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

Summary

As Bitcoin's position in the financial market becomes increasingly solidified, the BTCFi (Bitcoin Finance) sector is rapidly becoming the forefront of cryptocurrency innovation. BTCFi encompasses a range of Bitcoin-based financial services, including lending, staking, trading, and derivatives. This report provides an in-depth analysis of several key tracks within BTCFi, exploring stablecoins, lending services, staking services, re-staking services, and the combination of centralized and decentralized finance (CeDeFi).

The report first introduces the scale and growth potential of the BTCFi market, emphasizing how the participation of institutional investors brings stability and maturity to the market. It then discusses in detail the mechanisms of stablecoins, including the different types of centralized and decentralized stablecoins, as well as their roles in the BTCFi ecosystem. In the lending sector, it analyzes how users gain liquidity through Bitcoin lending, while assessing the major lending platforms and products.

In terms of staking services, the report highlights key projects like Babylon, which provide staking services for other PoS chains by leveraging the security of Bitcoin, while also creating yield opportunities for Bitcoin holders. Re-staking services further unlock the liquidity of staked assets, providing users with an additional source of income.

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

Finally, the report reveals the unique advantages and potential risks of BTCFi compared to other categories of crypto finance by comparing the security, yield, and ecological richness of different asset classes. With the continuous development of the BTCFi sector, more innovations and capital inflows are expected, further consolidating Bitcoin's leadership position in the financial realm.

Keywords: BTCFi, stablecoin, lending, staking, re-staking, CeDeFi, Bitcoin finance

BTCfi Track Overview

BTCFi (Bitcoin Finance) is like a mobile Bitcoin bank, encompassing a series of financial activities centered around Bitcoin, including Bitcoin lending, staking, trading, futures, and derivatives. According to data from CryptoCompare and CoinGecko, the BTCFi market reached a scale of approximately $10 billion in 2023. Based on predictions from Defilama, the BTCFi market is expected to reach a scale of $1.2 trillion by 2030, a figure that includes the total value locked (TVL) of Bitcoin in the decentralized finance (DeFi) ecosystem, as well as the market size of Bitcoin-related financial products and services. Over the past decade, the BTCFi market has gradually shown significant growth potential, attracting more and more institutional participants, such as Grayscale, BlackRock, and JPMorgan, who have started to delve into the Bitcoin and BTCFi market. The participation of institutional investors has not only brought in a substantial influx of capital, increasing market liquidity and stability, but also enhanced the maturity and regulation of the market, bringing greater recognition and trust to the BTCFi market.

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

Part Two: BTCFi Track Segmentation

1. Stablecoin

Introduction

Stablecoins are a type of cryptocurrency designed to maintain a stable value. They are typically pegged to fiat currencies or other valuable assets to reduce price volatility. Stablecoins achieve price stability through the backing of reserve assets or algorithmic adjustments to supply, and are widely used in scenarios such as trading, payments, and cross-border transfers, allowing users to enjoy the benefits of blockchain technology while avoiding the severe fluctuations of traditional cryptocurrencies.

In economics, there is a concept known as the impossible trinity: a sovereign nation cannot simultaneously achieve a fixed exchange rate, free capital movement, and an independent monetary policy. Similarly, in the context of Crypto stablecoins, there exists an impossible trinity: price stability, decentralization, and capital efficiency cannot be achieved simultaneously.

Classifying stablecoins by their degree of centralization and by the type of collateral is two relatively intuitive dimensions. Among the current mainstream stablecoins, classification by degree of centralization can be divided into centralized stablecoins (represented by USDT, USDC, FDUSD) and decentralized stablecoins (represented by DAI, FRAX, USDe). Classification by type of collateral can be divided into fiat/physical collateral, crypto asset collateral, and under-collateralized.

According to DefiLlama data on July 14, the total market value of stablecoins is currently reported at $162.372 billion. In terms of market value, USDT and USDC are far ahead, with USDT leading significantly, accounting for 69.23% of the entire stablecoin market value. DAI, USDe, and FDUSD follow closely, ranking 3rd to 5th in market value. All other stablecoins currently account for less than 0.5% of the total market value.

Centralized stablecoins are generally backed by fiat currency/physical assets, essentially being RWA (Real World Assets) of fiat currency or other physical assets. For example, USDT and USDC are pegged to the US dollar at a 1:1 ratio, while PAXG and XAUT are pegged to the price of gold. Decentralized stablecoins, on the other hand, are usually backed by crypto assets or are uncollateralized (or under-collateralized). DAI and USDe are both backed by crypto assets, which can be further categorized into fully collateralized or over-collateralized. Uncollateralized (or under-collateralized) is generally what is known as algorithmic stablecoins, represented by FRAX and the former UST. Compared to centralized stablecoins, decentralized stablecoins have a lower market cap, are slightly more complex in design, and have given rise to several star projects. In the BTC ecosystem, the stablecoin projects worth paying attention to are all decentralized stablecoins, so the mechanisms of decentralized stablecoins will be introduced below.

Decentralized Stablecoin Mechanism

Next, we will introduce the CDP mechanism represented by DAI (over-collateralization) and the contract hedging mechanism represented by Ethena (equal collateralization). In addition, there is also the mechanism of algorithmic stablecoins, which will not be detailed here.

CDP (Collateralized Debt Position) represents a Collateralized Debt Position, which is a mechanism in decentralized finance systems to generate stablecoins by collateralizing cryptocurrency assets. After being pioneered by MakerDAO, it has been applied in many different categories of projects such as DeFi, NFTFi, and others.

DAI is a decentralized, over-collateralized stablecoin created by MakerDAO, designed to maintain a 1:1 peg with the US dollar. The operation of DAI relies on smart contracts and a decentralized autonomous organization (DAO) to sustain its stability. Its core mechanisms include over-collateralization, collateralized debt positions (CDP), liquidation mechanisms, and the role of the governance token MKR.

CDP is a key mechanism in the MakerDAO system, used to manage and control the process of generating DAI. In MakerDAO, CDP is now referred to as Vaults, but its core functions and mechanisms remain the same. Here is a detailed operation process of CDP/Vault:

i. Generating DAI: Users deposit their crypto assets (such as ETH) into the MakerDAO smart contract to create a new CDP/Vault, and then generate DAI based on the collateral assets. The generated DAI is the portion of the debt that the user borrows, with the collateral serving as the guarantee for the debt.

ii. Over-collateralization: To prevent liquidation, users must maintain their CDP/Vault's collateralization ratio above the system's minimum collateralization ratio (e.g., 150%). This means that if a user borrows 100 DAI, they must lock up collateral worth at least 150 DAI.

iii. Repayment/Liquidation: Users need to repay the generated DAI and a certain stability fee (priced in MKR) to redeem their collateral. If users fail to maintain a sufficient collateralization ratio, their collateral will be liquidated.

Delta represents the percentage change in the price of a derivative relative to the price change of the underlying asset. For example, if the Delta of a certain option is 0.5, when the price of the underlying asset rises by 1 dollar, the price of the option is expected to rise by 0.5 dollars. A Delta-neutral position is an investment strategy that aims to offset the risk of price fluctuations by holding a certain amount of the underlying asset and derivatives. The goal is to make the overall Delta value of the portfolio zero, thereby keeping the value of the position unchanged during price fluctuations of the underlying asset. For instance, for a certain amount of spot ETH, buying an equivalent ETH short perpetual contract.

Ethena tokenizes the "Delta neutral" arbitrage trading of ETH by issuing the stablecoin USDe, which represents the value of Delta neutral positions. Therefore, their stablecoin USDe has the following two sources of income:

Staking Rewards

Basis differential and funding rate

Ethena achieves equivalent collateral and additional returns through hedging.

Project One, Bitsmiley Protocol

Project Overview

The first native stablecoin project in the BTC ecosystem.

On December 14, 2023, a trading platform announced a strategic investment in the stablecoin protocol bitSmiley on the BTC ecosystem. This protocol allows users to mint the stablecoin bitUSD by over-collateralizing native BTC on the BTC network. Additionally, bitSmiley encompasses lending and derivatives protocols, aiming to provide a new financial ecosystem for Bitcoin. Previously, bitSmiley was selected as a high-quality project in the BTC hackathon co-hosted by ABCDE and a trading platform in November 2023.

On January 28, 2024, it was announced that the first round of token financing was completed, with a certain institution leading the investment along with ABCDE, and participants including CMS Holdings, Satoshi Lab, Foresight Ventures, LK Venture, Silvermine Capital, and relevant individuals from Delphi Digital and Particle Network. On February 2, LK Venture, a subsidiary of the Hong Kong listed company Blueport Interactive, announced on platform X that it had participated in the first round of financing for bitSmiley through the Bitcoin network ecological investment management fund BTC NEXT. On March 4, a certain institution released a tweet announcing a strategic investment in the Bitcoin DeFi ecological project bitSmiley.

Operating Mechanism

bitSmiley is a native Bitcoin stablecoin project based on the Fintegra framework. It consists of the decentralized over-collateralized stablecoin bitUSD and a native trustless lending protocol (bitLending). bitUSD is based on bitRC-20, which is a modified version of BRC-20, and is compatible with BRC-20. bitUSD introduces Mint and Burn operations to meet the needs of stablecoin minting and burning.

bitSmiley launched a new DeFi inscription protocol called bitRC-20 in January. The first asset of this protocol, OG PASS NFT, is also known as bitDisc. bitDisc is divided into two levels: Gold Card and Black Card, with Gold Cards allocated to Bitcoin OGs and industry leaders, totaling less than 40 holders. Starting February 4, the Black Card will be made available to the public through a whitelist event and public minting event in the form of BRC-20 inscriptions, which once caused on-chain congestion. Subsequently, the project team announced that they would compensate for unsuccessful inscriptions.

$bitUSD stablecoin operating mechanism

The operational mechanism of $bitUSD is similar to that of $DAI. First, users over-collateralize, and then the bitSmileyDAO on L2 sends the Mint bitRC-20 message to the BTC mainnet after receiving the oracle information and conducting consensus verification.

The logic of liquidation and redemption is also similar to that of MakerDAO, with liquidation taking the form of a Dutch auction.

Project Progress & Participation Opportunities

bitSmiley will launch Alphanet on BitLayer on May 1, 2024. Among them, the maximum loan-to-value ratio (LTV) is 50%. To prevent users from being liquidated, a relatively low LTV ratio has been set. As the adoption rate of bitUSD increases, the project party will gradually raise the LTV.

bitSmiley and the Merlin community will launch an exclusive liquidity incentive grant starting from May 15, 2024, to increase the liquidity of bitUSD. The detailed rules are as follows.