Historically, the development of financial markets has been closely linked to the creation of credit. In the past, financial activities were limited to small communities, but this changed dramatically during the colonial era with the advent of fractional reserve systems and joint-stock companies.
In the 17th century, institutions such as the Swedish central bank and the Bank of England adopted fractional reserve systems. By holding only a small fraction of deposits as reserves while using the rest for loans and investments, they facilitated credit creation and stimulated economic growth. This innovation played a crucial role in establishing Britain as a global financial power at that time.
The same principles apply to today's financial markets. Banks provide loans based on customer deposits, companies raise funds by issuing stocks and bonds, and complex financial instruments such as derivatives enhance market efficiency. These mechanisms increase the money supply, facilitate capital flow, and drive the growth of financial markets.
By January 2025, the number of tokenized bitcoins used in centralized bridging systems within smart contract networks is estimated to be around 160,000 BTC. Additionally, the amount of Bitcoin staked natively through networks like Babylon is approximately 56,000 BTC, collectively accounting for just over 1% of the circulating supply of Bitcoin.
This indicates that, relative to its size, Bitcoin as an asset is underutilized. This inefficiency suggests that the Bitcoin network resembles a financially underdeveloped market where assets are not effectively utilized. The inherent limitations of the Bitcoin network make it extremely challenging to use Bitcoin locally without trust assumptions. These trust requirements are a significant reason why most Bitcoin holders are reluctant to use their assets in decentralized finance.
On the other hand, this highlights the immense untapped potential of Bitcoin DeFi. If Bitcoin can be used locally without relying on trust-based systems, a substantial amount of unused BTC liquidity could be released, potentially ushering in a second golden age for the Bitcoin network.
Unlike ETH or SOL, using BTC in DeFi faces significant challenges. This stems from Satoshi Nakamoto's intentional design decisions that limit the functionality of Bitcoin's stack-based scripting language to prevent potential security vulnerabilities.
For years, efforts have been made to unlock Bitcoin's vast liquidity. The most notable method involves using centralized custodial providers like WBTC and cbBTC, which hold BTC reserves and issue an equivalent amount of wrapped BTC tokens on supported smart contract chains. While this is a straightforward and widely used method, it creates single points of failure due to reliance on custodial providers, making it less than ideal for truly unlocking Bitcoin's liquidity.
Although the pace of development in the Bitcoin ecosystem seems slower than that of ecosystems like Ethereum or Solana, the approval of Bitcoin spot ETFs has sparked a wave of new projects aimed at leveraging Bitcoin's vast liquidity.
Bitcoin Layer 2 solutions aim to address Bitcoin's shortcomings while effectively utilizing BTC. As mentioned earlier, the primary limitations of Bitcoin are its difficulty in executing complex smart contracts and low scalability. If an EVM-compatible network relying on Bitcoin's security can be realized, these issues could be addressed.
A key point is that many projects claiming to be Bitcoin L2 solutions are actually more akin to sidechains. Sidechains are independent chains with their own consensus algorithms and security assumptions. While they may periodically write data to the Bitcoin network, they operate independently. Therefore, they cannot be classified as true Bitcoin L2.
The total value locked (TVL) in DeFi protocols is about $120 billion. In contrast, the total issuance of stablecoins exceeds $200 billion, highlighting the critical role of stablecoins in the blockchain ecosystem.
Yala @yalaorg is named after Yala Peak in Nepal, embodying the ambition to unlock Bitcoin's vast liquidity. Yala can securely and seamlessly issue stablecoins on smart contract networks using native BTC, eliminating the centralized risks of bridging and wrapped tokens, thereby enhancing security and reducing reliance on non-native assets for more efficient portfolio management.
The Yala team consists of alumni from well-known companies such as Alchemy Pay, Binance Labs, Circle, Sky (MakerDAO), Microsoft, and Lido. Yala has successfully raised $8 million in seed funding, led by Polychain Capital, Ethereal Ventures, Galaxy, Amber, and Anagram.
Yala utilizes Cubist services to manage BTC deposits, withdrawals, and transaction validation. Users deposit BTC on the Bitcoin network and mint YBTC on the target chain (e.g., Ethereum). Users destroy YBTC on the target chain and withdraw BTC on the Bitcoin network.
Users who mint YBTC can create vaults on the Ethereum network, deposit YBTC as collateral, and issue YU stablecoins within the collateralization rate allowed by the protocol. YU stablecoins can be used for various DeFi strategies on the Ethereum network to generate additional yield. Alternatively, users can deposit them into Yala's YSR or stable pool to earn rewards from protocol operations and liquidation processes.
YSR is similar to MakerD and Dai savings rates; it is a special module that allows DAI holders to deposit their tokens and earn a share of MakerDAO's income as yield. Similarly, in Yala, when users deposit YBTC and issue YU, the interest income flows into YSR, providing sustainable real yields to YU holders.
How does YU maintain its peg to the dollar? In fact, YU is an over-collateralized stablecoin backed by YBTC. If the value of the collateral drops, the system will maintain health through collateral liquidation. Users must also pay stability fees as interest for issuing stablecoins. If the price of YU drops below $1, the stability fee increases, incentivizing users to repay YU and push up the price. Conversely, if the price of YU rises above $1, the stability fee decreases, encouraging users to issue more YU and drive down the price.
Let's talk about how liquidation occurs. Suppose a user deposits BTC worth $1000 and issues 666% BTC through their YBTC, with a collateralization rate of 150%. If the price of Bitcoin drops and the value of collateral falls to $800, the collateral ratio for the vault becomes 800/666 = about 120%, making it eligible for liquidation. A role known as the custodian will identify this and trigger the liquidation process.
Liquidation occurs through the stable pool. The $666 debt is fully repaid by YU deposited by stable pool participants, who will receive collateral equivalent to the amount of debt repaid. In this example, $666 of the $800 BTC is proportionally allocated to YU depositors, and the remaining collateral surplus ($800 - $666 = $134) will be returned to the original vault owner. If the stable pool lacks enough YU to repay the debt, the remaining debt and collateral will be proportionally redistributed to other vaults to maintain system stability.
Yala aims to encourage ecosystem participants through the use of YALA tokens, enhance system stability, and evolve into a community-driven platform.
The stable pool is a liquidity pool in the Yala protocol designed to prevent bad debts. Since it contributes significantly to system stability, depositors of YU stablecoins in the stable pool will be incentivized with YALA tokens.
In the future, YALA tokens will be used for staking to enhance system security. For example, users can stake YALA tokens on Yala Bridge, liquidity solutions, or LayerZero-based DVN to earn YU. Stakers will contribute to system stability and receive rewards. YALA token holders can participate in key protocol decisions, including collateralization rates, fees, collateral types, and protocol upgrades.
Although Yala is still in its early stages, it seeks to strengthen its services and expand the utility of stablecoins through partnerships with major projects. In addition to the projects listed below, Yala also plans to partner with Plume, Lombrad, and Stakestone.
Yala has achieved remarkable results in its testnet, including over 510,000 BTC deposits, more than $20 billion in YU issuance, and over 1.5 million active users. While incentives may have contributed to these numbers, they also reflect a significant interest in the potential of Bitcoin-backed stablecoins within the blockchain ecosystem.
The stablecoin market is massive.
The Bitcoin market is even larger.
The combination of these two markets could introduce a whole new mechanism for stablecoins with far-reaching implications. This innovation could inject new vitality into the Bitcoin network, where credit creation has traditionally been constrained. With its intuitive applications and robust infrastructure, Yala is poised to play a key role in unlocking Bitcoin's vast liquidity and achieving its ambitious vision.