jakiro
Written by: Freya, Knight, Ausdin, ZJUBCA; Elaine, Youyu, Satoshi Lab, Source: Waterdrip Capital
summary
As Bitcoin (BTC)’s position in the financial markets is growing stronger, the BTCFi (Bitcoin Finance) field is rapidly becoming the forefront of cryptocurrency innovation.BTCFi covers a series of Bitcoin-based financial services, including lending, pledge, transactions, and derivatives.This research report deeply analyzes multiple key tracks of BTCFi, discusses stablecoins, lending services (Lending), staking services (Staking), restaking services (Restaking), and the combination of centralized and decentralized finance (CeDeFi)).
The report first introduces the scale and growth potential of the BTCFi market, and emphasizes how the participation of institutional investors brings stability and maturity to the market.Next, the mechanisms of stablecoins are discussed in detail, including the different types of centralized and decentralized stablecoins, and their roles in the BTCFi ecosystem.In the lending field, it analyzes how users can obtain liquidity through Bitcoin lending, while evaluating major lending platforms and products.
In terms of staking services, the report focuses on key projects such as Babylon, which provide staking services to other PoS chains by leveraging the security of Bitcoin, while creating profit opportunities for Bitcoin holders.Restaking services further unlock the liquidity of pledged assets and provide users with additional sources of income.
In addition, the research report also explores the CeDeFi model, which combines the security of centralized finance and the flexibility of decentralized finance to provide users with a more convenient financial service experience.
Finally, the report reveals the unique advantages and potential risks of BTCFi over other crypto finance fields by comparing the security, yield and ecological richness of different asset classes.With the continuous development of the BTCFi field, more innovation and capital inflows are expected to usher in, further consolidating Bitcoin’s leadership in the financial field.
Keywords: BTCFi, stablecoin, lending, pledge, re-pled, CeDeFi, Bitcoin Finance
BTCfi Track Overview:
• Squirrels collect acorns before hibernation and collect them into a hidden and safe place; pirates buried their plundered gold and silver treasures under the soil that only they know; and in today’s society, people will deposit cash for a period of time when they have cash.The picture not only shows the annualized return of less than 3%, but also has stability.Now imagine that you have a cash, you are optimistic about the cryptocurrency market but don’t want to take too much risk, and want to obtain assets with a higher ROI, so you chose BTC called “digital gold”.You just want to hold BTC for a long time, instead of watching the price fluctuations in unnecessary operations to cause losses.At this time, there needs to be something that can use your BTC and exert the liquidity and functions brought by its value, just like Defi on Ethereum.It not only allows you to hold on to your assets for a long time, but also brings additional returns, reusing the liquidity of your assets, or even three-time use. The gameplay and projects are worthy of our deepestIn-depth research.
•BTCFi (Bitcoin Finance) is like a mobile Bitcoin bank, which is a series of financial activities surrounding Bitcoin, including Bitcoin lending, pledge, trading, futures and derivatives.According to data from CryptoCompare and CoinGecko, the size of the BTCFi market has reached about US$10 billion in 2023.According to Defilama’s data, the BTCFI market will reach a scale of 1.2 trillion US dollars by 2030. This data includes the total lock-in volume (TVL) of Bitcoin in the decentralized finance (DeFi) ecosystem, as well as BitcoinThe market size of related financial products and services over the past decade, the BTCFi market has gradually shown significant growth potential, attracting more and more institutions to participate, such as Grayscale, BlackRock andJPMorgan has begun to get involved in the Bitcoin and BTCFi markets.The participation of institutional investors not only brings a large amount of capital inflows, increases market liquidity and stability, but also improves market maturity and standardization, bringing higher recognition and trust to the BTCFi market.
• This article will explore in-depth several popular areas in the current cryptocurrency financial market, including Bitcoin Lending, Stablecoin, Staking Service, Restaking Service, and CentralizationCeDeFi (CeDeFi) combined with decentralized finance.Through detailed introduction and analysis of these areas, we will understand their operating mechanisms, market development, major platforms and products, risk management measures, and future development trends.
Part 2: BTCFi track segmentation
1. Stablecoin Stablecoin Track
Introduction
• Stablecoins are cryptocurrencies designed to maintain stable value.They are often pegged to fiat currencies or other valuable assets to reduce price volatility.Stable coins achieve price stability through reserve assets support or algorithm adjustment of supply, and are widely used in transactions, payments and cross-border transfers, allowing users to avoid the drastic fluctuations of traditional cryptocurrencies while enjoying the advantages of blockchain technology.
• There is such an impossible triangle in economics: a sovereign state cannot simultaneously realize a fixed exchange rate system, free flow of capital and independent monetary policy.Similarly, in the context of Crypto stablecoins, there is also such an impossible triangle: price stability, decentralization and capital efficiency cannot be achieved simultaneously.
• Classification by the degree of centralization of stablecoins and the classification of collateral type are two relatively intuitive dimensions.Among the current mainstream stablecoins, classified by the degree of centralization can be divided into centralized stablecoins (represented by USDT, USDC, FDUSD), and decentralized stablecoins (represented by DAI, FRAX, USDe).Classified by mortgage type, it can be divided into fiat currency/physical mortgage, crypto asset mortgage and insufficient mortgage.
• According to DefiLlama data on July 14, the total market value of stablecoins is now at US$162.372 billion.In terms of market value, USDT and USDC are ahead of the pack, among which USDT is far ahead, accounting for 69.23% of the entire stablecoin market value.DAI, USDe, FDUSD followed closely, with market value of 3-5.All other stablecoins currently account for less than 0.5% of the total market value.
• Centralized stablecoins are basically fiat currency/physical collateral, essentially fiat currency/RWA for other physical assets. For example, USDT and USDC are both 1:1 anchored to the US dollar, and PAXG and XAUT anchored to the gold price.Decentralized stablecoins are generally mortgaged or unsecured (or under-collateralized). DAI and USDe are both mortgaged crypto assets, which can be subdivided into equal mortgages or over-collateralized.Unsecured (or under-collateralized) is generally what is commonly known as algorithmic stablecoins, represented by FRAX and former UST.Compared with centralized stablecoins, the market value of decentralized stablecoins is not high, the design is a bit complicated, and many celebrity projects have been born.In the BTC ecosystem, the stablecoin projects worth paying attention to are all decentralized stablecoins, so the following will introduce the mechanism of decentralized stablecoins.
Top 10 stablecoins market value on July 14, 2024, source Coingecko
The top ten stablecoins market value share on July 14, 2024, source DefiLlama
Decentralized stablecoin mechanism
• Next, we will introduce the CDP mechanism represented by DAI (over-collateralization) and the contract hedging mechanism represented by Ethena (equal mortgage).In addition, there is also the mechanism of algorithmic stablecoins, which will not be introduced in detail here.
• CDP (Collateralized Debt Position) represents a collateralized debt position. It is a mechanism for generating stablecoins in a decentralized financial system by collateralizing crypto assets. It has been first developed by MakerDAO and has been used in many different categories of projects such as DeFi and NFTFi.middle.
￮ DAI is a decentralized, over-solidated stablecoin created by MakerDAO, designed to maintain a 1: 1 anchor with the US dollar.DAI operates on smart contracts and decentralized autonomous organizations (DAOs) to maintain their stability.Its core mechanisms include over-collateralization, collateralized debt positions (CDP), liquidation mechanisms, and the role of governance token MKR.
￮ CDP is a key mechanism in the MakerDAO system that manages and controls the process of generating DAI.In MakerDAO, CDP is now called Vaults, but its core functions and mechanisms are still the same.The following is the detailed operation process of CDP/Vault:
i. Generate DAI: The user deposits his crypto assets (such as ETH) into MakerDAO’s smart contract, creates a new CDP/Vault, and then generates DAI on the basis of the collateral assets.The generated DAI is part of the debt lent by the user, and the collateral is used as a guarantee for the debt.
ii. Over-collateralization: To prevent liquidation, users must keep their CDP/Vault mortgage rate higher than the minimum mortgage rate set by the system (for example, 150%).This means that users lend 100 DAI and need to lock in collateral worth at least 150 DAI.
iii. Repayment/Liquidation: The user needs to reimburse the generated DAI and certain stability fees (priced in MKR) to redeem their collateral.If the user fails to maintain a sufficient collateral ratio, his collateral will be liquidated.
• Delta represents the percentage of the price of derivatives relative to the price of the underlying asset.For example, if an option has a Delta of 0.5 , the option price is expected to rise by $0.5 when the underlying asset price rises by $1.Delta neutral position is an investment strategy that offsets the risk of price movement by holding a certain amount of underlying assets and derivatives.The goal is to keep the overall Delta value of the portfolio to zero, thus keeping the position’s value unchanged as the underlying asset price fluctuates.For example, for a certain amount of spot ETH, buy an ETH short perpetual contract of equivalent value.
Ethena tokenizes ETH’s “Delta-neutral” arbitrage transactions by issuing USDe, a stablecoin representing the value of Delta’s neutral position.Therefore, their stablecoin USDe has two sources of income:
￮ Pledge income
￮ Basic difference and capital fee rate
￮ Ethena realizes equal collateral and additional benefits 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 ecosystem, which allows users to over-stake native BTC to mint stablecoins bitUSD on the BTC network.At the same time, bitSmiley also includes lending and derivatives agreements, aiming to provide Bitcoin with a brand new financial ecosystem.Previously, bitSmiley was selected for the quality project of the BTC Hackathon, co-organized by ABCDE and OKX Ventures in November 2023.
• On January 28, 2024, it announced the completion of its first token financing, led by OKX Ventures and ABCDE, with CMS Holdings, Satoshi Lab, Foresight Ventures, LK Ventures, Silvermine Capital and relevant personnel from Delphi Digital and Particle Network participating.On February 2, LK Venture, a subsidiary of Hong Kong-listed Blueport Interactive, announced on the X platform that it has participated in bitSmiley’s first round of financing through BTC NEXT, a Bitcoin network ecological investment management fund.On March 4, KuCoin Ventures tweeted announcing a strategic investment in Bitcoin DeFi ecosystem project bitSmiley.
Operation mechanism
• bitSmiley is a Bitcoin native stablecoin project based on the Fintegra framework.It consists of a decentralized over-solidated stablecoin bitUSD and a native trustless lending protocol (bitLending).bitUSD is based on bitRC-20. It is a magically modified BRC-20. It can be compatible with BRC-20. bitUSD has added Mint and Burn operations to meet the needs of stablecoins minting and destruction.
• bitSmiley launched a new DeFi inscription protocol called bitRC-20 in January.The first asset of the protocol is OG PASS NFT, also known as bitDisc.bitDisc is divided into two levels: gold and black cards. Gold cards are allocated to Bitcoin OG and industry leaders, with a total number of holders less than 40.Starting from February 4, the black card will be open to the public in the form of BRC-20 inscriptions through whitelisting and public casting activities, causing congestion on the chain for a time.Subsequently, the project party stated that it would compensate for the unsuccessful inscriptions.
•$bitUSD stablecoin operation mechanism
The operating mechanism of $bitUSD is similar to $DAI. First, the user oversized, and then the bitSmileyDAO on L2 receives oracle information and performs consensus verification, then sends Mint bitRC-20 information to the BTC main network.
Source https://github.com/bitSmiley-protocol/whitepaper/blob/main/BitSmiley_White_Paper.pdf
• The logic of liquidation and redemption is similar to MakerDAO, which uses the Dutch auction.
Source https://github.com/bitSmiley-protocol/whitepaper/blob/main/BitSmiley_White_Paper.pdf
Project Progress & Opportunities for Participation
• bitSmiley launched Alphanet on BitLayer on May 1, 2024.Among them, the maximum loan-to-value ratio (LTV) is 50%. In order to prevent users from being liquidated, a relatively low LTV ratio is set.As bitUSD adoption increases, project parties will gradually increase LTV.
• bitSmiley and Merlin communities will launch exclusive liquidity incentive grants starting May 15, 2024 to increase liquidity in bitUSD.The detailed rules are as follows:
￮ bitSmiley will provide up to 3,150,000 $BIT tokens to Merlin community members as rewards.Rewards will be unlocked based on user behavior in the Merlin community.Season 1 Time: May 15, 2024 – August 15, 2024.
￮ Reward method: bitUSD casting achieves the goal and increases liquidity for the bitUSD pool on bitCow. The details of the two methods of incentives are as follows.Liquidity incentive funds will be allocated based on bitPoints obtained by the user on the Merlin chain. The more points the user receives, the more token incentives it will receive.
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 is circulated on the BRC 20-5 byte and Runes protocols (the two are currently equivalent).
Operation mechanism
• Its project design has 2 stages.In Phase 1, NUSD and USDe support it at a 1: 1 ratio, holding NUSD can accumulate BAMKs in each block (the earlier you have more NUSDs, you can get more BAMKs).In the second phase, NUSD will be completely supported by delta’s neutral Bitcoin position and obtain native returns, namely “bitcoin bonds”, while opening up BTC-based minting and exchange..However, the casting method currently provided by the official website is casting by USDT 1:1.
• The project token BAMK mentioned above is in the form of rune, the rune code BAMK•OF•NAKAMOTO•DOLLAR, was printed on April 21, 2024, with a maximum supply of 21,000,000,000 (21 billion).Of these, 6.25% of the supply has been provided as a reward to all NUSD holders.Simply buy NUSD and put it in your wallet to start accumulating BAMK tokens.Each block between 844, 492 and 886, 454 – a total of 41,972 blocks will accumulate 31,250 BAMK, allocated proportionally to the user NUSD holdings divided by the total NUSD TVL at the height of that block.
Project III, Yala Labs
Project Overview
• Yala uses its own modular infrastructure to build its own stablecoin $YU to flow freely and safely among various ecology, releasing BTC liquidity, and bringing huge financial vitality to the entire crypto ecosystem.
• Core products include:
￮ Over-solidated Stable Coin $YU: This stablecoin is generated by over-solidated Bitcoin. The infrastructure is not only based on the Bitcoin native protocol, but can also be deployed freely and securely in EVM and other ecosystems.
￮ Metamint: The core component of $YU, which enables users to easily use native Bitcoin to mint $YU in various ecosystems, injecting Bitcoin liquidity into these ecosystems.
￮ Insurance derivatives: Provide comprehensive insurance solutions within the DeFi ecosystem to create arbitrage opportunities for users.
Operation mechanism
• In order to facilitate users to use $YU in various ecosystems, a Metamint solution has been launched.Whether using native Bitcoin or wrapped BTC on EVM as collateral, users can easily mint $YU on any target chain.In order to lower the threshold for use, users do not need to manually package Bitcoin, but simply staking BTC. The system will automatically generate the wrapped BTC of the required target chain in the background, thereby minting the $YU of the target chain.
• Through this smooth asset conversion solution, users can participate in DeFi protocols in various ecosystems, including cross-chain income Farming, staking and other DeFi activities, opening up new income opportunities.This multi-chain solution significantly enhances users’ potential to achieve greater benefits.Unlike traditional stablecoin companies that concentrate profits, Yala returns the system-generated fees to core $YU holders, ensuring that users can directly benefit from the growth of the ecosystem.
• Features and Advantages
￮ Use Bitcoin as the main collateral, and also enjoy the security and resilience of the Bitcoin network.
￮ Users can participate in various DeFi activities through $YU to obtain profits.
￮ Yala Follows a user-centered decentralized governance structure, and revenue will also be returned to core users.
Project Progress & Opportunities for Participation:
Through cooperation with outstanding projects, Yala provides users with multiple profit opportunities while ensuring safety.For example, through cooperation with Babylon, Yala users can over-collateralize BTC on the platform and mint stablecoin $YU, and further pledge these collaterals to the Babylon platform to achieve multiple returns.Since the Babylon staking agreement does not require third-party custody, this integration ensures the absolute security of user assets while increasing revenue.
Yala’s roadmap focuses on building a strong liquidity layer that connects Bitcoin to the outstanding Layer 1 Layer 2 ecosystem in the market.In order to ensure security and the best user experience, Yala will launch its main network and test network in stages:
• Test Network V 0: $YU stablecoin issuance, Pro mode, oracle and oracle;
• Test Network V1: $YU stablecoin lightweight mode with dollar gains;
• V1 release: Insurance module and security upgrades.
• V2 is launched: the governance framework is launched.
The test network is getting online, and Yala has received support from front-line funds. Please look forward to the recent financing news announcement for specific institutions and valuations.
Project 4, Satoshi Protocol
Project Overview
• The first CDP stablecoin protocol in the BTC ecosystem is based on the BEVM ecosystem.
•Satoshi Protocol announced the completion of a seed round of financing on March 26, 2024. This round of financing was led by Web3Port Foundation, Waterdrip Capital, and participated by BEVM Foundation, Cogitent venture, Statoshi Lab and other institutions.It announced the completion of a $2 million financing on July 9, 2024.
Operation mechanism
• Low interest rates allow Bitcoin holders to release liquidity from their assets; at the same time, the Satoshi protocol is a multi-chain protocol, and its stablecoin SAT has a highly compatible multi-token standard mechanism.Satoshi Protocol currently has two tokens: the US dollar-pegged stablecoin SAT and the practical token that incentivizes and rewards ecosystem participants, OSHI.Users can mint the US dollar stablecoin $SAT with a minimum collateral rate of 110% by depositing BTC-based interest-generating assets such as BTC and LST, and earn profits in transactions, liquidity pools, borrowing and other scenarios.
• In the Satoshi agreement, users must maintain a mortgage rate of at least 110% when building positions to avoid being liquidated.For example, when lending 100 SAT, users need to lock BTC with a total value of more than 110 SAT as collateral.If the price of BTC falls leads to a collateral value of less than 110% collateral, the agreement will initiate a liquidation mechanism.
• Stability pools are the core mechanism of the Satoshi protocol, aiming to ensure the stability of the system by providing liquidity to settle debts in liquidated positions.When a position under-collateralized (the collateral ratio is less than 110%) is liquidated, the SP uses SAT to pay off the debt and obtain liquidated BTC collateral.Users participating in the stable pool can purchase these BTC collateral at a discount, and the agreement uses these liquidation SATs to repay the debt.
Project Progress & Opportunities for Participation
• The latest announcement stated that Satoshi Protocol is developing Runes stablecoins based on the Bitcoin main network, and in addition, through cooperation with projects such as Omini Network, it will open up the Bitcoin and Ethereum ecosystem to realize the vision of “full-chain stablecoins”.
• Currently, $OSHI airdrop points activity is underway. Users can get points by voting the project in the BVB plan, depositing collateral to lend $SAT, providing liquidity and recommendation, and then distributing $OSHI based on points later.
Project 5, BTU
Project Overview
• BTU is the first decentralized stablecoin project in the Bitcoin ecosystem. It adopts the collateralized bond warehouse (CDP) model, allowing users to issue stablecoins based on BTC assets.Through seamless decentralized design, BTU solves the problem of insufficient liquidity among Bitcoin holders in the existing decentralized finance (DeFi) ecosystem, and provides a safer and de-trustworthy stablecoin solution.
Operation mechanism
1. Bitcoin-backed stablecoins: BTU is a decentralized stablecoin that is completely staked by Bitcoin.By locking BTC into the BTU protocol, users can directly mint stablecoins without transferring assets off-chain or giving up control over BTC.This design not only ensures decentralization, but also avoids the risks of traditional centralized exchanges or custodians.
2. No cross-chain bridge is required: Unlike other solutions that rely on cross-chain bridges, BTU completes all operations within the Bitcoin network, and users do not need to transfer BTC across chains.This design eliminates possible third-party risks during the cross-chain process and further strengthens user asset security and control.
3. Proof of Assets Without Trading: BTU introduces a mechanism to prove BTC holdings without trading, and users can prove their assets without transferring their Bitcoins.This trustless, seamless design provides users with additional flexibility to maintain full control of BTC assets while participating in the DeFi ecosystem.
4. Decentralized CDP model: BTU adopts a decentralized collateralized bond warehouse (CDP) model, and users can fully control when to issue or redeem BTU stablecoins.The protocol design ensures that the user’s BTC can only be used with the user’s consent, maintaining a high degree of decentralization and control.
5. Improve liquidity and leverage: BTU is the first protocol to map BTC on the Bitcoin network and increase its liquidity and leverage.Through this mechanism, BTC holders can introduce their assets into the DeFi ecosystem without sacrificing decentralization, enjoying greater flexibility and investment opportunities.
• BTU provides BTC holders with a trustless and decentralized way to participate in the DeFi ecosystem by unlocking Bitcoin liquidity.Traditionally, Bitcoin holders have difficulty participating in DeFi and on-chain financial activities without relying on centralized exchanges or custodians.The emergence of BTU has brought new opportunities for Bitcoin holders to securely issue stablecoins, increase liquidity and retain control over BTC.
• This innovative decentralized stablecoin solution not only provides more financial options for BTC holders, but also brings new growth potential to the DeFi ecosystem.By promoting the release of Bitcoin’s liquidity, BTU has the potential to promote the emergence of a new generation of DeFi applications and protocols, further expanding the user base and usage scenarios of the DeFi market.
• BTU’s infrastructure design focuses on decentralization and security.Because it is entirely based on operations within the Bitcoin network, BTU does not need to introduce cross-chain bridges or third-party custody, which greatly reduces the problems associated with centralized risks.BTU’s decentralized model ensures that it can be seamlessly integrated with the existing Bitcoin ecosystem without adding additional technical or security risks.
Project Progress & Opportunities for Participation
• The project has received investment support from Waterdrip Capital, Founder Fund and Radiance Ventures.
2. Lending track
Introduction
•BTC Lending is a financial service that obtains loans by using Bitcoin as collateral or earns interest by lending Bitcoin.The borrower deposits Bitcoin into the lending platform, which provides loans based on the value of Bitcoin, the borrower pays interest, and the lender earns income.This model provides liquidity for Bitcoin holders while providing investors with new channels of return.
• Mortgage loans in BTC Lending are similar to home mortgage loans in traditional finance.If the borrower defaults, the platform can auction the mortgaged Bitcoin to recover the loan.BTC Lending platform usually takes the following risk management measures:
1. Control the mortgage rate and loan-value ratio (LTV): The platform will set an LTV.For example, Bitcoin is worth $10,000 and borrowings are no more than $5,000 (LTV is 50%).This provides a buffer space for Bitcoin price fluctuations.
2. Supplementary collateral and margin: When the price of Bitcoin falls, borrowers need to supplement collateral to reduce LTV.If the supplement is not possible, the platform may force the position to be closed.
3. Forced liquidation mechanism: When the borrower fails to add margin, the platform will sell part or all of the Bitcoins to repay the loan.
4. Risk management and insurance: Some platforms will set up insurance funds or cooperate with insurance companies to provide additional protection.
• From 2013 to 2017, Bitcoin has gradually been accepted as a new asset class, with early lending platforms such as Bitbond and BTCJam appearing, mainly lending through the P2P model.From 2018 to 2019, the cryptocurrency market grew rapidly, with more platforms such as BlockFi, Celsius Network and Nexo emerging. The concept of DeFi has driven the rise of decentralized lending platforms.
•Major platforms are constantly innovating and launching a variety of financial products and services, such as Lightning Loan, liquidity mining and cryptocurrency reward credit cards, attracting more users.
• BTC Lending The track has become an important part of the cryptocurrency market, covering major cryptocurrencies such as Bitcoin and Ethereum, and lending products include mortgage loans, deposit accounts and unsecured loans.The platform makes profits through interest rate spreads and handling fees.Popular platforms such as Aave provide flash loans and liquidity mining rewards, MakerDAO provides DAI Savings Rate (DSR), and Yala provides DeFi returns based on stablecoins, etc.Next, we will introduce the popular products on the BTC Lending track.
Project 1, Liquidium
Project Overview
• Liquidium is a P2P lending protocol running on Bitcoin, which enables users to lend and borrow native Bitcoin using native Ordinals and Runes assets as collateral.
• On December 11, 2023, Liquidium completed a US$1.25 million Pre-Seed round of financing, with Bitcoin Frontier Fund, Side Door Ventures, Actai Ventures, Sora Ventures, Spicy Capital, UTXO Management and others participating in the investment.
• On July 18, 2024, a seed round of financing of $2.75 million was completed.This round of financing was led by Wise 3 Ventures, with Portal Ventures, Asymmetric Capital, AGE Fund, Newman Capital and others participating.
Operation mechanism
• The platform completes Bitcoin lending in a secure and uncustodial manner through partially signed Bitcoin transactions (PSBT) and discrete log contracts (DLCs) on Bitcoin L1.Currently supports lending for Ordinals, Runes assets (BRC-20 is under testing).
• Tokenomics: Rune form LIQUIDIUM•TOKEN, launched on July 22, 2024, with a total volume of 100 M.Creation airdrop has been completed.As of September 3, the market price of LIQUIDIUM•TOKEN is about $ 0.168 and the market value is $ 2 M.
• According to Geniidata, the total transaction volume of the agreement reached about 2400 BTC as of September 3, most of which were Ordinals and a small number of Runes assets.The agreement volume high is in April-May, with an average of about 15-20 BTC of Ordinal assets trading volume per day.With the launch of runes, DAU and trading volumes have a new peak and then gradually declined.In August, trading volume in September fell to an average of 5-10 BTC per day.
Project 2: Shell Finance
Project Overview
• Based on BTC L1, it supports the use of BTC, Ordinals NFT, Runes, BRC-20, ARC-20 assets as collateral to obtain $bitUSD.
Operation mechanism
• Similar to Liquidium, BTC native lending is implemented based on PSBT and DLC technologies.PSBT allows secure and collaborative transaction signatures, while DLC allows conditional and trustless contract execution based on verified external data.
• Unlike Liquidium’s P2P model, Shell Finance adopts a point-to-pool solution, namely Peer-to-Pool, to maximize utilization.
• Testnet is not yet launched.
3. Staking track
Introduction
• Staking is usually recognized by people as a safe and stable livelihood.When staking tokens over time, users will usually gain some kind of access, privilege or reward token in exchange for their lock coins, which can withdraw their tokens anytime, anywhere.Staking occurs at the network level and is completely used to protect the network.Ethereum’s staking Proof of Stake (PoS) mechanism is the most typical example of staking, with more than 565,000 validators holding standard 32 ETHs, which are worth more than $32 billion today.Assets pledged by equity are usually linked to DeFi liquidity, income rewards and governance rights.Locking tokens into blockchain networks or protocols for rewards, these tokens will be used to provide users with critical services.
• The current concept of Staking bringing shared security provides a new dimension for the modular track, namely, leveraging the potential of “digital gold and silver”.From a narrative perspective, it not only releases the liquidity of trillions of market value, but also is the key core of the future expansion path.Taking the recent Bitcoin staking agreement Babylon and Ethereum restaking agreement EigenLayer, respectively, have won huge financing of US$70 million and US$100 million respectively as examples, it is not difficult to see that the top VCs are very recognizing this track.
• At this stage, this track is mainly divided into two factions: 1. Layer 1 with sufficient security as the functional layer of Rollups; 2. Recreate an existence that is close to Bitcoin/Ethereum security and has better performance, such as usThe well-known Celestia is to create a secure, decentralized and powerful DA layer in a short time through a pure DA functional architecture and low gas cost.The disadvantage of this plan is that the degree of decentralization still takes some time to complete and lacks orthodoxy.The newly born projects like Babylon and Eigenlayer are relatively neutral compared to the former two. Their advantage lies in inheriting orthodoxy and security, while giving the main chain assets more application value——Create shared security services through POS, borrow the asset value of Bitcoin or Ethereum.
Project 1, Babylon
Project Overview
• Babylon is the layer 1 blockchain founded by Professor David Tse at Stanford University.The mission of the project is to bring unrivalled security to all PoS blockchains without any additional energy costs.The team consists of Stanford researchers and experienced developers and experienced business consultants.
• Babylon is a Bitcoin staking protocol, and its core component is a Cosmos IBC-compatible POS public chain, which can lock Bitcoin on the Bitcoin main network to provide security for other POS consumption chains, and at the same time, it can be used to lock Bitcoin on the Babylon main network or POS consumption chain.Obtain pledge income.Babylon allows Bitcoin to utilize its unique security and decentralized features to provide economic security for other POS chains to achieve rapid start of other projects.
Source https://www.rootdata.com/zh/Projects/detail/Babylon?k=MjgwNQ%3D%3D
• Babylon’s team consists of 32 technical personnel and consultants. The team has strong technical strength. The team’s consultants include Sunny Aggarwal of Osmosis lab, and Sreeram Kannan, the founder of Eigenlayer, serves as a strategic consultant.As of June 1, 2024, Babylon disclosed a total of several rounds of financing, with a total amount higher than $96.8 Million.It can be seen from the table below that compared with other Bitcoin Layer 2 projects, Babylon has a higher financing quota and many institutions.
Operation mechanism
• In terms of working mechanism, Babylon is consistent with Ethereum’s re-staking protocol EigenLayer. “Bitcoin + Babylon” can be regarded as “Ethereum + EigenLayer”, but since Bitcoin does not support smart contracts, Babylon needs to do one more step than EigenLayer., which is also the most difficult step from 0-1, to make the unstaken Bitcoins first become pledged, and then do Bitcoins and then pledge them.
• Babylon uses UTXO to implement staking contracts, which is called Remote staking.That is, BTC security is passed to the PoS chain through the remote end of the intermediate layer, and at the same time, cleverly combines the existing opcode in the idea. The specific steps for implementing the contract can be decomposed into the following four steps:
a. Locking funds
The user sends the funds to an address controlled by a multi-signature.Through OP_CTV (OP_CHECKTEMPLATEVERIFY, predefined transaction templates are allowed to be created to ensure that transactions can only be executed according to specific structures and conditions), the contract can specify that these funds can only be spent when specific conditions are met.After the funds are locked, a new UTXO is generated, indicating that the funds have been pledged;
b. Conditional verification
Calling OP_CSV (OP_CHECKSEQUENCEVERIFY allows setting a relative time lock, based on the transaction sequence number, indicating that UTXO can only be spent after a certain relative time or block number) can achieve time locking, which ensures that funds cannot be withdrawn within a certain period of time.Combined with the OP_CTV mentioned above, pledge and unstake (when the pledge time is satisfied, the pledge can spend the locked UTXO), and confiscation (slashing. If the pledge does evil, the pledge will be forced to spend.UTXO to lock address and limit to a non-spending state, similar to a black hole address);
Source https://docs.babylonchain.io/assets/files/btc_staking_litepaper-32bfea0c243773f0bfac63e148387aef.pdf
c. Status update
Whenever a user pledges or retrieves the pledged funds, it involves the creation and expenditure of UTXO.The new transaction output will generate a new UTXO, while the old UTXO will be marked as spent.In this way, every transaction and capital flow is accurately recorded on the blockchain, ensuring transparency and security;
d. Revenue distribution
Based on the amount of the pledge and the time of the pledge, the contract calculates the rewards due and is allocated by generating a new UTXO.These rewards can be unlocked and spent after a specific condition is met through script conditions.
• The overall architecture of Babylon can be divided into three layers: Bitcoin (as a timestamp server), Babylon (a Cosmos Zone), which serves as the intermediate layer and the PoS chain requirements layer.Babylon calls the latter two Control Plane (control plane, that is, Babylon itself) and Data Plane (data demand plane, that is, various PoS consumption chains).
• The validators of each PoS chain download the Babylon block and observe whether its PoS checkpoint is included in the Babylon block checked by Bitcoin.This enables the PoS chain to detect differences, for example, if the Babylon validator creates an unavailable block checked by Bitcoin and lies at the PoS checkpoints contained in the unavailable block.
• There is a penalty rule, that is, if the verifier does not withdraw its stake when the attack is detected, the verifier with a double signature conflict PoS block can be confiscated.Malicious PoS validators may therefore fork the PoS chain when assigning Bitcoin timestamps to blocks on the standard PoS chain.In the eyes of later PoS clients, this will change the standard PoS chain from the top chain to the bottom chain.Although this is a successful security attack, it will result in the confiscation of the interests of malicious PoS validators because they have double-signature conflicting blocks, but their pledged interests have not been withdrawn.
Source https://docs.babylonchain.io/assets/files/btc_staking_litepaper-32bfea0c243773f0bfac63e148387aef.pdf
Project Progress & Opportunities for Participation
• In February 2023, Babylon has implemented BTC timestamping testnet.The BTC staking poc was implemented in July, and the BTC staking testnet will be launched in Q4.
• In Q2 2024, Babylon will be launched Mainnet, and will be launched in Q3-4 2024. Data Availability is currently in testnet 4. Users participating in the testnet will receive some project points as incentives, and the points can be redeemed on the main network.Become a governance token airdrop.
• The main network is expected to be online soon.On August 1, 2024, babylon has started cooperating with a number of popular restake projects such as chakra, bedrock, solv protocol, pstake, and began the pre-stake process.Users can already participate in babylon’s pre-staking and get the corresponding share through the above projects. Now is a very good time to participate.After the main network is online in the later stage, users can also obtain governance tokens when pledging on the main network, and pledgers can obtain annualized returns from the pledge network at any time.
4. Restaking track
Introduction
• Based on staking, ETH introduced the concept of resting for the first time.ReStaking is the use of liquid staking token assets for staking on validators of other networks and blockchains to gain more benefits while still helping to improve the security and decentralized behavior of new networks.With ReStaking, investors can earn twice the profits from both the original network and the ReStaking network.Although ReStaking enables stakers to gain greater benefits, it also poses the risk of smart contracts and fraud in staking by validators.
• In addition to accepting original assets, the ReStaking network also accepts other assets, such as LSD tokens, LP tokens, etc., which increases the security of the network.And while still generating actual revenue for the protocol and its users, it frees up the unlimited source of liquidity in the DeFi market.Revenue from the ReStaking network and standard networks comes from costs incurred by security leasing, validators and dApps, protocols and tiers.Staking participants on the network will receive a portion of the network’s revenue and may also receive inflation rewards for the network’s native tokens.
• Many BTC holders will pledge their BTC in projects such as babylon and bedrock, obtaining considerable annualized yields and governance tokens, and early participants can obtain quite good returns and long-term returns.But their BTC will lose other application value because of staking.So, how can we release new liquidity to make their BTC more valuable?Since it is impossible to release more liquidity of BTC, start with LSD to release the liquidity of LSD obtained through staking.The user naturally pays the bill and restats the asset vouchers obtained by pledging BTC in exchange for five returns – the annualized income of staking, the governance tokens obtained by staking, the annualized income of restat, and the governance tokens obtained by restat.
Project 1, Chakra
Project Overview
• Chakra is an innovative modular settlement infrastructure that uses zero-knowledge proof technology to ensure trustless security and efficiency.By integrating decentralized Bitcoin liquidity, Chakra provides a safer and smoother settlement experience.Users can easily pledge Bitcoin with one click, leveraging Chakra’s advanced settlement network to participate in more liquidity earnings opportunities including the Babylon ecosystem’s LST/LRT projects.
• Chakra is supported by Starknet Ecology. In March 2024, the official announced that it has received early investment from investment institutions such as StarkWare, CoinSummer, as well as many Wanbihou and miners.
Operation mechanism
• Chakra provides a highly modular Bitcoin settlement network to realize the free flow of BTC derivative assets between major public chains, injecting liquidity into the DeFi protocol, solving the liquidity and interoperability of Bitcoin in the current blockchain ecosystem.Sexual problems.At the same time, Chakra helps Layer 2. Decentralized exchanges (DEX) and DeFi protocols bypass the complexity of building Bitcoin settlement infrastructure and avoid waste of resources and security risks caused by project parties when repeatedly building settlement systems.
• Chakra uses the finality provided by the Babylon network to enhance economic security and prevent settlement errors caused by consensus attacks.Chakra is able to provide efficient zero-knowledge proof aggregation for Layer 2’s state and liquidity settlement, ensuring frictionless circulation of cross-chain Bitcoin assets.The Parallel VM designed and implemented by the Chakra team through multi-threading optimization, achieving performance of more than 5,000 TPS per second in 4 threads. In a high-configuration environment with 64 threads, TPS can even reach 100,000.
Project Progress
• Chakra launched Devnet in May, inspiring developers to jointly build an application ecosystem and establish deep connections with Starknet’s multiple local communities. In the future, a series of developer education activities and Devnet incentives will be launched with the support of Starknet.In June, in the test network activities launched by Chakra and Babylon at the same time, Chakra has been the Finality Provider in Babylon’s first network, contributing 41% of the pledged users on the entire network to the Babylon ecosystem.
• From August 1 to August 7, 2024, Chakra and Binance Web3 Wallet jointly launched the Babylon pre-stake campaign.Participants are provided with double rewards for Babylon potential gains and ChakraPrana, and have the opportunity to receive rewards for other ecological tokens in the settlement system in the future.The event has ended, with a total of 48,767 users participating in the pledge.
Project 2, Bedrock
Project Overview
• Bedrock is a multi-asset liquidity re-staking agreement powered by a non-custodial solution designed in partnership with RockX.Bedrock utilizes its common standards to unlock liquidity and maximum value of PoS tokens such as ETH and IOTX, as well as existing liquid staking tokens called uniETH and uniIOTX.
• Bedrock provides users with institutional-level services, with a total pledge of more than US$200 million as of May 2, building the first liquid staking Bitcoin (uniBTC) on Babylon.
TVL so far:
Source https://defilama.com/protocol/bedrock#information
• TVL exceeded US$200 million at its peak, and there are signs of climbing again so far.In addition, the project has carried out in-depth cooperation with ecological agreements such as Pendle, Karak, Celer, and zkLink, highlighting its influence in the DeFi ecosystem.
Image source https://www.rootdata.com/zh/Projects/detail/Bedrock?k=MTI1OTM%3D
• Bedrock has received investment from well-known institutions such as OKX Ventures, Waterdrip Capital, and Amber Group.On May 2, 2024, OKX Ventures announced the lead investment in Bedrock.Dora Yue, founder of OKX Ventures, said: “With DeFi’s rapid development, the total value of on-chain pledges has exceeded US$93.4 billion, of which 48% comes from the liquidity re-pled sector. The investment in Bedrock is aimed at accelerating liquidity re-pled solutions.We hope to provide community users with diversified and secure asset management options. We look forward to the gradual maturation and systematization of DeFi usage scenarios to promote the sustainable development of the Web3 industry.”
Operation mechanism
• Use uniBTC supported by babylon for restaking.Users can pledge their WBTC on the ETH chain to Babylon. After pledging their WBTC, they will obtain a 1:1 credential – uniBTC. The user’s uniBTC can be redeemed as wBTC at any time.Babylon provides core technical support.Users who pledge wBTC and hold uniBTC can get Bedrock and Babylon points.Through uniBTC and Babylon, Bedrock provides liquid staking services to support Babylon’s PoS chain.Ensure the stability and security of Babylon PoS chains by casting uniBTC and further expand Bedrock products to BTC chains.
Image source https://www.bedrock.technology/
• From August 1 to August 7, 2024, Bedrock and Binance jointly launched a staking activity.Starting from August 1st, users only need to hold uniBTC in their wallets, and each token will receive a 21x Bedrock diamond reward per hour, and a 3x increase will be received for Binance Web3 wallet users.
Source https://docs.bedrock.technology/bedrock-lrt/bedrock-diamonds
5. Decentralized hosting
• Recently, the main body behind wBTC BitGO has issued an announcement to hand over wBTC control, which has triggered market discussions on the security of WBTC.
WBTC
•WBTC is the earliest and most widely used form of Bitcoin encapsulation. It bridges Bitcoin assets to the Ethereum ecosystem and uses Ethereum’s DeFi scenario to release Bitcoin liquidity.However, this ERC-20 token-form encapsulated Bitcoin has centralized management problems, which has led to users’ concerns about the security and transparency of their assets.MakerDAO voted to stop new lending to WBTC.More than $30 million worth of WBTC was destroyed in one week.Interest in new products such as tBTC and Coinbase has increased.
tBTC
• When cross-chain from BTC to ETH, you can consider casting tBTC.Redeem from WBTC to tBTC and redeem it back to native BTC for proper storage or continue to use tBTC as DeFi collateral.tBTC has good DeFi adoption and has received a lot of use cases in Curve Finance.In addition to being actively traded in major stable and volatility pools, tBTC can also mint crvUSD stablecoins.
FBTC
• FBTC is a new synthetic asset in the whole chain, anchored with BTC 1:1, and supports the circulation of full chain BTC (Ominichain).In the future, FBTC will first go online on ETH, Mantle and BNB chains, and then expand to more networks. FBTC can be used to generate income in the DeFI scenario.
• The key advantages of FBTC are:
1. FBTC will use multi-party computing hosting providers.
2. FBTC’s casting, destruction and cross-chain bridges are managed by the TSS (threshold signature scheme) network run by the FBTC Security Committee and the security company.
3. FBTC’s reserve certificate can be queried in real time and monitored and verified by security companies.
4. Locked FBTC can be scheduled as collateral or participate in Babylon pledge.
5. Built by well-known parties that have long existed in the blockchain ecosystem and Bitcoin financial institutions, it is trusted by a large number of miners and builders.
6. Governance tokens as an incentive.
dlcBTC
• dlcBTC is a non-custodial receipt of Bitcoin on Ethereum, enabling Bitcoin holders to participate in the DeFi protocol while retaining full ownership of their assets.It uses discreet log contracts (DLCs) to lock Bitcoin in a multi-signature UTXO, where one key is held by the user and the other key is distributed in a decentralized network.The minted dlcBTC tokens can be used as collateral in various DeFi platforms such as Curve and AAVE.
• dlcBTC Unlike wBTC and other bridge assets (such as tBTC and BTC.B), it locks Bitcoin on the chain by eliminating the needs of intermediaries or custodians and takes user sovereignty as its core principle.dlcBTC is protected by all computing power of the Bitcoin network and does not require users to send their Bitcoin to a third-party deposit address.
• Compared with wBTC, dlcBTC has the following advantages:
1. Self-encapsulation: dlcBTC is self-encapsulated by depositors (dlcBTC merchants) and locks BTC in DLC.Self-encapsulation means that DLC can only be paid to the original depositors, so that BTC will not be stolen in hacking or confiscated by government actions.
2. Completely automatic: Due to manual steps in the BitGo hosting process, it takes 3-12 hours to mint or destroy wBTC.dlcBTC is fully automated, and coins can be minted or destroyed in 3-6 BTC blocks confirmation.
3. Flexible fees: Since DLC.Link is not the custodian, dlcBTC has lower overhead, thus providing more competitive coin minting and destruction costs.
6. Cedefi
Introduction
• CeDeFi is a financial service that combines the characteristics of centralized finance (CeFi) and decentralized finance (DeFi).The end of DeFi Summer has sparked people’s thinking: mechanism innovation is urgently needed to get rid of the hassle of manual operations and interaction with liquid mining pools and break through the algorithmic limitations of underlying mining pools.After Ethereum turned to PoS, Lido’s success promoted the active asset management model of income-generating interest, that is, obtaining stETH by pledging native ETH, releasing liquidity and generating interest at the same time.In this process, users change from interacting with the liquidity pool to entrusting assets to professional asset management institutions (centralization), which is what CeDeFi means.
• In CeDeFi mode, users lock Bitcoins in a third-party custodian’s exchange-independent over-the-counter settlement network, which will be mapped tokens on the exchange side at a ratio of 1:1.Users can then use these tokens to perform various operations on the CeDeFi platform, such as interest rate arbitrage trading between different markets.The actual Bitcoin is securely stored in a cold wallet isolated from the exchange.Only necessary capital flows will occur between the custodial platform and the exchange account, ensuring the security of user assets.
• As of June 13, 2024, about 28% of the total ETH supply was pledged (33 million / 120 million), and about 29% of ETH was pledged through Lido (10 million / 33 million).In other words, the liquidity of BTC with a trillion-dollar value has not been released, which is why CeDefi is about to emerge.
• The sources of income of CeDefi usually include rate arbitrage, pledge income, re-pled income, and the agreement itself (such as airdrop expectations), etc.Rate arbitrage refers to using the difference in capital interest rates between CeFi and DeFi systems to conduct interest rate arbitrage transactions to earn profits.CeDeFi arbitrage strategy combines the security of CeFi and the flexibility of DeFi, and users arbitrage through Delta neutral interest rates.
Project 1. Solv Protocol
Project Overview
• The Solv protocol is a unified Bitcoin liquidity matrix designed to unify Bitcoin’s decentralized trillion-dollar liquidity through SolvBTC.
• I received seed round financing in 21 years, with a total of four rounds of financing, with a total amount exceeding US$11 million (including the strategic round of Binance Labs’ undisclosed amount); the project contract was audited by many well-known companies.
Operation mechanism
•SolvBTC is the liquidity layer of Bitcoin and is currently online in Ethereum, BNB chain, Arbitrum and Merlin chains.As of July 16, 2024, the Agreement TVL had a total of 20,224 BTC, about $1.22B.
• By pledging SolvBTC, users can obtain SolvBTC Ethena (SolvBTC.ENA) or SolvBTC Babylon (SolvBTC.BBN).
￮ SolvBTC Ethena uses Bitcoin as collateral to borrow stablecoins, which are then used to mint and pledge Ethena’s USDe.This process mainly reaps income from two main sources: financing and basis from Ethereum staking and Delta hedging derivative positions.In addition, you can also obtain token incentives at both Solv and Ethena.
￮ SolvBTC.BBN will not generate any profit at first, but it is designed to prepare for Babylon’s mainnet launch.Babylon is expected to launch its mainnet by the end of July.Among them, the 500 BTC limit of first epoch and second epoch has been claimed.
• Solv Protocol cooperates with digital asset custodians include Copper, Ceffu, Cobo and Fireblocks.These custodians provide “off-counter settlement” solutions that enable Solv to delegate assets to or cancel the entrusted from the centralized exchange without the need to transfer 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, focusing mainly on LST.The first asset supported by LVN is SolvBTC.Solv Guard, the basic security module of LVN, has been launched to ensure the integrity and security of all operations in the network by supervising and managing the authority of asset managers.
Source https://docs.solv.finance/solv-documentation/getting-started-2/liquidity-validation-network
Project Progress & Opportunities for Participation
• The Solv points system is in operation and will become a reference for future airdrops.
￮ Total XP = Basic XP + Improve XP + Recommended XP
￮ Enhance the basic points through pledge (basic XP = (each $1 deposited XP) x (holding time)).At the same time, reach a certain threshold or participate in community activities to obtain the multiplier to improve XP.
• July 16 Community News, SolvBTC.BBN’s third epoch is about to be launched.
Project 2, Bouncebit
Project Overview
• BTC Restaking chain, fully EVM-compatible, has CeDeFi product design, uses LCT (liquidity custodial tokens) for re-staking and on-chain Farming.
• On February 29, 2024, BounceBit announced the completion of a $6 million seed round of financing, led by Blockchain Capital and Breyer Capital, with CMS Holdings, Bankless Ventures, NGC Ventures, Matrixport Ventures, DeFiance Capital, OKX Ventures and HTX Ventures participating.On the same day, OKX Ventures and HTX Ventures announced strategic investments in them.On April 11, Binance Labs announced an investment in BounceBit.
Operation mechanism
• Bouncebit introduces Mainnet Digital and Ceffu’s MirrorX technology to complete regulated custody guarantees, map assets to exchanges, and realizes BTC’s interest-bearing income in MPC wallets.At the same time, the chain uses the BTC + BounceBit hybrid PoS mechanism for verification.
• BounceBit supports seamless conversion of pure BTC into more flexible forms such as BTCB and Wrapped Bitcoin (WBTC) on the BNB chain.Users can choose to deposit their BTC into a secure hosting service accessible through the EVM network, thereby bridging these assets to the BounceBit platform.This process allows the accumulation of on-chain gains without direct interaction with the Bitcoin main chain.
• The Bouncebit CeDeFi ecosystem provides users with three types of benefits: original Cefi income (arbitrage), node operation rewards for pledging BTC on the BounceBit chain, and opportunity gains for participating in on-chain applications and Bounce Launchpad (on-chain ecosystem DeFi income).
￮ User contribution to TVL is managed security by Mainnet Digital’s regulated managed services to ensure compliance and security.These assets are then mirrored through Ceffu’s MirrorX service.The user gets BBTC/BBUSD.
Source https://docs.bouncebit.io/cedefi/bouncebit-cefi-+-defi/infrastructure
Project Progress
• The main network was launched in May. As of July 16, $BB had a market value of $ 201 M, FDV $ 968 M, and the main network TVL $ 310 M.
Project III, Lorenzo protocol
Project Overview
• Lorenzo is a Babylon-based BTC liquidity finance layer.
• On May 21, Lorenzo, the Bitcoin liquidity financial layer project, announced an ecological strategic cooperation with Bitlayer, the Bitcoin Layer 2 project. Lorenzo will launch the Beta version on Bitlayer to accept BTC stake, supporting users to stBTC, the liquidity staked token generated by the pledge.Use it in Bitlayer to get extra benefits.
Operation mechanism
• Lorenzo converts the staked bitcoin tokens into liquid principal tokens (LPT) and earnings accumulation tokens (YAT) for each pledged transaction.Lorenzo also provides infrastructure for exchanging LPT and YAT and redeems the staking proceeds.
•Lorenzo matches users who stake BTC with Babylon and converts Babylon’s staked BTC into BTC liquid staked tokens to release liquidity to the downstream DeFi ecosystem.Architecturally, Lorenzo consists of a Cosmos application chain built using Cosmos Ethermint, a relay system that synchronizes BTC L1 and Lorenzo application chains, and a system responsible for issuing and settlement of BTC liquid staking tokens.
• As of July 16, 2024, TVL is $ 70 M.
7. DEX AMM Swap
Introduction
•DEX AMM Swap (Decentralized Exchange Automatic Market Maker Exchange) is a decentralized trading mechanism that runs on the blockchain.It uses algorithms and liquidity pools to automatically provide liquidity for trading pairs without the need for a centralized order book.Users can directly exchange tokens on the chain and enjoy a low slippage and low fee trading experience.The AMM model greatly improves the liquidity and availability of DEX and is an important infrastructure for the DeFi ecosystem.
• The development of DEX in the Bitcoin ecosystem is relatively lagging behind other chains that support smart contracts, which is mainly due to the original design intention and technical limitations of the Bitcoin network.
• Technically, AMM (automatic market makers), PSBT (partially signed Bitcoin transactions) and atomic exchange jointly provide a technical basis for the implementation of DEX on Bitcoin.AMM manages liquidity pools through algorithms to achieve automatic pricing and transaction execution; PSBT allows step-by-step construction of complex transactions and multiple parties to participate, enhancing transaction flexibility and security; atomic exchange realizes trustless exchange of cross-chain assets.Its core mechanism is the hash time-locked contract (HTLC).
Project 1, Bitflow
Project Overview
• Bitflow focuses on sustainable BTC yields, using technologies such as PSBT, atomic exchange, AMM, and Layer-2 solutions such as Stacks to trade BTC, stablecoins, etc.
• Bitflow announced on January 25, 2024 that it had completed a pre-seed round of financing of US$1.3 million, led by Portal Ventures, and participated by Bitcoin Frontier Fund, Bitcoin Startup Lab, Big Brain Holdings, Newman Capital, Genblock Capital, Tykhe Block Ventures and others.Co-founder Dylan Floyd is CEO, a former software engineer at AT&T, and graduated from Georgia Tech.Another co-founder, Diego Mey, is a CSO, a founding partner of Bussola Marketing Group, and has worked in business development at Wicked Studios.
Operation mechanism
• Bitflow is positioned as DEX (decentralized exchange), built on Stacks.According to DefiLlama data, Bitflow’s current TVL is $ 18.27 M.The feature of the project is to earn the benefits of native BTC without introducing custody risks.Users can provide liquidity in the liquidity pool to earn profits, mainly including stablecoins such as USDA, STX and stSTX, and BTC (supported after Stacks’ Nakamoto upgrade).
• Another goal of Bitflow is to build BTCFi.With BitFlow’s StableSwap, in addition to stablecoins, xBTC, sBTC (all Wrapped BTC on Stacks) and native Bitcoin assets can also be easily integrated into the BitFlow ecosystem.Where sBTC is a representation on Stacks that is pegged to Bitcoin 1:1, and sBTC operates under a fully decentralized framework and is supervised by a group of open member signers.xBTC is a packaged version of Bitcoin issued on Stacks, backed by 1:1 Bitcoin held by the Reserve, similar to Wrapped Bitcoin on the Ethereum network.
Project Progress & Opportunities for Participation
• Bitflow has currently launched the AMM DEX main network and currently supports multi-hop transactions.At the same time, Bitflow’s RUNES AMM is being built, and you can currently fill in your email on the official website to add the waitlist.In terms of tokens, $BFF is about to be launched, so you can continue to pay attention to the dynamics.
Project 2, Dotswap
Project Overview
• BTC mainnet is native AMM DEX, and its supported assets include Runes, BRC 20, ARC 20 and the latest CAT 20.The main network was launched in September 2019 and has been updated to the V3 version.As of September 25, 2024, the total trading volume reached 1770 BTC, and TVL is currently close to 60 BTC.
Operation mechanism
• Upgraded multi-signature: DotSwap’s liquidity pool is powered by MMM (Multilayered Multisig Matrix), an upgraded multi-signature framework that integrates the advantages of MPC and BTC native multi-signature.
• Unmanaged and licenseless atomic exchange: using PSBT technology.
Project Progress
• 24 Q3, the new DotSwap tool was launched: rune casting machine and multi-function BTC trading accelerator.The DotSwap Accelerator is formerly known as BTC-Speed, and optimizes the transaction time of BTC by utilizing the child payment (CPFP) method.Rune casting/etching focuses on zero cost, and three different casting modes are available
Project 3. Unisat AMM Swap
Project Overview
• Unisat is a wallet application focused on Ordinals and brc-20, which is based on an order book to enable transactions in the inscription market (including Ordinals, brc-20 and Runes), which is not the same as a typical AMM-based DEX.
• Unisat completed a strategic round of financing in February 2024 and in May, it completed a Pre-A round led by Binance.
• Unisat started airdropping pizza inscriptions at the end of May.On September 9, the Fractal mainnet developed by the Unisat team was officially launched, consolidating its position as a giant in the field of inscriptions.
Part 3: Comparison of different asset classes
Security comparison
• The BTC ecosystem pays much more attention to “security” than other ecosystems, which is determined by the characteristics of the BTC ecosystem operators.From the storage of funds in the wallet to the specific links of participating in FI solutions, security is required, and the effective control of “asset ownership” is the key.
• Ethereum is the largest proof of stake (PoS) blockchain calculated by total stake value.As of August 2024, ETH holders have pledged ETH worth more than US$111 billion, accounting for 28% of the total ETH supply.The amount of ETH staked is also called Ethereum’s security budget, because stakers will be punished by the network when they violate protocol rules.While ETHFi has spawned a super huge ETH ecosystem, it also adds systemic risks to the entire ETH itself (including the risk of excessive centralization, bank runs, etc.).Because the security of POS is determined by the value of the pledged coins, once a run/verifier exit occurs, a death spiral will be produced, causing the POS security to decrease.At the same time, in the context of a bear market, the decline in the currency price may cause Gas fees to fall, causing ETH to fall into inflation, thereby further promoting the decline of ETH.Finally, “half-month attacks” are also one of the problems with ETH security, that is, when ETH validators control more than 50% of governance rights, it is very easy to manipulate and attack the network.
• The total TVL of Solana Ecosystem reached $ 4.86 B on July 17, 2024. Although there is still a gap compared to $ 59 B of Ethereum Ecosystem, it currently surpasses BSC with a slight advantage, ranking third after Tron.Solana also belongs to the PoS blockchain, and its security logic is similar to Solana.It is worth mentioning that Solana has many off-market factors, and it is easier for currency price to fluctuate compared to Ethereum.For example, in April this year, network congestion caused by memecoin and Ore mining appeared on Solana.
• Given that BTC is a POW system, there is no such problem in principle, but once too many risks of FI protocols accumulate and cause systemic risks, it may also cause a sharp decline in the price of BTC, which will affect the bull market in the entire market.The bear trend is very unfavorable for BTCFI, especially in the early stage of development, which is easy to “death” and it takes longer to be recognized.
Rate of return comparison
• There are many sources of income, adapted to different product application scenarios.Generally speaking, it includes pledge income, DeFi product income and the income of the agreement itself.
￮ Staking income, for example, Babylon proposed to use BTC as a guarantee of POS chain security to generate pledge income
￮ Rewards from DeFi products, such as arbitrage returns involved in Solv products, or the income generated by the Lending agreement.
￮ Agreement income refers to the profits brought by the currency price of the agreement itself or the expectation of issuing coins.
• The following is a comparison of the yield and source of income for major projects/protocols of ETHfi, SOLfi and BTCfi.
￮ ETHfi The yield and sources of returns of various popular agreements:
￮ SOLfi Rates of return and sources of income for various popular agreements:
￮ BTCfi The yield and sources of returns of various popular agreements:
Note: The RETRO in the table means that because the APR of Babylon has not been counted yet, and the APR of other projects depends on Babylon, no estimates are made here.In addition, Binance, OKX, HTX, etc. have cooperated with Babylon, Chakra, Bedrock, B², Solv Protocol, etc. to carry out a series of pre-staking, farming and other activities, and users have achieved very high returns, especially Binance.A series of pledge activities for web3 wallets.
• From a macro perspective, BTCFi has greater potential compared to ETHFi and SolFi, because both of them have passed the first stage of TVL’s explosive growth, while BTCFi is still a blue ocean. From this perspective, BTCFi products have moreHigh yield expectations.
Ecological richness
• The ETH ecology includes Defi, NFT, RWA, and Restake.Traditional top projects such as Uniswap, AAVE, Link, ENS and other protocols have further improved the growth of real users and effective and practical frequency.Since 2023, many new Ethereum liquid staking/re-staking agreements such as Lido and EigenLayer have attracted a lot of funds.
• On Solana, DEX Raydium and liquidity solution Kamino Finance’s total TVL are close to $ 1 B, and are the two top projects in the Solana DeFi ecosystem.By TVL, Jupiter, Drift, Marginfi, and Solend are listed behind.Solana is also a PoS blockchain, with most of the funds concentrated on Liquid Staking, and the top project is Jito.
• For BTCFi, the first thing to consider is the asset category and TVL above Fi.According to data from CryptoCompare and CoinGecko, the size of the BTCFi market has reached about US$10 billion in 2023.This data includes the total locked-in volume (TVL) of Bitcoin in the decentralized finance (DeFi) ecosystem, as well as the market size of Bitcoin-related financial products and services.The number of BTC holders is also rising, which means the inflow of new user groups and new funds. The passage of ETFs has also pushed BTC into a super bull market brought about by a round of price increase. The chain has BTC installed on the chain.New wallets are also gradually increasing.
• In addition to BTC itself, there are also a wealth of asset types to participate in BTCFI.For example, inscriptions, runes and other first-layer assets based on the BTC network; rgb++, taproot asset and other second-layer assets based on the BTC network; WBTC on the ETH chain, various LST or LRT certificates representing pledged BTC, etc. wrap/stake assets;These asset liquidity has expanded the scope of FI, making future FI scenarios more abundant.
• In terms of protocol and ecological projects, the Bitcoin ecosystem is in an explosive period. A large number of projects including Layer 2 are emerging, and VC financing is increasing, which has attracted market attention.For example, merlin and Bouncebit revolve around BTC layer 2 networks; BlockFi, Celsius Network, etc. lending protocols; Satoshi Protocol, BitSmiley, etc. Stablecoin protocols; Babylon, Pstake, etc. Staking protocols, and Chakra, Bedrock, etc. Restaking protocols.
Ending
In this rapidly evolving digital age, with the entry of global institutions and technology giants, the number and complexity of public chains continue to increase, but Bitcoin (BTC) has always maintained its unique position, 1 BTC is always equal to 1 BTC, itThe value of the company has withstood the test of time and proves its potential as a long-term value-added asset.BTC is not just a string of numbers or codes, it is a highly liquid and practical asset. Whether it is simplifying cross-border transactions, supporting electronic payments, or its widespread use in the financial field, BTC has demonstrated itsUnique value.
Investors have growing liquidity demand for BTC, and developers are also actively exploring the programmability of Bitcoin to unlock its full potential.BTCFi came into being in this context. It not only satisfies the market’s desire for BTC liquidity, but also further promotes the activity of the BTC network by increasing the use scenarios of Bitcoin.With the continuous development of the BTCFi ecosystem, we have witnessed healthy competition between agreements. This competition not only reduces the risk of centralization, but also promotes the maturity and diversification of the entire BTC ecosystem.
Looking ahead, BTCFi will continue to serve as an innovation engine in the field of crypto finance, pushing the Bitcoin network toward higher-level financial applications and global participation.With the continuous advancement of technology and the continuous expansion of the market, BTCFi is expected to become a bridge connecting the world of traditional finance and cryptocurrency, providing global users with richer, safer and more efficient financial services.
