Article reprinted from: JiaYi
Written by: JiaYi
I have mentioned many times before that Bitcoin, with a volume of trillions of dollars, is actually the largest and highest-quality "capital pool" in the crypto world.
Last month, Avalon Labs, the largest on-chain lending protocol in the Bitcoin ecosystem, just completed a $10 million Series A financing round led by Framework Ventures. My venture capital firm GeekCartel also participated in it. We hope to work with Avalon and more innovative projects in the Bitcoin ecosystem to transform BTC from a digital value storage to a more active financial instrument.
In fact, for the Bitcoin ecosystem, starting from Babylon and Solv, BTC, as a liquid asset and a niche asset, has clearly evolved into richer on-chain structured income scenarios, gradually generating a unique and self-contained BTCFi ecosystem.
From a sustainable perspective, if the dormant BTC can be revitalized and an efficient and secure liquidity network can be built, it will completely open up the global imagination space for BTC, a trillion-dollar asset, as a DeFi niche asset.
Industry practices to liberate Bitcoin liquidity
DeFiLlama data shows that as of January 9, 2025, the total locked value on the Ethereum chain exceeds US$64 billion, a significant increase of nearly 180% from January 2023 (US$23 billion). However, the Bitcoin ecosystem, which began to gain momentum with the Ordinal wave during the same period, has never been able to keep up with the expansion speed of the Ethereum chain ecosystem, even though BTC's market value and price increase are far better than ETH.
You should know that even if 10% of BTC liquidity is released, it will give birth to a market of up to 180 billion US dollars. If it can reach a TVL ratio similar to ETH (on-chain TVL/total market value, currently about 16%), it will release about 300 billion US dollars of liquidity.
This is enough to drive explosive growth in the BTCFi ecosystem, and it even has the potential to surpass the pan-EVM network and become the largest super-chain financial ecosystem.
From this perspective, the greatest potential for Avalon, a Bitcoin liquidity platform that "allows anyone to benefit from BTC lending", lies here - as of now, it has become the largest lending protocol in the entire BTC ecosystem, second only to DAI and lisUSD.
This also created the record of the DeFi lending protocol with the fastest TVL growth in the history of DeFi. According to official data, Avalon Labs TVL has exceeded US$2 billion, and the locked volume of its Bitcoin stablecoin USDa exceeded US$500 million just one week after its launch.
For current BTC holders, making full use of the BTC assets in their hands is definitely a rigid demand, but at the same time they do not want their BTC to bear too much risk of losing the principal. It would be best to convert fixed assets into liquid assets for easy operation.
Therefore, the on-chain lending protocol based on Bitcoin is destined to usher in a window of opportunity, which is also the opportunity for Avalon - the interest rate for project lending is fixed at 8%, and the pledged Bitcoin is managed by professional institutions. At the same time, the borrowed stablecoins are in unlimited supply, which allows BTC holders to have more sufficient liquidity to participate in other projects in the ecosystem.
The logic of this gameplay has also been certified by the market. It is worth mentioning that, unlike other TVL project strategies, Avalon officials focus on the healthy construction of retail investors in the entire ecosystem. It is not just a game for big investors. Anyone can participate and use leverage to increase the rate of return as much as possible within a safe range.
How much is Bitcoin stablecoin worth?
From the perspective of stablecoins, on-chain decentralized stablecoins are still dominated by collateralized debt position (CDP) stablecoins - MakerDAO's DAI is the largest, followed by liUSD, USDJ, etc.
Essentially, a CDP doesn’t look like a loan — a borrower mints a CDP, the protocol oracle calculates the USD value at a 1:1 price, the CDP can be sold on the open market, allowing the borrower to “borrow” another asset, and the lender receives the CDP.
To put it simply, this is an extension of the use of stablecoins based on lending scenarios, which is equivalent to creating an additional liquidity trading pool for assets that are dormant on weekdays. Taking Avalon as an example, its ecosystem currently has four core business segments: USDa, a yield-generating stablecoin based on Bitcoin collateral; a lending protocol based on USDa; a hybrid lending platform connecting DeFi and CeFi; and a decentralized lending protocol that supports BTC staking.
This is also the reason why stablecoin protocols and lending protocols can easily penetrate each other - for example, Aave and MakerDAO, which are based on lending, are running in both directions, one launching the native stablecoin GHO, and the other accelerating the construction of its own lending scenario coverage.
Therefore, on the same basis, Avalon's liquidity market can build a stablecoin USDa market through liquidity design while the "lending" relationship of the underlying assets is formed, and provide users with fixed-income products.
In a word, Avalon has really made it possible for anyone to benefit from BTC lending, turning Bitcoin from an idle asset into a more liquid one. This not only helps the Bitcoin ecosystem solve the stablecoin problem that has plagued it for a long time, but also because of the cross-chain compatibility achieved with the help of LayerZero technology, users can also seamlessly operate USDa in multiple DeFi ecosystems without the need for a third-party cross-chain bridge, which in disguise brings the liquidity of the Bitcoin ecosystem to other chains.
It should be noted that most BTC is idle. Since it has sufficient safety margin compared to other altcoin assets, many OGs or Maxis have no motivation and are unwilling to take the risk of cross-chaining it to Ethereum and other ecosystems. This has caused most BTC to remain dormant for a long time, and the scale of BTCFi has been stagnant.
USDa is a relatively important part of this. On the one hand, USDa fills the missing DeFi infrastructure (lending agreement) part in the Bitcoin ecosystem. On the other hand, Avalon's USDa takes advantage of the CeDeFi lending platform, allowing users to use USDa to obtain USDT from CeFi liquidity providers, solving the peg problem.
It also provides the Bitcoin network with a basic framework that can efficiently utilize assets and activate dormant BTC, allowing more BTC Holders to safely participate in on-chain liquidity activities and safely put large amounts of dormant BTC into DeFi liquidity pools for exchange or to earn returns.
Conclusion
It is foreseeable that as Bitcoin assets gradually emerge from their slumber, BTCFi is very likely to become a new DeFi asset direction with a scale of hundreds of billions of dollars, and a key tool for building a prosperous on-chain ecosystem.
As an investor in Avalon, which has become the absolute leader in Lending in the BTCFi track in just a few months, I also firmly believe that Avalon and BTCFi will have better performance in the future - building a variety of financial product forms and DeFi scenarios with BTC as the core, and redefining the role of BTC in the DeFi field of the entire network.
As for whether BTC’s deep integration in the DeFi field can reach a critical turning point, it is worth looking forward to.
