Article Source: Golden Finance

Author: Jessy, Golden Finance

With the gradual clarification of U.S. regulation on virtual currencies, DeFi has also become one of the main lines of this bull market.

Currently, the DeFi under U.S. regulation that people are discussing more refers to real-world assets on-chain (RWA), dollar stablecoins, PayFi, etc. These practices are generally built on Ethereum and its Layer 2 solutions or some high-performance new public chains. The relationship between all this and Bitcoin seems to only involve wrapped Bitcoin participating in on-chain financial activities.

To change the previous awkward situation where only wrapped Bitcoin could participate in on-chain finance, BTCFi has emerged. The so-called BTCFi refers to financial service platforms and protocols constructed around Bitcoin and its ecosystem, combining decentralized finance technology to expand Bitcoin's financial functionalities.

Specifically, this allows Bitcoin itself to participate in financial activities on-chain, enhancing the previously barren smart contract capabilities of Bitcoin. The Bitcoin ecosystem has also seen more complex DeFi protocols similar to those on other public chains, such as centralized exchanges, over-collateralized stablecoins, and re-staking. Furthermore, assets related to the BTC ecosystem, such as inscriptions, runes, RGB++, etc., are also involved in DeFi-related activities.

According to DeFiLlama data, the current total TVL of BTC is $6.545 billion, while Solana's total TVL is $8.297 billion, and Ethereum's total TVL is $68.31 billion. It is evident that BTCFi is still a blue ocean with high development potential.

Currently, there are standout projects like Babylon emerging on BTCFi, which primarily introduces Bitcoin staking protocols that allow users to stake Bitcoin on another PoS blockchain and earn rewards without using third-party custody, bridging solutions, or wrapping services. What other projects are worth paying attention to?

Overall Development Status of BTCFi

According to DeFiLlama data, the total TVL of representative BTCFi projects such as Babylon has exceeded $5 billion. Among them, lending and re-staking protocols are the two core components of the BTCFi ecosystem, occupying the largest market share.

BTCFi Protocol TVL Ranking (Data as of December 24, 2024)

According to DefiLlama predictions, by 2030, the BTCFi market size will grow to about $1.2 trillion. This year marks a rapid development year for the BTC ecosystem, with the overall TVL of BTC reaching $300 million at the beginning of 2024, and by the end of 2024, it has already reached $6.5 billion, growing more than 20 times.

In the BTCFi track, lending protocols are one of the most important applications. Traditionally, Bitcoin, as a digital asset, has not participated in the lending market. However, BTCFi protocols allow Bitcoin to be used as collateral for decentralized lending. Notable projects include Liquidium and Shell Finance.

Next are the stablecoin protocols, which in BTCFi issue stablecoins pegged to Bitcoin and its derivative assets (such as Ordinals and Rune) as collateral. In stablecoin practice, there are Bitcoin-pegged stablecoins from Shell Finance and stablecoins backed by Bitcoin from Babylon, among others.

The re-staking mechanism is also an innovation in the current BTCFi ecosystem. This year, these projects have achieved considerable success in locked amounts, and there are currently many re-staking protocols in the BTCFi ecosystem. Users can re-stake already staked Bitcoin or other crypto assets to earn additional rewards, such as BounceBit and Lombard Protocol in the Babylon ecosystem, which both support re-staking.

Introduction to Leading BTCFi Projects

Babylon

When it comes to BTCFi, Babylon is certainly an unavoidable project. It is the first in the industry to introduce Bitcoin's own standard Staking, essentially a staking, security, and liquidity protocol.

The main innovation lies in the introduction of Bitcoin's own standard Staking, implemented through Bitcoin Improvement Proposals, such as Schnorr signatures, Taproot upgrade, and Tapscript updates, improving the efficiency and privacy of Staking transactions, allowing Bitcoin holders to lock BTC assets in a self-custodial manner using opcode contracts on the Bitcoin mainnet, and provide 'secure consensus services' on various BTC layer 2s, thereby obtaining rich returns from other expanded offerings.

Currently, the TVL exceeds $5 billion, with a rich ecosystem. According to public data, its ecosystem projects span 7 categories, including Layer 2, DeFi, liquid staking, wallets and custodians, Cosmos, finality providers, and Rollup infrastructure, totaling 91 projects, including many well-known projects, such as BisonLabs and BSquared Network in the Layer 2 field; Kina Finance and LayerBank in the DeFi field; and Bedrock, Chakra, Lombard, etc., in the liquid staking field. These projects form a large ecosystem around Babylon, promoting the diversified development of the Bitcoin ecosystem.

Shell Finance

It is the first decentralized lending and stablecoin protocol built on Bitcoin's first layer, aimed at providing decentralized lending and stablecoin protocols for the Bitcoin ecosystem, allowing holders of Bitcoin and related assets to manage assets and obtain liquidity more flexibly.

One of its core functions is the lending service, allowing users to use Bitcoin, Ordinals NFT, BRC-20, Runes, and other Bitcoin ecosystem assets as collateral to borrow a synthetic asset called BTCX. This process does not require trust in third parties and is realized through a unique peer-to-protocol lending mechanism, with Shell Finance acting as the counterparty to the borrower. Unlike traditional lending protocols, Shell Finance charges a one-time loan fee to borrowers instead of continuously charging interest through floating rates, enabling interest-free instant borrowing and providing unique yield opportunities for inscription holders.

The second core function is stablecoin issuance. Shell Finance is the first decentralized stablecoin protocol on the Bitcoin mainnet, allowing users to obtain stablecoins after collateralizing the aforementioned Bitcoin ecosystem assets. The launch of this stablecoin enhances the liquidity of Bitcoin layer 1 assets, laying the foundation for the development of BTCFi, and will further expand to Bitcoin Fractal and other UTXO model networks, broadening its use cases.

Technically, it employs cautious logging contracts (DLC) technology and PSBT technology. The former, proposed by Tad Gredryja, co-creator of the Bitcoin Lightning Network, allows for a more private, secure, and fully automated contract execution process, such as automatic liquidation when the value of staked assets falls below critical points to repay loans.

On December 4, 2024, the Shell Finance mainnet has been launched.

Liquidium

A lending platform based on the Bitcoin blockchain, which allows users to use native ordinals as collateral to lend and borrow native Bitcoin, thus eliminating the need for intermediaries or custodians.

This product supports various collateral types, not only allowing Bitcoin Ordinals as collateral but also planning to support BRC-20 tokens, providing users with more options and further expanding the application scenarios for Bitcoin assets.

Technically, it is based on the Bitcoin network, and all lending operations are conducted directly on the first layer of the Bitcoin network. The project's token LIQUIDIUM was launched on July 22, 2024, as the first governance token of the Bitcoin rune token standard. This token aims to decentralize the Liquidium protocol and promote community participation in its governance.

BitSmiley

This project has three main components. The first is the over-collateralized stablecoin protocol bitUSD, which is benchmarked against DAI. Users can over-collateralize native BTC to mint stablecoin bitUSD from the bitSmiley Treasury.

The second is the native trustless lending protocol bitLending, which utilizes point-to-point atomic swap technology to facilitate transaction matching and introduces an insurance system to optimize the deficiencies of traditional lending liquidation processes.

The third is the innovative derivatives protocol Credit Default Swaps (CDS), which is essentially a risk transfer tool. On the BitSmiley platform, one party (usually concerned about debt default risk) regularly pays a fee to another party (willing to take on the risk for a certain return), similar to an insurance premium. If a default event occurs regarding the underlying debt (for example, debts arising from lending related to Bitcoin ecosystem assets), the risk-bearing party must compensate the paying party as agreed, managing and hedging the risk of debt default. It integrates NFT slicing with CDS and uses aggregated bidding methods to enhance market efficiency and fairness.

Currently, its token SMILE has been listed on multiple exchanges, such as Bybit, Gate.io, Bitget, and others.

Chakra

The technical innovations of the Bitcoin re-staking protocol are as follows: First is self-custodial staking, where Bitcoin holders can stake without moving assets out of their wallets by using time-locked scripts, avoiding third-party risks, adhering to the principle of 'not your keys, not your coins,' and ensuring asset security. Second, zero-knowledge proof technology is employed, specifically using Stark to implement the proof system. Bitcoin's staking events are verified off-chain through zero-knowledge proof to access on-chain information, without needing to connect to the Bitcoin network or requiring trusted setup, which enhances security compared to Snark.

By integrating fragmented Bitcoin liquidity, Chakra provides a safer and smoother settlement experience. Users can easily stake Bitcoin with one click, utilizing Chakra's advanced settlement network to participate in more liquidity yield opportunities, including LST/LRT projects in the Babylon ecosystem.

Solv Protocol

The Bitcoin staking protocol's core highlight is its collaboration with leading protocols from various ecosystems to provide diverse yield scenarios.

The project has launched SolvBTC, the first BTC product that generates yield by allowing users to create a secure base yield from their previously idle Bitcoin through staking. SolvBTC captures staking yields from BTC Layer 2, re-staking yields, and DeFi yields from ETH Layer 2, seamlessly integrating various protocols in the application layer to provide rich yield opportunities for Bitcoin holders, with yields generated through staking, re-staking, and trading strategy yields.

We can understand this as a unified Bitcoin liquidity matrix aimed at consolidating Bitcoin's fragmented trillion-dollar liquidity through SolvBTC. It acts as a yield aggregator for Bitcoin assets, allowing various BTC assets across different chains, such as BTCB, FBTC, MBTC, etc., to be minted into SolvBTC, simplifying the user asset management experience.

This also effectively integrates liquidity opportunities for different Bitcoin assets, allowing a SolvBTC to traverse the chain and form a unified asset pool, providing holders with more diverse yield opportunities.

Bedrock

Bedrock is a multi-asset liquidity re-staking protocol.

In terms of BTCFi, it uses uniBTC supported by Babylon for re-staking. In the Babylon War, Bedrock performed outstandingly, successfully capturing a staking quota of 297.8 BTC, accounting for nearly 30% of the total initial staking amount in Babylon.

Users of this product can stake wBTC on the Ethereum chain to Babylon, and after staking their WBTC, they will receive a 1:1 voucher—uniBTC, which can be exchanged for wBTC at any time. Babylon provides core technical support in the process. Users staking wBTC and holding uniBTC can earn Bedrock and Babylon points. Through uniBTC and Babylon collaboration, Bedrock offers liquid staking services to support Babylon's PoS chain. By minting uniBTC, the stability and security of the Babylon chain is ensured, further expanding Bedrock products to the BTC chain.

Bouncebit

Dedicated to creating yield infrastructure for Bitcoin, providing institutional-grade yield products, re-staking application scenarios, and CeDeFi services, its specific business includes:

Bouncebit Protocol: Users deposit assets such as BTC and can receive corresponding Liquid Custody Tokens, with assets managed through a secure custodial account and mirroring mechanism on the Binance platform, generating rewards to return to users.

Bouncebit Chain: A Layer 1 blockchain that adopts a delegated proof of stake consensus mechanism and is fully compatible with the Ethereum Virtual Machine, allowing users to delegate tokens to validation nodes for staking, with the staking proof usable in DApps on the chain.

Share Security Client: Its logic is consistent with Eigenlayer, allowing the security of Bouncebit Chain to be rented out, supporting applications such as Bridge, Oracle, Sidechain, etc.

Bouncebit launched in early 2024, raising a total of $7.98 million. In May 2024, its native token BB was listed on Binance.

Lorenzo Protocol

A modular Bitcoin L2 infrastructure based on Babylon, aimed at providing a financial layer of Bitcoin liquidity.

Through Babylon's Bitcoin staking and timestamp protocol, a scalable and high-performance Bitcoin application layer is laid out, enhancing Bitcoin's scalability and enabling smart contract execution and other functions.

This project features an innovative token system, including Liquid Principal Tokens (LPT, such as stBTC) and Yield Accumulation Tokens (YAT). stBTC is pegged 1:1 to the staked BTC, unifying the liquidity of BTC across different ecosystems, allowing holders to redeem their principal after the staking period; YAT has its own re-staking plan with start and end times, can be traded and transferred before maturity, and holders can receive POS chain rewards, while YAT from the same staking plan is interchangeable. Its value derives from accumulated yields and speculation on future yields.

This project supports various staking methods, such as circular and leveraged staking. Circular staking utilizes partnerships with external DEXs, allowing users to stake BTC, borrow more BTC, and increase staking rewards; leveraged staking simplifies the process by providing internal liquidity, allowing users to apply maximum leverage with a click, improving capital efficiency and optimizing staking returns.

Current Issues in BTCFi

There are currently not a few projects in this track, and by 2024 its total TVL has experienced explosive growth. However, the BTCFi track itself has not yet truly sparked a trend in the industry.

Currently, there are still many issues in the development of this track. The most critical issue is that the Bitcoin community often struggles to reach a consensus on discussions regarding certain technical upgrades and innovative solutions, leading to difficulties in advancing projects related to the Bitcoin ecosystem.

On a technical level, there are also significant challenges. First, Bitcoin's block scalability is insufficient, preventing it from achieving automated financial transactions and complex business logic like Ethereum. Additionally, interoperability between Bitcoin and other blockchains is limited, with most solutions relying on centralized institutions for cross-chain interactions.

Moreover, the transaction fees for BTCFi projects are relatively high, which significantly increases the costs for participants. For instance, Babylon exposes the issue of high transaction fees during the staking process, including the soaring miner fees caused by FOMO effects, and the high fees for unlocking and withdrawing after staking.

Insufficient liquidity is also a common issue in this track. On one hand, the liquidity risk of Wrapped BTC still exists. For instance, in the Babylon protocol, the Wrapped BTC provided by participating nodes does not fully match the native BTC liquidity they aggregate, relying on the credibility of various aggregation platforms to maintain stability. On the other hand, the liquidity provision methods for Bitcoin staking, lending, and other financial activities are relatively singular, primarily relying on capital lending, and have not formed a diversified and efficient liquidity provision mechanism like that in traditional financial markets.

In this context, the total locked value of BTCFi projects is still relatively small compared to mainstream public chains like Ethereum, and the market's acceptance and participation are not high, posing significant challenges for project development and promotion.

Looking Ahead

Currently, exchanges such as Binance and OKX have collaborated with Babylon, Chakra, Bedrock, B², Solv Protocol, and others to conduct a series of pre-staking, farming, and other activities, allowing users to achieve high returns, which is also a very convenient way for ordinary users to participate in BTCFi.

Looking at the projects mentioned above, it is found that the current BTCFi ecosystem, in addition to Bitcoin itself, already has a rich variety of asset types participating in BTCFi. For example, inscriptions, runes, and other layer 1 assets based on BTC; RGB++, Taproot assets, and other layer 2 assets based on the BTC network; WBTC on the ETH chain and various LST or LRT certificates representing staked BTC; these assets have expanded the liquidity scope of BTCFi and enriched its scenarios.

Looking ahead, with technological advancements, such as Layer 2 technology continuously evolving and improving, solutions like Rollups will become more mature, significantly enhancing the transaction processing capabilities of Bitcoin.

With the emergence of reliable cross-chain bridges, it will also enable safer and more efficient asset transfers and interactions between Bitcoin and other blockchain networks. Bitcoin will be able to participate more broadly in DeFi applications across different chains.

With the help of solutions like RSK, AVM, BitVM, the smart contract capabilities of Bitcoin will be enhanced, thereby supporting more complex financial business logic and applications.

All these technological advancements will provide stronger technical support for decentralized financial services in the Bitcoin ecosystem, achieving more flexible staking, lending, derivatives trading, and other financial products.

As DeFi revives, we may see the connection between BTCFi and real finance become closer, such as the expanding application of stablecoins in the BTCFi ecosystem, which will provide more efficient and cost-effective solutions for cross-border payments and international trade. For example, the USDi stablecoin supported by RGB++, with its 1:1 peg to the US dollar design and AML/KYC compliance requirements, makes it an important tool in the international payment field. It is expected to be widely adopted in future global cross-border e-commerce and international settlement scenarios, which will promote the extensive use of Bitcoin within the global financial system.