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Author: Lou Kerner, Andy Singleton, Source: Quantum Economics, Compiled by: Shaw Bitchain Vision
In April 2020, the total locked value (TVL) on Ethereum was approximately US$750 million.In May 2020, the launch of Compound’s governance token COMP kicked off what was later called “Summer of DeFi”.By the end of 2020, Ethereum’s TVL will be about $15 billion.now,Ethereum’s TVL is about $96 billion.
By contrast, Bitcoin’s earnings seem to be just getting started.Ethereum’s TVL is equivalent to 17% of Ethereum’s market value, andBitcoin’s TVL is only about 0.4% of Bitcoin’s market value(According to DeFi Llama data):
We know that there is a potential demand for decentralized finance (DeFi) on Bitcoin to obtain income and use it as collateral to borrow dollars becauseMore than $35 billion of DeFi on various blockchains besides Bitcoin is used:
We believe that BTCfi will eventually scale up due to a variety of factors, including improving infrastructure such as Taproot, BitVM, and BRC-20, a more favorable U.S. regulatory environment, and greater (institution-driven) liquidity.
Sources of Bitcoin Income
Based on the chart below, we identified four sources of Bitcoin earnings and provided more background information for each source below the chart:
Pledge
Staking provides Bitcoin-denominated benefits from blockchain and staking networks that use Bitcoin as verification collateral.Staking Bitcoin is often advertised as having high security and can be locked directly on the Bitcoin chain.This is a new idea, but it is not very attractive, partly because the current yield is only around 1%.However, if combined with token rewards for holding or holding non-bitcoin protocol tokens for a long time, the yield may be higher.
The “liquidity re-staked tokens” market booms, which encapsulate Bitcoin or the previous class of liquid staked tokens and increase returns, and rewards (in theory) can be used for other purposes.Some of these tokens may not have collateral guarantees, so users of these tokens should verify that they can be really exchanged for the underlying assets.
These tokens will eventually be used in DeFi lending and trading strategies, which may add additional benefits.
Lending
The core earnings of the US dollar are provided by borrowers who need the US dollar.BTCfi has a market for lending Bitcoin in the same way.However, unlike the US dollar, the price of Bitcoin may soar, resulting in excessive cost of repaying loans.Therefore, although there are a large amount of Bitcoin available in the lending pool, the demand for lending is very small.This is why native lending rates usually do not exceed 1%.
There is some demand for borrowing Bitcoin for short selling, or for market making (essentially short selling).In addition, there is a need to arbitrage between different types of encapsulated Bitcoin and liquidity supply tokens (LST) BTC.In addition, the income of some fund pools will increase due to agreement rewards, up to 8%.
trade
Bitcoin is one of the most active and liquid markets in the world.TheseMarket participants can earn liquidity (LP) and arbitrage fees by trading Bitcoins.They can provide LP positions in a pool of funds that trade different types of Bitcoin, or hedge in a pool of funds that trade Bitcoin with other assets, or conduct cross-chain market making.They can use Bitcoin as margin for perpetual contract and option trading strategies.Earnings-focused derivatives strategies often sell options to meet leverage demand.
An effective Bitcoin trading strategy is to conduct short-term arbitrage between centralized exchanges (CEXs) that provide Bitcoin.Some DeFi treasuries offer tokenized positions for hedge funds, which also adopt this strategy.As more and more transaction volumes enter the DeFi field and the efficiency of DeFi continues to improve, the transaction category of BTCfi is growing.
US dollar strategy
Bitcoin can be used as collateral to borrow USD at low risk interest rates.These dollars can then be invested in a more profitable dollar strategy.
Borrowers can usually borrow up to 60% of the value of locked Bitcoin.So if the borrower pays 5% interest and gets 10% of the gain, they can get a 5% spread of 60% of the value of Bitcoin, which means the total gain of locking Bitcoin is 3%.
The U.S. dollar loan terms are an important variable in any U.S. dollar strategy.The BTCfi market offers usage-based floating rate, fixed rate or CDP rate (stayed until liquidation).Borrowers will look for markets that are competitive in cost and scale, and then optimize loan-to-value ratios (LTV) and interest rate stability.
The two most popular investment strategies today are DeFi high-yield and basis strategies.
DeFi high-yield strategy has a good effect when the investment amount is small.This applies to reward enhancement strategies for providers such as Pendle, Morpho and various lending platforms.The yield rate can reach more than 15%, which is equivalent to the yield rate of Bitcoin reaching more than 6% (the loan-to-value ratio is 60%, and the borrowing cost is 5%).
The basis strategy refers to establishing a neutral delta position on a perpetual contract exchange, that is, long cryptocurrencies/short perpetual contracts.This will earn “funding rates” that provide leverage to long buyers of perpetual contracts.The strategy is scalable and profits from perpetual contract traders who want to do long cryptocurrencies and are willing to pay positive funding rates.The capital fee rate fluctuates greatly, but it has remained above 11% on average recently.You can make basis transactions by purchasing pledged Ethena and distribute basis income.Alternatively, you can choose professional suppliers such as Hermetica to conduct basis trading, or build positions on your own through exchanges or Hyperliquid.
Identify the major players in BTCfi
The following list is our preliminary review of the different BTCfi participants:
We look forward to including other parties involved when they appear or when we learn about them.
What will happen next
As BTCfi matures, it will become more like a fixed income market, offering market-neutral and scalable solutions..BTCfi will become more structured, more complete risk management, more institutionalized, and more like CeFi.
The winners will be those who can provide fair, transparent bitcoin-denominated returns, with real infrastructure and stable returns, and that’s just the beginning.
