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 research report provides an in-depth analysis of several key tracks within BTCFi, exploring stablecoins, lending services, staking services, restaking 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. Next, it explores in detail the mechanisms of stablecoins, including the different types of centralized and decentralized stablecoins, and their roles in the BTCFi ecosystem. In the lending sector, it analyzes how users can obtain liquidity through Bitcoin lending while evaluating 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 earning opportunities for Bitcoin holders. Restaking further unlocks 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 to provide 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 welcome more innovations and capital inflows, further consolidating Bitcoin's leadership position in the financial sector.

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

Overview of the BTCfi Track

Now imagine that you have some cash, you are optimistic about the cryptocurrency market but do not want to take too much risk, and you want to obtain assets with a relatively high ROI, so you choose BTC, known as "digital gold." You just want to hold BTC for the long term, rather than making unnecessary moves because of the fluctuations in coin prices that could cause losses. At this point, you need something that can utilize your BTC, bringing liquidity and functionality to its value, just like DeFi on Ethereum. It not only allows you to hold your assets for the long term but also brings additional returns, allowing for secondary and even tertiary use of the liquidity of your assets, with many ways and projects worth our deep study.

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 size reached approximately $10 billion in 2023. Predictions from Defilama suggest that by 2030, the BTCFi market will reach a scale of $1.2 trillion, which 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 shown significant growth potential, attracting more institutional participation, with firms like Grayscale, BlackRock, and JP Morgan venturing into the Bitcoin and BTCFi markets. The involvement of institutional investors has not only brought in substantial capital inflows, increasing market liquidity and stability, but has also enhanced the maturity and regulatory standards of the market, bringing higher recognition and trust to the BTCFi market.

This article will delve into several popular 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.

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 reserve assets backing 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 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 the degree of centralization and by the type of collateral are two relatively intuitive dimensions. Among the mainstream stablecoins currently, by degree of centralization, they can be divided into centralized stablecoins (represented by USDT, USDC, and FDUSD) and decentralized stablecoins (represented by DAI, FRAX, and USDe). By type of collateral, 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 by a wide margin, accounting for 69.23% of the entire stablecoin market capitalization. DAI, USDe, and FDUSD follow closely behind, ranking 3rd to 5th in market capitalization. All other stablecoins currently account for less than 0.5% of the total market capitalization.

Centralized stablecoins are generally fiat/physical collateralized, essentially representing fiat/other physical assets as RWA. 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 collateralized by crypto assets or are uncollateralized (or under-collateralized). DAI and USDe are both collateralized by crypto assets, which can further be divided into fully collateralized or over-collateralized. Uncollateralized (or under-collateralized) typically refers to what is commonly known as algorithmic stablecoins, represented by FRAX and the former UST. Compared to centralized stablecoins, decentralized stablecoins have a lower market value and are designed to be somewhat more complex, while also giving rise to many star projects. In the BTC ecosystem, the stablecoin projects worth paying attention to are all decentralized stablecoins, so below is an introduction to the mechanisms of decentralized stablecoins.

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 are algorithmic stablecoin mechanisms, which will not be detailed here.

CDP ( Collateralized Debt Position ) represents a Collateralized Debt Position, which is a mechanism to generate stablecoins through the collateralization of crypto assets in a decentralized financial system. It was pioneered by MakerDAO and has since been applied in various categories of projects such as DeFi and NFTFi.

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 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 borrowed by the user, with the collateral serving as the guarantee for the debt.

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

iii. Repayment/Liquidation: Users are required to repay the generated DAI as well as 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 increases by 1 dollar, the price of the option is expected to increase by 0.5 dollars. 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, thus maintaining the value of the position unchanged during fluctuations in the price of the underlying asset. For example, for a certain amount of spot ETH, buy an equivalent ETH short perpetual contract.

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

• 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, 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 encompasses lending and derivatives protocols, aiming to provide a brand new financial ecosystem for Bitcoin. Previously, bitSmiley was selected as a premium project in the BTC hackathon co-hosted by ABCDE and OKX Ventures in November 2023.

On January 28, 2024, it was announced that the first round of token financing was completed, led by OKX Ventures and ABCDE, with participation from CMS Holdings, Satoshi Lab, Foresight Ventures, LK Venture, Silvermine Capital, and relevant personnel from Delphi Digital and Particle Network. On February 2, LK Venture, a subsidiary of Hong Kong-listed Blue Ocean 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, KuCoin Ventures tweeted to announce a strategic investment in the Bitcoin DeFi ecological project bitSmiley.

Operating Mechanism

bitSmiley is a Bitcoin native stablecoin project based on the Fintegra framework. It consists of the decentralized over-collateralized stablecoin bitUSD and the 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 named 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 4th, the Black Card will be open to the public in the form of BRC-20 inscriptions through a whitelist event and public minting event, which once caused congestion on the chain. Subsequently, the project team stated that they would provide support for those who failed to mint.