the Bitcoin main chain.
• The Bouncebit CeDeFi ecosystem offers users three types of returns: original CeFi yields (arbitrage), node operation rewards for staking BTC on the Bouncebit chain, and opportunity yields from participating in on-chain applications and Bounce Launchpad (DeFi yields within the on-chain ecosystem).
  • User contributions to TVL are securely managed by Mainnet Digital’s regulated custody services, ensuring compliance and security. These assets are then mirrored through Ceffu’s MirrorX service, providing users with BBTC/BBUSD.

Source: https://docs.bouncebit.io/cedefi/bouncebit-cefi-+-defi/infrastructure

Project Progress

• The mainnet was launched in May, and as of July 16, the market capitalization of $BB is $201 million, with a fully diluted valuation (FDV) of $968 million and a mainnet TVL of $310 million.

Project 3: Lorenzo Protocol
Overview

• Lorenzo is a BTC liquidity finance layer based on Babylon.
• On May 21, the BTC liquidity finance layer project Lorenzo announced an ecological strategic partnership with the Bitcoin Layer 2 project Bitlayer. Lorenzo will launch a Beta version on Bitlayer, allowing users to stake BTC and use the liquidity staking token stBTC generated from staking to earn additional rewards on Bitlayer.

Operational Mechanism

• Lorenzo tokenizes staked Bitcoin into Liquidity Principal Tokens (LPT) and Yield Accumulation Tokens (YAT) for each staking transaction. It also provides the infrastructure for swapping LPT and YAT, allowing users to realize their staking rewards.
• Lorenzo matches users who stake BTC with Babylon and converts the BTC staked in Babylon into liquidity staking tokens, releasing liquidity to the downstream DeFi ecosystem. The architecture of Lorenzo consists of a Cosmos app chain built using Cosmos Ethermint, a relay system that synchronizes BTC L1 with the Lorenzo app chain, and a system responsible for issuing and settling BTC liquid staking tokens.
• As of July 16, 2024, the TVL stands at $70 million.

1. DEX AMM Swap
   Introduction

• DEX AMM Swap (Decentralized Exchange Automated Market Maker Swap) is a decentralized trading mechanism that operates on the blockchain. It utilizes algorithms and liquidity pools to automatically provide liquidity for trading pairs without the need for a centralized order book. Users can directly swap tokens on-chain, enjoying a trading experience with low slippage and low fees. The AMM model significantly enhances the liquidity and usability of DEXs and is a vital infrastructure within the DeFi ecosystem.
• The development of DEXs in the Bitcoin ecosystem has lagged behind that of other smart contract-supporting chains, primarily due to the design intent and technical limitations of the Bitcoin network.
• Technically, AMM (Automated Market Maker), PSBT (Partially Signed Bitcoin Transactions), and atomic swaps provide the technological foundation for implementing DEXs on Bitcoin. AMMs manage liquidity pools through algorithms, enabling automated pricing and trade execution; PSBT allows for the step-by-step construction of complex transactions and multi-party participation, enhancing flexibility and security; atomic swaps facilitate trustless exchanges of cross-chain assets, with their core mechanism being Hash Time-Locked Contracts (HTLCs).

Project 1: Bitflow
Overview

• Bitflow focuses on sustainable BTC yield, utilizing technologies such as PSBT, atomic swaps, and AMM, along with Layer-2 solutions like Stacks for trading BTC, stablecoins, and more.
• On January 25, 2024, Bitflow announced the completion of a $1.3 million pre-seed funding round, led by Portal Ventures, with participation from Bitcoin Frontier Fund, Bitcoin Startup Lab, Big Brain Holdings, Newman Capital, Genblock Capital, Tykhe Block Ventures, and others. Co-founder Dylan Floyd serves as CEO, having previously worked as a software engineer at AT&T and graduated from Georgia Tech. Another co-founder, Diego Mey, is the CSO and founding partner of Bussola Marketing Group, with prior experience in business development at Wicked Studios.

Operational Mechanism

• Bitflow is positioned as a DEX (Decentralized Exchange) built on Stacks. According to DefiLlama data, Bitflow’s current TVL is $18.27 million. The project aims to earn native BTC yields without introducing custodial risks. Users can provide liquidity in the liquidity pool to earn returns, primarily in stablecoins like USDA, STX, stSTX, and BTC (supported after the Nakamoto upgrade on Stacks).
• Another goal of Bitflow is to build BTCFi. With Bitflow’s StableSwap, not only stablecoins but also xBTC, sBTC (both are wrapped BTC on Stacks), and native Bitcoin assets can seamlessly integrate into the Bitflow ecosystem. sBTC represents a 1:1 peg to Bitcoin on Stacks and operates under a fully decentralized framework, overseen by a group of open-member signers. xBTC is a wrapped version of Bitcoin issued on Stacks, backed 1:1 by Bitcoin held in reserve, similar to Wrapped Bitcoin on the Ethereum network.

Project Progress & Participation Opportunities

• Bitflow has launched its AMM DEX mainnet, which currently supports multi-hop trading. Additionally, Bitflow’s RUNES AMM is in development, and users can sign up for the waitlist on the official website. The $BFF token is set to launch soon, with updates to follow.

Project 2: Dotswap
Overview

• Dotswap is a native AMM DEX on the BTC mainnet, supporting assets such as Runes, BRC 20, ARC 20, and the latest CAT 20. The mainnet went live in September 2023 and has since been updated to version 3. As of September 25, 2024, the total trading volume has reached 1,770 BTC, with a TVL close to 60 BTC.

Operational Mechanism

• Upgraded Multisignature: The liquidity pools of Dotswap are supported by the MMM (Multilayered Multisig Matrix), an upgraded multisignature framework that integrates the advantages of MPC and Bitcoin’s native multisignature.
• Non-custodial, permissionless atomic swaps: Utilizes PSBT technology.

Project Progress

• In Q3 2024, Dotswap introduced new tools: the Rune Minting Machine and a multifunctional BTC Trading Accelerator. The accelerator, originally called BTC-Speed, optimizes BTC transaction times by utilizing Child Pays for Parent (CPFP) methods. The Rune minting/etching feature boasts zero fees and offers three different minting modes.

Project 3: Unisat AMM Swap
Overview

• Unisat is a wallet application focused on Ordinals and brc-20, utilizing an order book to facilitate trading in the inscription market (including Ordinals, brc-20, and Runes), which differs from typical AMM-based DEXs.
• Unisat completed a strategic funding round in February 2024 and followed up with a Pre-A round led by Binance in May.
• At the end of May, Unisat began airdropping pizza inscriptions. On September 9, the Fractal mainnet, developed by the Unisat team, officially launched, solidifying its status as a leading player in the inscription space.

Part Three: Comparison of Different Asset Classes

Comparison of Security

• The BTC ecosystem places a significantly higher emphasis on “security” compared to other ecosystems, which is determined by the characteristics of BTC holders. From the storage of funds in wallets to the specific steps in participating in financial infrastructure (FI), security guarantees are essential, with a particular focus on the effective control of “asset ownership.”
• Ethereum is the largest Proof of Stake (PoS) blockchain by total staked value. As of August 2024, ETH holders have staked over $111 billion worth of ETH, accounting for 28% of the total ETH supply. The amount of staked ETH is referred to as Ethereum’s security budget, as stakers face network penalties for violating protocol rules. While ETHFi has birthed a vast ETH ecosystem, it has also introduced systemic risks to ETH itself, including risks of excessive centralization and run risk. Since the security of PoS is determined by the value of staked coins, any run risk or validator exit can result in a downward spiral, diminishing PoS security. In a bear market, falling token prices may reduce gas fees, potentially causing ETH to experience inflation and further price declines. Finally, “51% attacks” pose another security issue for ETH; if ETH validators control over 50% of governance rights, they can easily manipulate and attack the network.
• The total TVL of the Solana ecosystem reached $4.86 billion on July 17, 2024. Although this still lags behind Ethereum’s $59 billion, Solana has slightly surpassed BSC and is currently ranked third, just behind Tron. Solana also operates as a PoS blockchain, and its security logic is similar to that of Ethereum. It is worth noting that Solana is subject to more external factors, making its token price more susceptible to fluctuations compared to Ethereum. For instance, in April of this year, Solana experienced network congestion due to memecoin and Ore mining activities.
• Given that BTC operates on a Proof of Work (PoW) system, it theoretically should not face these issues. However, if risks from multiple financial protocols accumulate and create systemic risk, it could lead to a significant drop in BTC prices, adversely affecting the market’s bull and bear trends. This scenario is particularly unfavorable for BTCFi, especially as it is still in its early development stages and could “fail to thrive,” requiring more time for acceptance.

Comparison of Yields

• There are various sources of yield tailored to different product application scenarios. Generally, these include staking rewards, DeFi product yields, and the yields generated by the protocol itself.
  • Staking Rewards: For example, Babylon proposes using BTC as a guarantee for the security of PoS chains, thereby generating staking rewards.
  • DeFi Product Yields: Such as the arbitrage yields involved in Solv products or yields generated from lending protocols.
  • Protocol Yields: Referring to the gains arising from the protocol’s token price appreciation or its expected token issuance.
• The following are comparisons of yields and yield sources among major projects/protocols in ETHfi, SOLfi, and BTCfi.
  • Current Yields and Sources of Yield for Popular ETHfi Protocols:

￮ SOLfi’s current yields and sources of income for various popular protocols:

￮ BTCfi’s current yields and sources of income for various popular protocols:

Note: The RETRO in the table refers to the fact that Babylon’s APR has not yet been calculated, and the APR of other projects depends on Babylon, so estimates are not provided here. In addition, Binance, OKX, HTX, and others have collaborated with Babylon, Chakra, Bedrock, B², Solv Protocol, and other projects to conduct a series of pre-staking and farming activities, allowing users to achieve significant returns, particularly from the staking activities associated with Binance’s Web3 wallet.

• From a macro perspective, BTCFi has greater potential compared to ETHFi and SolFi, as the latter two have already surpassed the first stage of explosive TVL growth, while BTCFi remains an untapped market. From this perspective, BTCFi products are expected to offer higher yield potential.

Ecological Diversity

• The Ethereum ecosystem includes DeFi, NFTs, RWAs, and Restaking. Traditional top projects such as Uniswap, AAVE, LINK, and ENS have seen further growth in real user adoption and effective usage frequency. Since 2023, many Ethereum liquid staking/restaking protocols like Lido and EigenLayer have attracted substantial capital.
• On Solana, the total TVL of DEX Raydium and the liquidity solution Kamino Finance is close to $1 billion, making them two leading projects in the Solana DeFi ecosystem. Following them in terms of TVL are Jupiter, Drift, Marginfi, and Solend. Solana is also a PoS blockchain, with most of its funds concentrated in Liquid Staking, led by projects like Jito.
• For BTCFi, it is crucial to consider the asset categories and TVL in the financial infrastructure (FI) space. According to data from CryptoCompare and CoinGecko, the BTCFi market size reached approximately $10 billion in 2023. This figure includes the total locked value (TVL) of Bitcoin in the decentralized finance (DeFi) ecosystem, as well as the market size of financial products and services related to Bitcoin. The increasing number of BTC holders signifies an influx of new user groups and capital, and the approval of ETFs has propelled BTC into a super bull market, further increasing the number of new wallets holding BTC on-chain.
• In addition to Bitcoin itself, there are already a variety of asset types participating in BTCFi. For example, layer one assets based on the BTC network, such as inscriptions and runes; layer two assets based on the BTC network, like RGB++ and Taproot assets; wrapped/staked assets such as WBTC on the ETH chain and various LST or LRT certificates representing staked BTC. These assets enhance the liquidity of FI, expanding its reach and enriching future FI scenarios.
• In terms of protocols and ecosystem projects, the Bitcoin ecosystem is currently experiencing explosive growth, with numerous projects emerging, including Layer 2 initiatives. Venture capital financing is increasing, drawing market attention. For example, projects like Merlin and Bouncebit are focused on the BTC Layer 2 network; lending protocols such as BlockFi and Celsius Network; stablecoin protocols like Satoshi Protocol and BitSmiley; staking protocols such as Babylon and Pstake; and restaking protocols like Chakra and Bedrock.

Conclusion

In today’s fast-paced digital age, as global institutions and tech giants join the blockchain race, the number of public chains and their complexity continues to grow. Yet, Bitcoin (BTC) retains its unique status—1 BTC always equals 1 BTC. Its value has endured, proving its potential as a long-term appreciating asset. Far from being just numbers or code, BTC is a highly liquid, practical asset with distinct advantages, whether simplifying cross-border transactions, enabling electronic payments, or supporting various financial applications.

Investor demand for BTC liquidity is on the rise, and developers are exploring its programmability to unlock more of its potential. BTCFi has emerged to meet this need, enhancing liquidity and breathing new life into the BTC network by expanding its use cases. As the BTCFi ecosystem evolves, we’re seeing healthy competition among protocols, which not only mitigates centralization risks but also drives the broader Bitcoin ecosystem toward maturation and diversification.

Looking ahead, BTCFi will remain a driving force for innovation in the crypto-financial landscape, pushing the Bitcoin network towards more sophisticated financial applications and greater global adoption. With ongoing technological advancements and a growing market, BTCFi is poised to become the bridge between traditional finance and the crypto world, offering global users richer, safer, and more efficient financial services.

Disclaimer：

1. This article is reprinted from [Waterdrip Capital]. All copyrights belong to the original author [Freya、Knight，Ausdin，ZJUBCA；Elaine、Youyu，Satoshi Lab]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
3. Translations of the article into other languages are done by the Gate Learn team. Unless mentioned, copying, distributing, or plagiarizing the translated articles is prohibited.