Yesterday I attended the Space organized by COBO and talked about BTCFI. Due to time constraints, I was unable to elaborate in detail, so I wrote this article to explain it in detail.
1. What is BTCFI?
Before studying this issue, we need to have a clear understanding of BTCFI.
BTCFI is a combination of two words, one is BTC and the other is DEFI. We are very familiar with BTC, and although DEFI is often mentioned, different people have different opinions on its exact definition.
The COINBASE article defines it this way:
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DeFi (or “decentralized finance”) is an umbrella term for financial services on public blockchains, primarily Ethereum.
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Translated:
DeFi, or “decentralized finance,” is a general term for financial services on public blockchains, primarily Ethereum.
There are three key points here:
1) Public blockchain, which is what we often call "public chain", is mainly because Ethereum has a complete set of smart contract systems that can realize various functions. At the same time, it is the second largest public chain in terms of market value, so most DEFI products are established on this chain. In principle, this kind of public chain is not restricted, and the BTC chain can also be used as such a platform.
2) Decentralization: Most of them are based on the characteristics of the public chain itself. Of course, the products can also be made in a decentralized form. The main advantage is "no permission required, no third party required".
3) Financial services: This really involves specific business types. Financial services cover a wide range, and transactions, pledges, loans, etc. are all financial services.
Then, for BTCFI, we can define it as follows:
BTCFI is a decentralized financial service system built on the BTC public blockchain.
If we want to measure the value of this track, we can simply refer to the data on ETH:
Currently, DEFI’s market value on ETH accounts for approximately 25%. Combined with BTC’s market value of 1.3 trillion, it is equivalent to a track of more than 300 billion.
2. Let a Hundred Flowers Bloom
Before discussing this issue, let us first analyze what BTCFI needs? Due to the characteristics of BTC, does BTCFI have any new needs?
2.1 FI requirements
We can easily think of the following parts:
1) You must have assets. Assets are the basic elements for achieving FI.
In addition to regular BTC assets, we already have a wide variety of asset types to participate in BTCFI.
>A layer of assets based on the BTC network, such as inscriptions, runes...
> Second-layer assets based on the BTC network, such as rgb, rgb++, taproot asset......
>Stable currency assets, such as USDT on Liquid, are what Shell Finance will do in the future...
>Wrap/stake assets, such as wbtc, future stbtc...
Although some assets have low liquidity, they still expand the scope of FI and make future FI scenarios richer.
2) FI form, the form is the integration of FI complexity.
> Conventional swap is a form, with both layer 1 and layer 2 solutions, as well as on-chain and off-chain solutions. Lightning is preparing to develop into foreign exchange payment and introduce stablecoin payment. EVM-based projects have developed dex. RGB++ also has its own intent-based transaction model, and RGB also has its own set of transaction systems...
>There are projects doing lending, such as Shell Finance, which is doing lending based on the first layer...
>Staking is being done by some projects, and Babylon already has a native staking method based on time-lock...
>There are also projects doing restaking, such as Chakra, which has a zk-proof based on zk-stark and mint stbtc solution...
>There are also projects in asset management, for example, Solv Protocol has introduced BTC assets as a direction of asset management...
>......
3) Implementation path, the path is a combination of fantastic ideas.
In the past, we could achieve this on ETH directly through a technical solution such as smart contracts, but it is different on BTC because BTC’s scripting language is not Turing complete and the script opcodes are very limited, so various forms of implementation paths have emerged.
>Some use sidechain solutions, such as Liquid, Rsk, Merlin...
>Some are based on op-code solutions, such as Babylon, bitvm...
>There are DLC-based solutions, such as Bitlayer, dlc.link, shell finance...
>There are some based on indexer programming, such as atomics......
>Some are based on "one-time sealing", such as rgb, rgb++...
>......
Each route even has different branches and is continuously developing and extending.
4) Profit. Profit is the ultimate goal of FI.
There are many sources of revenue, suitable for different product application scenarios.
>Staking income, such as Babylon's proposal to use BTC as a guarantee of POS chain security to generate staking income
> Asset management income, such as Solv using a variety of financial products to generate income for BTC providers
>Lending income, such as CEX, Shell Finance, etc., which provide lending products and generate income
>......
So, you can see that the development of BTCFI can be described as "a hundred flowers blooming"!
2.2 Special requirements of BTCFI
However, BTC is different from ETH after all. Given the particularity of its network, it has more special requirements for FI:
1) Safety, safety, and safety
I have repeatedly emphasized that the BTC ecosystem pays much more attention to "security" than other ecosystems. This is determined by the characteristics of the BTC ecosystem. From the storage of funds in the wallet to the specific links of participating in the FI plan, security protection is required, and the effective control of "asset ownership" is the key.
I have analyzed the security of various technical solutions at different stages. If you are interested, you can read the previous article.
BTC "cross-chain" method and security analysis
2) Systemic risk
Although ETH’s Restaking has created a new narrative, it has also brought systemic risks to the entire ETH ecosystem, because the security of the POS chain is determined by the value of the staked coins. Once Restaking is “squeezed”, a downward spiral will occur, with the coin price falling and security decreasing, which in turn increases the security risk of the POS chain.
Since BTC is a POW system, in principle there is no such problem. However, once too much FI risk accumulates and creates systemic risk, it is also possible to cause a sharp drop in BTC prices, thereby affecting the bull-bear trend of the entire market. This is very unfavorable for BTCFI, especially at the current early stage of development. It is easy to "die" and take a longer time to be recognized.
3. The road ahead is long and difficult
Although we have seen the current booming development of BTCFI, we also need to see the huge challenges facing this road.
Note: You may compare it with the ETH ecosystem, which is inappropriate. The two have different positions in people's minds. You can try to compare your views on the BTC ecosystem 4 years ago. Yes, if you mentioned this term at that time, people would laugh at you because at that time people believed that BTC could only be used as a store of value.
3.1 Challenges of Recognition
At present, most of the BTC in the market are stored in cold wallets and CEX (the proportion of CEX is decreasing year by year). Most people are still not aware of BTCFI and are not necessarily willing to participate with funds. You can often see people in the market saying that "BTC does not need an ecosystem" and "BTCFI is a false proposition". It is actually difficult to overcome the conceptual rejection, so a longer stage of education and training is required.
A few things I can think of that could speed up this process are:
1) Wealth effect. Making money is the best driver of the market. If there is a safe solution that allows most users to make money during the participation process, it can attract many people and quickly change people's minds.
2) Large-scale adoption of lightning payments. If lightning can be more convenient, stablecoins can be introduced, and regulations are relatively friendly, then more and more people will actively or passively participate in the web2 world, and it will involve the field of life, not just the field of investment. This stickiness will be stronger, thus changing concepts and participating in BTCFI activities.
3.2 Technical Difficulty Challenges
If you pay attention, you can find that the development of solutions based on BTC native technology is relatively slow. For example, RGB took more than 4 years to develop, Lightning took many years to develop, and Babylon took several years to develop the "Timestamp Protocol". The root cause lies in the following points:
1) BTC’s limited scripting capabilities make development quite difficult.
2) The concept of BTC ecology was not popular in the early days, so there was little experience accumulated on various solutions.
3) It is difficult to develop an ecosystem on BTC, and there are few experienced developers.
4) The proposal of new solutions needs to fully consider unknown safety hazards, and more safety tests need to be done.
Various restrictions make it difficult to develop on BTC, so do not require the development progress of BTC projects based on the previous development time concept on ETH. Generally speaking, it is difficult to achieve.
Note: So I can understand why many projects are developed based on EVM compatibility. This can greatly reduce the difficulty of development and quickly promote product formation and bring it to market.
4.BTCFI Outlook
On this basis, I have conceived the development map of BTCFI as follows:
1) Currently in the infrastructure stage, which is also the early stage of BTCFI development;
2) Various solutions will coexist until the market gradually gives an answer;
3) The forms of BTCFI will become more and more diverse and more and more recognized. In this process, several leading projects with a value of over 10 billion will be born, generating a considerable wealth effect. At the same time, BTC developers will usher in a large dividend period and gradually form a mature industry.
4) Stablecoins will be introduced during this period and adopted on a large scale;
5) The market value of BTCFI surpasses that of ETH and the gap is gradually widening.
6) BTCFI becomes the new normal.