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

As Bitcoin's position in the financial market becomes increasingly solidified, the BTCFi 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 research report deeply analyzes several key tracks of BTCFi, exploring stablecoins, lending services, staking services, re-staking services, and the combination of centralized and decentralized finance.

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 explores 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 can obtain liquidity through Bitcoin lending, while assessing the major lending platforms and products.

In terms of staking services, the report highlights key projects such as Babylon, which provide staking services for other PoS chains by leveraging the security of Bitcoin, while 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 areas of crypto finance by comparing the security, yield, and ecological richness of different asset classes. As the BTCFi sector continues to develop, it is expected to see more innovations and capital inflows, further solidifying Bitcoin's leadership position in the financial domain.

BTCfi Track Overview

BTCFi 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 market size of BTCFi reached approximately 10 billion USD in 2023. Data from Defilama predicts that by 2030, the BTCFi market will reach a size of 1.2 trillion USD, which includes the total locked value (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 institutional participation, such as Grayscale, BlackRock, and JPMorgan entering the Bitcoin and BTCFi markets. The participation of institutional investors has not only brought in substantial capital inflow, increasing market liquidity and stability, but also enhanced the maturity and regulation of the market, bringing higher recognition and trust to the BTCFi market.

This article will delve into several hot areas in the current cryptocurrency financial market, including Bitcoin lending (BTC Lending), stablecoins, staking services, restaking 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.

BTCFi Track Segmentation

1. Stablecoin stablecoin track

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 backing by reserve assets or algorithmic adjustments to the supply, and are widely used in scenarios such as trading, payments, and cross-border transfers, allowing users to enjoy the advantages of blockchain technology while avoiding the extreme 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 is an impossible trinity as well: price stability, decentralization, and capital efficiency cannot be achieved simultaneously.

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

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

Centralized stablecoins are generally backed by fiat currency or physical assets, essentially representing RWA of fiat currency or other physical assets. For example, USDT and USDC are pegged 1:1 to the US dollar, while PAXG and XAUT are pegged to the price of gold. On the other hand, decentralized stablecoins 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 divided into fully collateralized or over-collateralized. Uncollateralized (or under-collateralized) stablecoins are typically what is referred to as algorithmic stablecoins, represented by FRAX and the former UST. Compared to centralized stablecoins, decentralized stablecoins have lower market capitalization and are somewhat more complex in design, but they have also given rise to many star projects. In the BTC ecosystem, the stablecoin projects worth paying attention to are all decentralized stablecoins, so below we will introduce the mechanisms of decentralized stablecoins.

Decentralized Stablecoin Mechanism

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

CDP ( Collateralized Debt Position ) represents a Collateralized Debt Position, which is a mechanism for generating stablecoins by collateralizing crypto assets in a decentralized financial system. It was pioneered by MakerDAO and has since been applied in many different categories of projects such as DeFi, NFTFi, etc.

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 decentralized autonomous organizations (DAOs) to maintain its stability. Its core mechanisms include over-collateralization, collateralized debt positions (CDPs), 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 MakerDAO's smart contract to create a new CDP/Vault, and then generate DAI based on the collateralized assets. The generated DAI is the portion of the debt that the user borrows, with the collateral serving as security for the debt.

ii. Over-collateralization: To prevent liquidation, users must maintain their CDP/Vault collateralization ratio above the system's minimum collateralization ratio (for example, 150%). This means that if a user borrows 100 DAI, they must lock 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 sufficient collateralization, their collateral will be liquidated.

Delta represents the percentage change in the price of derivatives relative to the price of the underlying asset. For example, if the Delta of an option is 0.5, when the price of the underlying asset rises by $1, the price of the option is expected to rise by $0.5. A Delta-neutral position is an investment strategy that offsets price movement risk 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 maintaining the value of the position unchanged during price fluctuations of the underlying asset. For example, for a certain amount of spot ETH, buying an equivalent amount of ETH short perpetual contracts.

Ethena tokenizes the "Delta neutral" arbitrage trading of ETH by issuing 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 equal collateral and additional returns 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 mint the stablecoin bitUSD by over-collateralizing native BTC on the BTC network. At the same time, bitSmiley also includes lending and derivatives protocols, aiming to provide a brand new financial ecosystem for Bitcoin. Previously, bitSmiley was selected as a quality project in the BTC hackathon jointly held by ABCDE and OKX Ventures in November 2023.

On January 28, 2024, it was announced that the first round of token financing was completed, with OKX Ventures and ABCDE leading the investment, and CMS Holdings, Satoshi Lab, Foresight Ventures, LK Venture, Silvermine Capital, as well as relevant personnel from Delphi Digital and Particle Network participating. On February 2, LK Venture, a subsidiary of Blueport Interactive, announced on platform X that it had participated in the first round of financing for bitSmiley through the Bitcoin network ecosystem investment management fund BTC NEXT. On March 4, KuCoin Ventures tweeted to announce a strategic investment in the Bitcoin DeFi ecosystem 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 also 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 is the OG PASS NFT, also known as bitDisc. bitDisc is divided into two levels: Gold Card and Black Card, with the Gold Card allocated to Bitcoin OGs and industry leaders, totaling fewer than 40 holders. Starting from February 4, the Black Card will be made available to the public in the form of BRC-20 inscriptions through a whitelist event and a public minting event, which once caused congestion on the blockchain. Subsequently, the project team announced that they would compensate for unsuccessful inscriptions.

$bitUSD stablecoin operating mechanism

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

The logic of liquidation and redemption is 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. The maximum loan-to-value ratio (LTV) is set at 50%, and to prevent users from being liquidated, a relatively low LTV ratio has been established. As the adoption rate of bitUSD increases, the project team will gradually raise the LTV.

The bitSmiley and 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:

bitSmiley will provide up to 3,150,000 $BIT tokens as rewards to Merlin community members. The rewards will be unlocked based on user behavior within the Merlin community. In the first season,