On the evening of June 13, Cobo and Tech Flow co-hosted a Space on X, featuring Cobo’s co-founder and CEO Shenyu, Merlin Chain Founder Jeff, Solv Protocol Co-founder Ryan Chow, B² Network Product Advocate Stan, and independent crypto researcher DaPangDun. The theme of the discussion was “Beyond HODL: Exploring the Potential of the Billion-Dollar BTCFi Market.” The panel engaged in an in-depth discussion on this topic.

Cobo has compiled the key insights from the guests and is sharing them with its users and readers. Click “Read Original” at the bottom left to listen to the Space replay.

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In the past two years, the crypto industry has seen dramatic changes, particularly within the Bitcoin ecosystem, which now features entirely new characteristics. This transformation includes the rise of BTC Layer 2 networks that support Total Value Locked (TVL), enabling Bitcoin to engage in on-chain DeFi activities such as lending, stablecoins, and innovative models like Solv Protocol and CeDeFi. Alongside this, there is an increasing number of on-chain participants seeking passive income and a new wave of active users. An ecosystem and infrastructure are gradually being built around these participants.

New demands bring new opportunities. The scale of Bitcoin assets far exceeds that of Ethereum and stablecoins, meaning that the growth of Bitcoin’s TVL and capital participation in specific products can reach astonishing volumes. Shenyu believes that the BTCFi sector has immense potential that remains largely untapped, with a significant market size. In the short term, the total market value of BTCFi could reach tens of billions of dollars and even surpass the historical peak of the Ethereum ecosystem. In the long term, the total market value of BTCFi could exceed one trillion dollars.

In this Cobo X Space session, various BTC stakeholders came together to discuss “Beyond HODL: Fully Unlocking the Billion-Dollar Potential of BTCFi.” The burgeoning BTC ecosystem is displaying new diversity, user group stratification, and demographic profiles.

Merlin Chain Founder Jeff estimates that the number of active BTC on-chain users ranges from several hundred thousand to a million. Unlike Ethereum users, the BTCFi ecosystem has fostered a new type of Bitcoin on-chain user. These users are less concerned with Gas fees and more focused on identifying promising assets, particularly inscriptions, runes, and Meme tokens. They are passionate about Bitcoin culture and the principle of fair issuance, seeking equal profit opportunities, and demonstrating high activity and loyalty. They favor high-risk, high-reward scenarios and are more adept at using Bitcoin wallets, finding Ethereum wallets like MetaMask more cumbersome.

The Bitcoin ecosystem has the potential to attract high-net-worth individuals and large holders, with a market size and unit price that could surpass Ethereum, and a potentially higher total value locked. The emergence of these users could inject new energy into the Bitcoin ecosystem.

In addition to these new active on-chain users, another primary user group of BTCFi consists of institutions and large holders. These entities hold significant amounts of Bitcoin and seek stable returns through passive methods. However, the current market lacks suitable value-adding options, leaving most Bitcoin assets idle in cold wallets.

Addressing this market demand, enabling institutions, large holders, and individual users to better leverage the Bitcoin ecosystem’s underlying infrastructure and activating the billions of dollars of BTC assets dormant in cold wallets, will be crucial for the development of BTCFi.

Bitcoin whales and institutional users are inherently more sensitive to risk. To address the needs of these BTC users, Cobo co-founder and CEO Shenyu suggests considering the following points:

• In the long term, as user demand surges, the development and technological upgrades of Bitcoin’s scripting language will gradually improve over the next 3-5 years, ultimately achieving fully decentralized and permissionless solutions. However, in this transitional phase, we will see the emergence of many multiparty computation (MPC) technology-based co-management solutions.
• These transitional solutions can engage institutional, whale, and some individual users, enabling them to better leverage the Bitcoin ecosystem’s underlying infrastructure. By ensuring the security of underlying assets through multiparty co-management, reducing the risk of single points of failure, and providing yield opportunities for users, this approach is likely to better meet the needs of risk-averse whales and institutions.
• The biggest weakness of the Bitcoin network is its inability to build smart contracts on the main chain, making the issue of underlying network asset ownership a key constraint in the industry’s development, introducing potential vulnerabilities and moral hazard risks.

Solv Protocol Co-founder Ryan mentioned that adopting hybrid solutions like Cobo’s MPC, which combine centralized custody with decentralized technology, ensures transparent fund flows and clear ownership. This addresses the issues seen in traditional opaque CeFi models, where funds enter a black box, leaving users unaware of their whereabouts and without control. By separating asset management from custody, institutions like Cobo can focus on secure custody, while innovative projects like Solv, Merlin, and B² Network focus on value addition and ecosystem expansion. This collaborative approach provides users with transparent and secure Bitcoin asset management and appreciation solutions. This new model of dividing asset custody and management could solve the pain points of traditional CeFi models, offering safe and transparent ways to increase returns.

The BTCFi sector is expansive, accommodating numerous startups and innovative ventures. This cycle has attracted new interest from AI, BTCFi, and crypto payments, injecting fresh vitality. Unlike the unified front presented by the Ethereum Foundation, the Bitcoin network does not have an absolute orthodoxy, offering a variety of cross-chain solutions that create significant market opportunities for integrating consensus and liquidity, which can particularly benefit Asian entrepreneurs. The future of the BTCFi sector is promising.

The following is a summary of the key points:

How big is the BTCFi market? When will this market truly thrive and no longer rely on existing subsidies or points mechanisms?

Divine fish:First of all, I think the market size of Bitcoin Finance (BTCFi) is very considerable. In the past two years, a large amount of traditional capital has flowed into the cryptocurrency market through ETFs, and currently only Bitcoin and Ethereum have been recognized. Due to Bitcoin’s advantages as a hard currency, it occupies a larger share of the entire industry, but has long lacked efficient utilization methods like Ethereum.

There is a strong demand for Bitcoin asset management, but there are few reliable, safe, and stable ways to add value. Its biggest value-added method is to lend Bitcoin as collateral to obtain other cryptocurrencies for investment operations. If the Bitcoin ecosystem develops quickly, it will provide more ways to make money from this large asset class. I personally predict that the total market capitalization of BTCFi will reach tens of billions of dollars in the short term, even exceeding the historical high level of the Ethereum ecosystem. In the long term, the total market value of BTCFi is expected to exceed one trillion US dollars, and will change with market fluctuations.

This is already a vast space that can accommodate a large number of startups and innovative attempts, because the annual value of the early Bitcoin mining ecosystem was only a few hundred million dollars. At present, the main users of BTCFi are institutions and large investors. They hold large amounts of Bitcoin and hope to obtain stable income through passive methods. However, the market has not yet provided a suitable way to add value, and most Bitcoin assets are still lying in cold wallets.

In the long term, as user demand surges, the development and technical upgrades of the Bitcoin scripting language will be gradually improved in the next 3-5 years, eventually achieving a fully decentralized and permissionless solution.

However, as a peer-to-peer cash system, Bitcoin’s underlying infrastructure iterates relatively slowly and will take several years to achieve full decentralization, allowing us to support permissionless solutions.

During this transitional stage, we will see a large number of multi-party coordinated management solutions based on MPC technology as transitional solutions to revitalize institutions, large households and some individual users, allowing them to better utilize the underlying infrastructure of the Bitcoin ecosystem. Ensure the security of underlying assets through multi-party coordination, reduce the risk of single points of failure, and provide users with benefits on this basis.

As entrepreneurs in the Bitcoin public chain field, how big do you think the market size is? Who are your unique target customer groups? Do you prefer institutional customers or other types of users?

Jeff：The market size of this track is very large. Bitcoin currently has a market capitalization of approximately more than $1 trillion, but the potential size of Bitcoin assets active on the chain could reach hundreds of billions of dollars. Merlin is mainly committed to helping Bitcoin users in the following two aspects:

* Participate in on-chain DeFi, such as lending, stablecoins, etc., to give Bitcoin the ability to earn interest;
* Cross-chain Bitcoin to EVM-compatible chains and participate in other on-chain DeFi products.

The current industry challenge and the problem we are trying to solve is the wrap and unwrap capabilities on the retail side, that is, bridging capabilities. Cobo helps solve this problem, with $13 billion to $15 billion of Bitcoin in our wallets doing cross-chain bridging operations in the past 45-60 days.

Another long-term challenge is bringing real revenue generation to Bitcoin, rather than relying on project points or tokens for monetization, which are highly cyclical. Solv is trying to obtain U.S. dollar-denominated returns for Bitcoin through quantitative investing and other methods.

In addition to the local currency of Bitcoin, Merlin all in BRC-20, Ordinals and other new Bitcoin assets have active users and the income potential is greater than the annualized fixed income. Merlin provides liquidity for these assets, allowing users to participate in trading and market making. As long as investment is in a bull market, the rate of return will be very impressive, just like the surge in Inscription and Rune at the end of last year.

Attracting users on the first layer to release liquidity to the second layer for better trading, lending and contract operations is a long-term and challenging process. Currently, Merlin’s DEX has generated more than $1 billion in trading volume over the past few months, with a daily trading volume of approximately $20 million-$30 million. This slow construction method is expected to bring higher profits and more users to the chain itself.

In general, the current industry is still very early, and different chains have different development strategies. For Merlin, he thinks more about how to safely bring new business to the Bitcoin ecosystem in the long term rather than pursuing short-term transaction volume growth.

Stan：The value of BTCFi lies in transforming Bitcoin from a passive asset to an active asset, which is mainly reflected in three aspects:

* Leveraging Bitcoin security to provide security for the wider network, such as the Stacks project;
* Improve the liquidity and application scope of Bitcoin and related assets, including second-layer networks, etc., and provide infrastructure for Bitcoin’s native DeFi;
* Provide cross-chain functions to introduce Bitcoin funds into other DeFi ecosystems and improve capital liquidity.
* 

Therefore, BTCFi’s target customer groups mainly include three categories:

* Original Bitcoin players: such as miners, holders, etc., BTCFi can meet their needs to earn income.
* For users and project parties of other blockchains: such as EVM, Solana, etc., the BTC layer 2 network can bridge the gap with these ecologies.
* Users outside the circle: As the core user group for all blockchain ecological expansion, BTCFi can lower the threshold for them to enter the cryptocurrency field.

Only if the second-layer network at the bottom of the Bitcoin ecological chain has sufficient vitality, users, and innovation can BTCFi continue to develop.

Jeff, can you estimate the number of DEX native traders active on the second-tier network, including Rune and Inscription players, and their average asset size? How would you describe these user groups?

Jeff：In terms of user level, active users on the BTC chain range from hundreds of thousands to one million, which can be observed through head assets and NFT data. Most of them are new on-chain users. They may have only been currency speculators before and are more familiar with the use of Bitcoin wallets. However, they think MetaMask is very difficult to use.

These users have relatively high personal net worth. Due to the high transaction fees of Bitcoin, ordinary transactions require tens to hundreds of dollars, which naturally filters out those who cannot afford the high fees. Therefore, users on the Bitcoin chain are less concerned about the level of handling fees and more concerned about how to discover assets with potential. For example, in the early days of Merlin, hundreds of millions of dollars in BRC20 assets and Ordinals NFT were quickly pledged, showing that these users were active and financially strong.

Typical user portrait:I like the Bitcoin culture, believe in the concept of fair issuance, and have a strong demand for equal profit opportunities through airdrops and other means. As a new user group on the Bitcoin chain, future development is worth looking forward to, and the potential of Bitcoin programmability needs to be further explored and utilized.

Generally speaking, this is a new type of active user group on the chain who likes Bitcoin culture and has strong economic strength. Their rise and development may inject new vitality into the Bitcoin ecosystem.

Ryan has extensive entrepreneurial experience in the Ethereum community. How is providing BTC financial services in the Bitcoin community different from that in the Ethereum community? Solv has been making compliance attempts and attracting large compliance investors. Is there an opportunity to introduce these investors into the Bitcoin ecosystem?

Ryan：The user groups, spiritual concepts, and infrastructure of the Bitcoin ecosystem are very different from those of the Ethereum ecosystem. Compared with the Ethereum community, providing BTC financial services in the Bitcoin community faces the following main differences and challenges:

* Bitcoin's infrastructure is relatively backward and the underlying level is more decentralized, making it much more difficult to build infrastructure and improve user experience than Ethereum;
* The high gas fees make it indeed more difficult to conduct retail business in the Bitcoin ecosystem.

But the Bitcoin ecosystem also has its unique advantages and characteristics:

* The Bitcoin ecosystem has a huge high-net-worth user market and total value locked (TVL) potential. First of all, the scale of Bitcoin assets is indeed much larger than that of Ethereum and stablecoins, so the growth of Bitcoin’s total value locked (TVL) and the participation of funds in specific products will bring staggering volumes. Secondly, the average personal holdings of large Bitcoin users (those holding more than 1,000 Bitcoins) may be higher than the average level of large Ethereum users. This means that the customer price and individual holdings of the Bitcoin ecosystem may be higher.
* The Bitcoin user base is relatively conservative and is significantly different from the Ethereum ecological users, creating opportunities to explore new areas.

In addition, there are two other important differences between the Bitcoin ecosystem and the Ethereum ecosystem:

1) The Bitcoin ecosystem lacked innovation opportunities in the past, but this cycle has absorbed a large amount of new traffic from AI, BTCFi, crypto payments and other fields, injecting new vitality.

2) Unlike the unified camp formed by the Ethereum Foundation, the Bitcoin network does not have an absolutely unified camp. There are various cross-chain solutions, creating huge market opportunities for integrating consensus and liquidity, and to a certain extent, giving Asian entrepreneurs greater opportunities. Chance.

Bitcoin’s high level of decentralization makes it relatively easy for compliance agencies to get involved.

Solv is engaged in BTCFi-related business on various public chains. Regarding your BTCFi ecosystem, are you worried that partners or BTCFi project parties will become institutions with centralized finance (CeFi) problems in this cycle in the future? How do you view this risk?

Ryan：The most obvious weakness of the Bitcoin network is its inability to build smart contracts on Layer 1. The Bitcoin mainnet currently does not have such an environment, which makes it very difficult to implement smart contracts at this stage. In this case, the ownership issue of the underlying network assets has become a key issue limiting the development of the entire industry.

Since the Bitcoin network cannot implement smart contracts on Layer 1, asset ownership issues have become a key constraint on industry development, causing loopholes and moral hazard.

This has prompted the emergence of hybrid solutions such as Cobo and Antalpha that combine centralized custody and decentralized technology to ensure that the location and flow of funds are transparent and traceable. Although some have questioned its centralization tendencies, unlike traditional CeFi, this model ensures transparency and ownership of capital flows. The fundamental problem of CeFi is that after funds enter the black box, users cannot know where they are going and cannot control them, which results in opaque profit margins. By realizing the separation of asset management and custody, it allows Cobo and other security custody institutions to integrate and collaborate with innovative projects focusing on value-added and ecological expansion such as Solv, Merlin, and B² Network to provide users with transparent and secure Bitcoin asset management and revenue-added solutions. This new model of division of labor between asset custody and asset management is expected to solve the pain points of the traditional CeFi model and bring a safe and transparent path to revenue growth.

Can you share with us any exciting new projects or trends you’ve been following recently?

DaPangDun：Regarding BTCFi, I analyze it from the following aspects:

Security is key, including wallet security, asset ownership protection security, and protection against systemic risks (such as the volatility risk caused by DeFi nesting dolls).

BTCFi needs to meet basic conditions: first, pegged assets (including Bitcoin itself); second, diversified forms of Fi (loans, pledges, etc.); third, implementation paths (side chains, OP Code, etc.).

After the last round of DeFi Summer, the market’s tolerance for security risks has decreased, guiding BTCFi to develop in a safer and more reliable direction.

Stablecoins play an important role in BTCFi, and users who are willing to participate in Fi are more inclined to use stablecoins.

The market will test through a hundred schools of thought which implementation path will win in the end.

The ultimate goal of Fi is revenue, and each project will achieve revenue through different forms (pledge, lending, etc.).

In general, BTCFi needs to focus on security, enrich asset forms, explore multiple implementation paths, and introduce stable coins, with the ultimate goal of creating benefits for users.

Does Merlin Chain have plans to work with Tether or Circle to introduce native stablecoins? What are the main difficulties faced?

Jeff：Currently, there are difficulties in introducing compliant stablecoins because BTC Layer 2 solutions (mainly side chains) cannot provide absolute security guarantees. Although USDT, USDC, etc. can be bridged, users’ trust in the security of the bridging solution is key.

At the same time, BTC users’ actual demand for stablecoins is not very large, and most transactions are priced in BTC. Therefore, in the short term, it is difficult to fully trust the current Layer 2 due to technical trust issues, and the introduction of stable coins like Tether and Circle is still a mid- to long-term goal. At present, it may focus on the development of native projects based on BTC, including over-collateralized stablecoins, while moderately introducing USDT, USDC, etc., rather than introducing compliant stablecoins on a large scale.

What are the challenges and obstacles faced in the development of the BTCFi ecosystem? What obstacles will traditional asset management institutions or ETH asset management track projects face when joining?

Divine fish:The biggest obstacle facing the BTCFi ecosystem is that the development speed of the BTCFi ecosystem lags far behind the speed of industry application innovation. This is due to the slowness of the underlying upgrade and iteration of Bitcoin. The decentralized nature of Bitcoin determines that its upgrade requires broad consensus from the community, and the process is complex and lengthy, which is in stark contrast to the rapid iteration expected by entrepreneurs. Therefore, the BTCFi ecosystem will become more decentralized and diversified in the long term, with various innovative attempts emerging endlessly

.

Bitcoin lacks official support and unity like Ethereum, which results in the BTCFi ecosystem becoming more fragmented and diversified, and project parties facing greater challenges in balancing their balance sheets. However, this also brings some unique advantages to the BTCFi ecosystem. For example, the bottom layer of Bitcoin uses mechanisms such as multi-signature and MPC, which can provide more detailed permission separation and asset monitoring capabilities for large households and institutional users. The risk is relatively lower, making it attractive to large households and institutional users.

Ryan：From a regulatory perspective, Ethereum has outlined the “red line” and “green line” for the development of BTCFi, providing a reference for the latter. At present, infrastructure such as Bitcoin L2, sidechains and Lightning Network have not caused obvious regulatory issues.

In terms of asset custody, both Bitcoin and Ethereum need to meet certain compliance requirements because they involve the transfer of asset ownership.

In the field of asset interest generation, Bitcoin has more advantages. Since Bitcoin is clearly defined as a commodity, the relevant interest-earning and management regulations are theoretically looser. Whether Ethereum staking is a security is still under discussion, and there is a gray area. Currently, Ethereum staking does not require KYC and anti-money laundering measures, but some exchanges have been warned by the SEC when offering related products, indicating uncertainty. In the Bitcoin interest-earning track, some products have not fully considered regulatory compliance, but they have not yet caused major regulatory issues, indicating that this field is still in a gray area. However, Bitcoin interest-earning products often need to operate in compliance due to their asset attributes. For example, some products on Solv require KYC to avoid regulatory risks. Through DeFi and decentralized exchanges, retail investors without KYC can also participate in these products.

The last round of Bitcoin growth was driven by user education and expansion driven by the L2 layer. In the next stage, asset interest generation may become a new growth driver. During this process, compliance issues still require continued attention.

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