Hotcoin Research | On the eve of the biggest narrative outbreak in the crypto industry: Analysis and outlook on the current status of the BCTFi track

1. Introduction

DeFi has built an open financial system that does not rely on traditional financial intermediaries through smart contract technology, providing users with a variety of financial services such as lending, trading, staking, derivatives, etc. As the main platform of DeFi, Ethereum has dominated the development of the DeFi track with its extensive smart contract functions and active developer community.

As the earliest and most valuable cryptocurrency, Bitcoin has long been regarded as a store of value, but its application in the field of decentralized finance is relatively scarce. This limitation mainly stems from the scalability of the Bitcoin network and the inherent limitations of the scripting language, which makes it difficult to support complex DeFi applications. However, with the development of Layer2 technology and cross-chain technology of the Bitcoin network, the BCTFi track has gradually acquired the ability to connect with DeFi. Today, the BCTFi track is developing rapidly, covering a variety of financial instruments and protocol types such as Bitcoin lending, decentralized trading, staking and stablecoins. Bitcoin's strong network effect and decentralized advantages make the BCTFi track have the potential to complement and further develop with Ethereum DeFi.

This study aims to comprehensively analyze the current status of the BTCFi track and its future development prospects. By deeply exploring the definition, development status, representative projects, comparison with Ethereum DeFi, and the opportunities and risks it faces, this article will provide readers with an in-depth understanding of the field. Now may be on the eve of the outbreak of the Bitcoin ecological narrative, BTCFi may become the next important growth point in the crypto industry.

2. BTCFi Overview

Compared with other crypto assets, Bitcoin, as the most liquid and influential asset in the world, has the largest market value and user base in the world, and has extremely high credibility, which provides a strong foundation for its entry into the DeFi market. Through BCTFi, holders can use Bitcoin as collateral assets to participate in financial activities such as lending, trading, and staking, further releasing the liquidity of Bitcoin.

2.1 Definition of BCTFi

BCTFi, or Bitcoin Financial Infrastructure, refers to decentralized financial applications based on the Bitcoin network and its related technologies and protocols. The core goal of this track is to introduce Bitcoin, the world's largest encrypted asset by market value, into the decentralized financial ecosystem, so that it is no longer just digital gold and a value storage tool, but can participate in a variety of financial activities such as lending, trading, and staking.

BTCFi mainly covers the following areas:

• Decentralized lending: Users can use Bitcoin as collateral to obtain loans without the need for traditional bank intermediaries. Such loans are usually automatically executed using smart contracts and use Bitcoin as collateral.

• Staking and re-staking: By staking Bitcoin, users can earn network rewards or transaction fees. In addition, the concept of restaking has also begun to emerge, allowing users to reinvest the income from staking to obtain higher returns.

• Decentralized stablecoins: BTCFi issues stablecoins pegged to fiat currencies by pledging Bitcoin, allowing users to obtain more stable trading tools in the crypto market and reduce the impact of price fluctuations.

• Liquidity provision and trading: The BTCFi project allows users to provide liquidity on the Bitcoin network, facilitating cross-chain transactions of Bitcoin assets and the establishment of liquidity pools.

Compared with the rapidly developing DeFi ecosystem on Ethereum and other public chain platforms, the BCTFi track started late, which is mainly attributed to the original design of the Bitcoin network and the limitations of the smart contract platform. Bitcoin pays more attention to its security, decentralization and scarcity, as a peer-to-peer payment system and value storage core functions. Ethereum, on the other hand, has massively expanded the application scenarios of blockchain through smart contract technology and has become the core platform for decentralized financial applications.

2.2 Peculiarities of BCTFi

Since its inception, Bitcoin has been positioned as digital gold or a value storage tool, which gives it the following unique financial positioning:

• Security: Bitcoin achieves a high level of network security through the Proof of Work (PoW) mechanism. Its globally distributed network of nodes and miners ensures Bitcoin’s immutability and censorship resistance.

• Decentralization: Bitcoin is currently recognized as the most decentralized blockchain network, with completely decentralized control, and users can conduct peer-to-peer transactions without the need for intermediaries or trust in third parties.

• Scarcity: The total amount of Bitcoin is limited to 21 million. This feature makes it highly resistant to inflation in an inflationary environment and is regarded by many investors as a long-term value preservation tool.

However, these characteristics also limit the application of Bitcoin in more complex financial scenarios. For example, DeFi applications need to support fast transactions, programmable smart contracts, and liquidity of multiple asset types, which are features that Bitcoin failed to provide in its early design. With the rapid development of DeFi on platforms such as Ethereum, the emergence of BCTFi has become particularly important because it enables Bitcoin holders to use their assets to enter the world of DeFi.

The key to the development of BCTFi lies in how to bring Bitcoin into a wider range of financial application scenarios without compromising its core value (security, decentralization, and scarcity). To this end, BCTFi relies on a series of innovative technologies such as Layer2 expansion solutions, cross-chain bridging protocols, and decentralized financial protocols to help Bitcoin holders release the liquidity of their assets and enter the decentralized financial system.

3. Limitations and technological progress of BCTFi track development

Although the BCTFi track has achieved significant development in recent years, the expansion and popularization of BCTFi faces many challenges due to the original design intentions and technical limitations of the Bitcoin network. In this chapter, we will explore the limitations of the BCTFi track and the technological advancements made to overcome these limitations, which provide new possibilities for decentralized financial applications on the Bitcoin network.

3.1 Limitations of the BCTFi Track

Bitcoin's decentralization and security make it a fundamental asset in the cryptocurrency field, but these characteristics also lead to Bitcoin's shortcomings in technical scalability and functionality, especially compared with blockchain platforms that support smart contracts such as Ethereum.

3.1.1 Scalability Issues

The Bitcoin network is designed with a strong emphasis on security and decentralization, which results in a relatively low transaction processing capacity (throughput). Bitcoin can only process about 7 transactions per second, while traditional financial payment networks such as Visa can process thousands of transactions. This scalability limits the scale of Bitcoin's application in daily payment scenarios and decentralized finance.

In addition, since the block time of the Bitcoin network is 10 minutes, it takes a certain amount of waiting time to confirm transactions, which also hinders its application in instant transactions and high-frequency transactions. In decentralized financial applications, users expect fast transaction confirmation time and high liquidity, and these limitations of the Bitcoin network make it face major bottlenecks in building DeFi applications.

3.1.2 Lack of support for smart contracts

The core protocol design of the Bitcoin network does not support complex smart contract functions. Bitcoin uses a simple scripting language that cannot be compared with Ethereum's Turing-complete smart contracts. Smart contracts are the core component of decentralized financial applications, which allow the construction of complex financial protocols such as decentralized exchanges, lending agreements, insurance contracts, etc.

Due to Bitcoin's lack of native support for smart contracts, many DeFi projects have to turn to platforms such as Ethereum that support smart contracts for development. Although Bitcoin dominates the world's crypto assets, this technical limitation has prevented its application potential in decentralized finance from being fully realized.

3.1.3 User Experience and Technical Threshold

The technical complexity of Bitcoin makes it difficult for ordinary users to directly participate in its Layer 2 solutions or cross-chain protocols. Take the Lightning Network as an example. Although it has significantly improved the payment speed and scalability of Bitcoin, users need to have high technical knowledge to run nodes, manage payment channels and other operations. In contrast, many applications in the Ethereum DeFi ecosystem make it easy for ordinary users to participate through simple and intuitive user interfaces, which to a certain extent increases the threshold for using BCTFi.

In addition, the complexity of cross-chain transactions is another major obstacle to the development of the BCTFi track. Cross-chain bridging protocols usually require users to convert assets between multiple blockchains, which involves more operational steps and potential security risks.

3.2 Technological progress promotes the development of BCTFi

Despite the many limitations, the technological innovation of the Bitcoin network in recent years has promoted the rapid development of the BCTFi track. The following major technological advances are gradually overcoming the limitations of Bitcoin in scalability and smart contract support.

3.2.1 Progress in Layer2 Solutions

The application of Layer2 technology has significantly improved the scalability of the Bitcoin network and provided a technical foundation for the prosperity of the BCTFi track. The Lightning Network enables instant payments through off-chain payment channels outside the Bitcoin main chain, significantly reducing transaction costs and increasing transaction speeds. Through the Lightning Network, users can participate in decentralized financial applications such as payments, lending, and decentralized transactions. The Bitcoin side chain brings richer financial application scenarios to Bitcoin by shortening transaction confirmation time, supporting asset issuance and cross-chain transactions.

3.2.2 Introduction of Smart Contract Platform

The lack of Bitcoin smart contract functionality has limited its expansion in the DeFi ecosystem, but in recent years, through the technological innovation of sidechains and independent platforms, smart contracts are gradually being integrated into the Bitcoin ecosystem. Sidechains achieve interoperability with Bitcoin through a two-way peg to the Bitcoin main chain. Stacks interacts with Bitcoin through its unique "PoX" (Proof of Transfer) consensus mechanism, allowing developers to run smart contracts on top of Bitcoin. The Clarity smart contract language of the Stacks platform is specially designed to improve security and transparency, which allows Bitcoin holders to use Bitcoin as an asset for financial operations such as staking and lending without leaving the Bitcoin network.

3.2.3 Breakthrough in cross-chain technology

Cross-chain technology is the key to enabling the flow of Bitcoin in the decentralized financial ecosystem. Through the cross-chain protocol, users can map Bitcoin to other blockchain platforms to participate in richer DeFi applications. The cross-chain transfer of Bitcoin assets is achieved through a decentralized cross-chain bridge, which supports the cross-chain flow of multiple assets such as Bitcoin between different blockchain platforms, introducing greater liquidity and application scenarios for Bitcoin.

Although the development of the BCTFi track faces limitations in scalability, insufficient smart contract support, and user experience, the continuous advancement of technology is driving this track to overcome obstacles. Layer2 solutions, smart contract platforms, and cross-chain protocols have introduced more financial functions and application scenarios to Bitcoin, allowing it to gradually integrate into the DeFi ecosystem.

IV. Project types and representative projects of the BCTFi track

Projects in the BCTFi track cover different types of DeFi applications, mainly including decentralized exchanges (DEX), lending protocols, pledge and re-pledge protocols, stablecoins, etc. These projects expand the application potential of Bitcoin in the financial field by leveraging the decentralization and security of the Bitcoin network.

4.1 Staking/Restaking Projects

Staking is usually used to provide security for blockchain networks, and stakers receive network rewards by locking assets. With the development of the modular track, the concept of Bitcoin staking has become a new dimension, especially projects such as Babylon that provide security through Bitcoin staking.

Babylon

Babylon is a blockchain project founded by Professor David Tse of Stanford University, which aims to provide security for other PoS chains through Bitcoin staking. Babylon directly stakes Bitcoin to the PoS chain through a complex UTXO script contract, realizing a mechanism without cross-chain and third-party custody. This method retains the decentralized nature of Bitcoin while providing security support for the PoS chain. In its ecosystem, multiple liquidity staking protocols such as Bedrock, Solv, Lorenzo and other projects have also emerged, providing users with diversified income channels.

Bouncebit

Bouncebit is a BTC Restaking chain where users can seamlessly convert BTC to packaged versions on other chains (such as BTCB and WBTC) and participate in the on-chain benefits. Bouncebit provides users with multiple benefits through the combination of Cefi and Defi. The on-chain ecosystem supports liquidity staking, node operation rewards, etc.

Chakra

Chakra is a modular settlement network that uses zero-knowledge proof technology to achieve liquidity settlement of Bitcoin. Users can stake Bitcoin through Chakra and participate in liquidity income opportunities. The project is supported by the Starknet ecosystem and works closely with Babylon's staking ecosystem.

4.2 DEX AMM Project

Decentralized exchange AMM (Automated Market Maker) provides users with a way to trade tokens without a centralized order book. Bitcoin ecosystem DEX AMM Swap achieves cross-chain transactions through technologies such as PSBT (Partially Signed Bitcoin Transaction) and atomic swap. Currently, there are 28 BTC ecosystem DEX projects listed by RootData.

Bitflow

Bitflow is a decentralized exchange based on Stacks. Users can earn BTC income through Bitflow's liquidity pool and participate in cross-chain transactions. Bitflow's goal is to build a BTCFi ecosystem so that Bitcoin can be easily integrated into the DeFi ecosystem without introducing custody risks.

Dotswap

Dotswap is a native AMM DEX of the BTC mainnet that supports trading of multiple assets, including Runes, BRC-20, etc. The project provides a secure liquidity pool through MMM (Multilayered Multisig Matrix) technology and realizes cross-chain transactions with the support of PSBT technology.

4.3 Lending Project

Bitcoin lending platforms provide liquidity and new income channels for Bitcoin holders by allowing users to use Bitcoin as collateral to obtain loans or earn interest by lending Bitcoin. Platforms usually set collateral ratios and forced liquidation mechanisms to deal with the risk of Bitcoin price fluctuations. From 2018 to 2019, the cryptocurrency market grew rapidly, and lending platforms such as BlockFi, Celsius Network, and Nexo emerged, while the concept of DeFi promoted the development of decentralized lending platforms. Currently, there are 17 BTC ecological lending projects listed by RootData.

Liquid

Liquidium is a peer-to-peer (P2P) Bitcoin lending platform that allows users to use their Bitcoin-based assets, such as Ordinal Inscriptions, Runes, and BRC20 tokens, as collateral for loans. It implements a secure, decentralized lending mechanism by using Partially Signed Bitcoin Transactions (PSBTs) and Discreet Log Contracts (DLCs) on the Bitcoin Layer 1 network. This approach ensures that users maintain control of their assets without relying on custodial services.

Shell Finance

Shell Finance is a trustless lending protocol built on the Bitcoin L1 network (BiFi = DeFi + NFTFi), which adopts a peer-to-pool model, which can increase lending efficiency by 100 times. It allows users to use Bitcoin inscription assets (including Ordinals, Runes, Atomicals, Stamps, etc.) as collateral to obtain loans. Loans are issued in the form of synthetic Bitcoin assets $BTCX.

4.4 Stablecoin Project

Stablecoins are an important part of the BCTFi track. By providing price stability linked to legal currencies or other assets, stablecoins enable users in the Bitcoin ecosystem to avoid the high volatility of cryptocurrencies and provide a powerful liquidity tool in decentralized transactions, lending and payments. Currently, there are 6 BTC ecosystem stablecoin protocols included in RootData.

bitSmiley

bitSmiley is the first native stablecoin project in the Bitcoin ecosystem, allowing users to mint the stablecoin bitUSD on the Bitcoin network by over-collateralizing BTC. bitSmiley consists of two core components: the stablecoin bitUSD and the decentralized mortgage lending bitLending based on bitUSD. Its stablecoin + decentralized lending business model is also known as the "MakerDAO + Compound" of the Bitcoin ecosystem. The bitSmiley team has made further optimizations based on Brc-20 and proposed an enhanced version of the Brc-20 protocol: bitRC-20. bitRC-20 is compatible with BRC-20, and the Mint and Burn operations have been added to meet the needs of stablecoin minting and destruction.

NUSD

The full name is Nakamoto Dollar, which is issued using the BRC20-5byte protocol. Similar to Ethena's issuance mechanism, NUSD also uses the hedging mechanism of perpetual contracts to achieve price stability. The difference is that NUSD's perpetual contract orders are directly executed through DEX to avoid security risks caused by centralized exchange custody. According to official introduction, the issuance of NUSD is divided into two stages. The first stage is to issue it in a way that is anchored to USDe, and it is bound to Ethena's USDe at a ratio of 1:1. The second stage begins to enter the triangular arbitrage hedging stage.

Yala

Yala launches $YU, an over-collateralized stablecoin. Whether using native Bitcoin or wrapped BTC on EVM as collateral, users can easily mint $YU on any target chain and participate in DeFi protocols in various ecosystems, including cross-chain yield farming, staking, and other DeFi activities, opening up new revenue opportunities. Unlike traditional stablecoin companies that concentrate profits, Yala returns system-generated fees to core $YU holders, ensuring that users can directly benefit from the growth of the ecosystem.

Satoshi Protocol

Users can deposit BTC and interest-bearing assets based on BTC such as LST, mint the US dollar stablecoin $SAT with a collateral rate of 110%, and earn income by participating in transactions, liquidity pools, lending and other scenarios. The protocol has been officially deployed on the BEVM and Bitlayer mainnets, and is also connected to testnets such as BOB, Botanix, B², Anduro, and Omni Network for closed testing.

The track of BTCFi (Bitcoin Financialization) covers multiple fields, from Bitcoin Lending, Staking, Restaking, Decentralized Custody to CeDeFi, etc. Each track has developed rapidly and has seen the emergence of multiple representative projects. The following will provide a detailed overview of the development and representative projects of different tracks.

4.5 Decentralized Custody

As the centralized management issues of Bitcoin WBTC gradually emerge, the market demand for decentralized custody is increasing. Decentralized custody technology provides security for users through multi-signature and non-custodial methods.

WBTC

WBTC is the earliest and most widely used Bitcoin package launched by Bitgo. It bridges Bitcoin assets to the Ethereum ecosystem and uses Ethereum's DeFi scenario to release Bitcoin liquidity. However, this ERC-20 token form of packaged Bitcoin has centralized management issues. In September, Bitgo announced that the multi-signature authority of WBTC reserve assets would be transferred from BitGo to BiT Global, a joint venture controlled by Justin Sun, which caused concerns and disputes among mainstream protocols. Protocols such as Sky (MakerDAO) and Aave have reduced their risk exposure to WBTC.

tBTC

tBTC is a custody protocol launched by Threshold that allows users to cross-chain Bitcoin to Ethereum. Users can use Bitcoin as collateral in DeFi protocols through tBTC. tBTC reduces the security risks brought by centralized packaging through a non-custodial approach and has been widely used on platforms such as Curve Finance.

FBTC

FBTC is a new type of synthetic asset on the entire chain, pegged to BTC at a 1:1 ratio, supporting the circulation of BTC on the entire chain. FBTC uses a multi-party computing hosting provider, and the minting, destruction, and cross-chain bridge of FBTC are managed by the TSS (Threshold Signature Scheme) network run by the FBTC Security Committee and the security company.

5. Comparison between BTCFi and Ethereum DeFi

With the rapid development of decentralized finance (DeFi), Ethereum has been dominant in this field. Its rich smart contract ecosystem and broad developer base make Ethereum the core of DeFi. However, the rise of the BTCFi track has brought new competitiveness to the decentralized financial market. Although BTCFi started late, it has gradually attracted the attention of a large number of investors and developers through Bitcoin's global consensus, security and decentralization advantages. The following is a comparison of the core differences between BTCFi and Ethereum DeFi.

5.1 Differences in Technology Ecosystem

Ethereum's technical advantage lies in its powerful smart contract capabilities. Each account in Ethereum can execute complex logic, thus realizing a variety of DeFi applications such as decentralized lending, liquidity provision, and derivatives trading. This makes Ethereum's DeFi ecosystem full of innovation and diversity. Its standards such as ERC-20 and ERC-721 allow developers to easily create new financial tools and platforms.

In contrast, Bitcoin's native network does not support complex smart contracts. BTCFi's main technical implementation relies on second-layer extension protocols and side chains such as RSK, Liquid, and Lightning Network. Although these technologies increase Bitcoin's programmability, they are still limited in the complexity and flexibility of smart contracts compared to Ethereum. However, BTCFi solves this part of the problem through a cross-chain protocol, allowing Bitcoin to interact with other blockchain platforms and expand Bitcoin's application scenarios.

5.2 Decentralization and Security

Bitcoin is widely regarded as the most decentralized and secure blockchain network in the world. It has extremely high computing power support, strong security and censorship resistance. BTCFi relies on these core advantages of Bitcoin to provide users with higher security when building financial applications, especially in large transactions and long-term asset management.

Although Ethereum is highly decentralized, its network security is not as strong as Bitcoin. Ethereum's consensus mechanism is still transitioning to Proof of Stake (PoS), while Bitcoin's Proof of Work (PoW) has been proven for more than ten years. Although Ethereum has advantages in transaction speed and smart contract complexity, Bitcoin's robustness and decentralization make it more suitable for high-value, low-risk financial applications.

5.3 User Base and Market Demand

Ethereum's DeFi ecosystem has attracted a large number of investors seeking high risk and high returns. Ethereum's rich application scenarios, including decentralized exchanges, lending platforms, derivatives markets, etc., cater to users who are willing to conduct high-frequency trading and speculation in the crypto market. The high-yield opportunities provided by Ethereum DeFi, especially in the fields of liquidity mining and high-interest lending, have become an important factor in attracting such users.

In contrast, BTCFi has a more robust user base, and its user base is mostly long-term Bitcoin investors. These users prefer to achieve low-risk appreciation of Bitcoin through staking or lending. At the same time, BTCFi platforms often provide more robust income and asset management tools, which is in stark contrast to Ethereum DeFi's high-risk, high-yield strategy.

5.4 Cross-chain and interoperability

Ethereum's DeFi ecosystem is very large, and it has established cross-chain bridges with multiple blockchains, allowing assets to be transferred and traded between different blockchains. Ethereum's strong interoperability has attracted cooperation from multiple blockchain projects such as Polkadot and Cosmos, which has not only made Ethereum a leader in the DeFi field, but also promoted the development of the cross-chain financial market.

However, BTCFi has begun to break the isolation of the Bitcoin ecosystem through cross-chain technology, especially the combination with RSK and Liquid, and gradually integrate into the entire decentralized financial market. The development of the BTCFi cross-chain bridge, especially in terms of interoperability with Ethereum, is further enhancing the liquidity and applicability of Bitcoin as a decentralized financial underlying asset. This allows BTCFi to take advantage of the security of Bitcoin while enjoying the flexibility and smart contract functions of Ethereum and other blockchain ecosystems.

5.5 Revenue Model and Risk Management

Ethereum DeFi platforms often attract liquidity providers and borrowers through high returns. For example, liquidity mining and high-interest lending products provide investors with opportunities for rapid appreciation in a short period of time. However, such high returns are accompanied by high risks, and market volatility and smart contract vulnerabilities often bring huge potential losses. The complexity and high risks of the Ethereum DeFi market also discourage many conservative investors.

In contrast, BTCFi's income model is more robust. Through staking and re-staking, Bitcoin holders can obtain relatively stable returns with relatively low risk. In addition, since Bitcoin is the world's largest crypto asset, its value is relatively stable, which enables BTCFi's users to better control risks, especially in long-term asset management. When designing, the BTCFi platform tends to pay more attention to asset security and transparency, attracting investors who are looking for more stable returns in crypto assets.

5.6 Richness of the Application Ecosystem

Ethereum's DeFi ecosystem is undoubtedly the most prosperous at present. Based on Ethereum's smart contracts, users can participate in a variety of financial operations such as decentralized transactions (such as Uniswap, SushiSwap), lending (such as Aave, Compound), staking, derivatives trading, etc. The strength of Ethereum's DeFi ecosystem is not only reflected in the number and types of applications, but also in the interoperability of its ecosystem. Users can easily switch between multiple DeFi platforms and obtain income through liquidity mining, cross-platform staking, etc.

In contrast, the application ecosystem of the BCTFi track is still in its early stages. Although Bitcoin has an advantage in market value and user awareness, the number and variety of DeFi applications in the BCTFi track are still far less than Ethereum due to its lack of native smart contract support. Although the number of these applications is small, BCTFi has gradually attracted more developers to participate by virtue of Bitcoin's global influence and security.

6. Opportunities and risks in the development of BTCFi track

With the rapid rise of the BTCFi track, as an emerging field of decentralized finance, it has shown great potential and abundant opportunities. However, like all emerging markets, the development of BTCFi is also accompanied by corresponding risks. Understanding these opportunities and risks is crucial for future market participants, investors and developers.

6.1 Opportunities in the BTCFi Track

a. Global consensus and acceptance of Bitcoin

As the world's first cryptocurrency, Bitcoin has established a broad consensus around the world and is recognized as a digital gold-like asset. Its advantages such as decentralization, security, and anti-censorship make the BTCFi track have a huge potential user base. As a basic asset, Bitcoin can attract a large number of investors and institutions, especially those who seek a stable and secure way to manage crypto assets. Therefore, the BTCFi track can use the mature foundation of Bitcoin to quickly attract a large number of users and capital into the market.

b. Continued growth of decentralized finance

The booming decentralized finance market provides huge room for growth. As users become more dissatisfied with traditional financial intermediaries, DeFi is gradually becoming an alternative solution. BTCFi can further promote the adoption of decentralized finance through Bitcoin, the most widely recognized crypto asset. Compared with DeFi platforms such as Ethereum, BTCFi will attract more institutional investors to enter this track by relying on the long-term market stability of Bitcoin. In addition, as the decentralized financial ecosystem expands, BTCFi's project types and application scenarios will gradually become richer, further promoting its market growth.

c. Technological progress and application of cross-chain technology

The technical bottlenecks currently faced by BTCFi are mainly concentrated on the limited programmability and scalability of Bitcoin itself. However, the development of cross-chain technology provides new possibilities for the interoperability of Bitcoin with other blockchain ecosystems. Through solutions such as Lightning Network, RSK, Liquid, etc., the BTCFi project is able to connect Bitcoin with other parts of decentralized finance to provide more financial services. These technological advances not only improve the programmability of Bitcoin, but also expand the scope of Bitcoin's application in decentralized finance.

d. Entry of institutional capital

As institutions continue to participate in the crypto market, the BTCFi track has gradually become the focus of institutional investors. Bitcoin's robustness and wide acceptance make it an ideal choice for institutional capital to enter decentralized finance. Many large financial institutions are developing Bitcoin-based financial products such as Bitcoin ETFs, mortgages, and stablecoins, further promoting the development of BTCFi. The entry of institutional capital not only provides a lot of financial support, but also increases the maturity and liquidity of the market.

6.2 Risks of the BTCFi Track

a. Technical bottlenecks and smart contract security

Although the BTCFi track has achieved the programmability of Bitcoin through the second-layer network and sidechain technology, there are still technical bottlenecks compared with blockchains such as Ethereum that are specifically used for smart contracts. Bitcoin's smart contract functions are relatively basic and it is difficult to implement complex decentralized financial operations. In addition, although cross-chain technology provides scalability, it also introduces new security risks, especially in the cross-chain bridging process, there may be risks of technical vulnerabilities or hacker attacks. The security issues of smart contracts are very prominent in decentralized finance, and once the contract vulnerabilities are exploited, it may cause significant losses.

b. Market volatility and regulatory risks

Although the volatility of the Bitcoin market has decreased in recent years, there is still a certain risk of price fluctuations. This is a potential risk for BTCFi projects, especially those lending and staking projects that rely on Bitcoin as collateral. Large fluctuations in Bitcoin prices may lead to insufficient collateral value, which in turn triggers chain liquidation risks. In addition, the regulatory policies for the cryptocurrency market worldwide have not yet been fully clarified, and some countries have tightened their regulation of Bitcoin, which may affect the development of the BTCFi market.

c. User costs and adoption barriers

Although the BTCFi track shows great potential, its complexity and technical barriers may become obstacles to large-scale user adoption. Due to the relatively complex Layer2 and cross-chain technology of the Bitcoin network, the threshold to enter the BCTFi track is high for ordinary users. This technical complexity may hinder users from adopting BCTFi applications on a large scale, especially those who are accustomed to easy-to-use DeFi platforms such as Ethereum. How to lower the participation threshold through a simple and easy-to-understand user interface and smooth user experience will be an important challenge facing BTCFi in the future.

d. Competition with Ethereum DeFi

Although BTCFi has the natural advantages of Bitcoin, compared with the Ethereum DeFi ecosystem, BTCFi still has a certain gap in the richness of application scenarios and developer ecosystem. Ethereum’s DeFi projects are not only numerous in number, but also have endless application innovations, attracting a large number of developers and users. BTCFi faces significant competitive pressure in this area, especially when smart contracts and decentralized application development capabilities are relatively limited. How to maintain competitiveness is an important issue in the development of the BTCFi track.

VII. Outlook and Summary

As an important extension of the Bitcoin network, the BCTFi track is gradually becoming a track that has attracted much attention in the DeFi ecosystem. With the strong network effect of Bitcoin, technological progress and the continuous expansion of decentralized finance, the BCTFi track is expected to become an important force in the global decentralized financial ecosystem. Although the BCTFi track started relatively late on the basis of the Bitcoin network, it has great development potential, especially in the fields of Layer2 expansion, cross-chain bridges, stablecoins, lending and decentralized transactions. BCTFi is expected to form a complementary relationship with other DeFi ecosystems such as Ethereum, and usher in broader growth opportunities in the next few years.

In the long run, the BTCFi track is expected to become an important pillar in the field of decentralized finance. As the world's most stable and decentralized crypto asset, Bitcoin is naturally suitable to become the basic layer in the decentralized financial system. With the continuous advancement of technology and the further maturity of the market, the BTCFi track will gradually get rid of the current technical limitations and expand more financial application scenarios.

In the future, the BTCFi track will not only be limited to basic applications such as lending and staking, but may also develop a series of innovative financial products, such as decentralized derivatives markets, Bitcoin-based financial contracts, decentralized insurance, etc. This will provide Bitcoin holders and cryptocurrency users with a wider range of financial service options, while bringing greater transparency and efficiency to the crypto financial market. In the future decentralized financial world, BTCFi has the potential to become one of the most important narratives in the crypto industry, driving Bitcoin from a value storage tool to a comprehensive financial infrastructure.