Jessy, Jinse Finance
With the gradual clarification of U.S. regulations on virtual currencies, DeFi has also become one of the main lines in this round of bull market.
Currently, the DeFi discussed under U.S. regulation refers more to Real World Assets (RWA) on-chain, US dollar stablecoins, and PayFi, etc. These practices are generally built on Ethereum and its second layers, or some high-performance new public chains. The relationship with Bitcoin seems to be limited to 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 was born. The so-called BTCFi refers to the financial service platforms and protocols built around Bitcoin and its ecosystem, combining decentralized financial technologies to expand Bitcoin's financial functionalities.
Specifically, this enables Bitcoin itself to participate in on-chain financial activities, enhancing the previously barren smart contract functionality 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. Additionally, some assets related to the BTC ecosystem, such as inscriptions, runes, and RGB++, have also participated in DeFi-related activities.
According to data from DeFiLlama, 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. This suggests that BTCFi is still a blue ocean with high development potential.
At present, BTCFi has given birth to star projects like Babylon, which mainly allows users to stake Bitcoin on another PoS blockchain and earn returns without using third-party custody, bridging solutions, or wrapping services. Are there any other projects worth paying attention to?
Overall development status of BTCFi
According to data from DeFiLlama, representative projects in the BTCFi space, such as Babylon, already have a total TVL exceeding $5 billion. Among them, lending and re-staking protocols are the two core components of the BTCFi ecosystem, capturing the largest market share.
BTCFi Protocol TVL Ranking (data as of December 24, 2024)
According to DeFiLlama's predictions, by 2030, the BTCFi market size will grow to around $1.2 trillion. This year has been a rapid development year for the BTC ecosystem, with the overall TVL of BTC at $300 million this year, which reached $6.5 billion by the end of 2024, an increase of over 20 times.
In the BTCFi space, lending protocols are among the most important applications. Traditionally, Bitcoin, as a digital asset, has not participated in the lending market. However, BTCFi protocols enable Bitcoin to serve as collateral for decentralized lending. Typical projects include Liquidium, Shell Finance, and others.
Then there is the stablecoin protocol, which uses Bitcoin and its derivative assets (such as Ordinals and Rune) as collateral to issue stablecoins pegged to the price of Bitcoin. In stablecoin practice, there are Bitcoin-pegged stablecoins from Shell Finance, and stablecoins collateralized by Bitcoin from Babylon, among others.
The re-staking mechanism is also an innovation in the current BTCFi ecosystem. This year, these projects have made considerable achievements in locked amounts, and there are quite a few re-staking protocols in the BTCFi ecosystem now. Users can re-stake already staked Bitcoin or other crypto assets to earn additional rewards, such as BounceBit and the Lombard Protocol in the Babylon ecosystem, both of which support re-staking.
Introduction to Leading BTCFi Projects
Babylon
When it comes to BTCFi, Babylon is certainly a project that cannot be overlooked, being 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, achieved through Bitcoin Improvement Proposals, with technical upgrades such as Schnorr signatures, Taproot upgrades, and Tapscript updates, enhancing the efficiency and privacy of Staking transactions, allowing Bitcoin holders to lock BTC assets in the Bitcoin mainnet in a self-custodial manner, without the need for third-party custody, using smart contracts, and providing 'secure consensus services' on various BTC layer2s, thereby gaining rich returns from other extensions.
Currently, the Total Value Locked (TVL) exceeds $5 billion, with a rich ecosystem. According to public data, its ecosystem projects cover seven categories: Layer2, 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 Layer2; Kina Finance and LayerBank in DeFi; Bedrock, Chakra, Lombard in liquid staking; 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 their assets more flexibly and obtain liquidity.
One of its core functions is lending services, allowing users to use Bitcoin, Ordinals NFTs, BRC-20, Runes, and other Bitcoin ecosystem assets as collateral to borrow a synthetic asset called BTCX, a process that requires no 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 loans and providing unique earning opportunities for holders of inscriptions.
The second core function is stablecoin issuance. Shell Finance is the first decentralized stablecoin protocol on the BTC mainnet. Users can receive stablecoins by collateralizing the aforementioned Bitcoin ecosystem assets. The launch of this stablecoin has improved the liquidity of BTC layer assets and laid the foundation for the development of BTCFi, which will be expanded to networks like Bitcoin Fractal in the future, further broadening its use cases.
Technically, it employs Discreet Log Contracts (DLC) technology and PSBT technology. The former, proposed by Tad Gredryja, a co-creator of the Bitcoin Lightning Network, allows for more private, secure, and fully automated contract execution, such as automatic liquidation to repay loans when the value of collateralized assets falls below a threshold.
On December 4, 2024, the Shell Finance mainnet was officially launched.
Liquidium
A lending platform based on the Bitcoin blockchain that allows users to use native ordinals as collateral to borrow and lend native Bitcoin, eliminating the need for intermediaries or custodians.
This product supports various collateral types, not only supporting Bitcoin Ordinals as collateral but also planning to support BRC-20 tokens, providing users with more choices and further expanding the application scenarios of Bitcoin assets.
Technically, it is based on the Bitcoin network, with all lending operations occurring directly on Bitcoin's first layer network. The project token LIQUIDIUM was launched on July 22, 2024, and is the first governance token of the runes token standard on Bitcoin. This token aims to decentralize the Liquidium protocol and promote community participation in its governance.
BitSmiley
The project consists of three main components, the first being an over-collateralized stablecoin protocol bitUSD, benchmarked against DAI, allowing users to over-collateralize native BTC to mint stablecoin bitUSD from the bitSmiley Treasury.
The second is the native trustless lending protocol bitLending, which uses peer-to-peer atomic swap technology for trading matching and also introduces an insurance system to optimize deficiencies in traditional lending liquidation processes.
The third is the innovative derivative protocol Credit Default Swaps (CDS), which is essentially a risk transfer tool. On the BitSmiley platform, one party (usually concerned about debt default risk) pays a regular fee to another party (willing to take on that risk for a certain return) similarly to an insurance premium. If a default event occurs concerning the agreed foundational debt (such as debts arising from related Bitcoin ecosystem asset lending), the risk-bearing party is required to compensate the fee-paying party according to the agreement, thereby managing and hedging debt default risk. It integrates NFT slicing CDS and uses an aggregated bidding approach 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 Bitcoin re-staking protocol has the following technical innovations: First, self-custodial staking, allowing Bitcoin holders to stake without transferring assets out of their wallets via time-lock scripts, avoiding third-party risks, adhering to the principle of 'not your keys, not your coins' to ensure asset safety. Second, it employs zero-knowledge proof technology, specifically using Stark to implement the proof system. Bitcoin staking events are verified off-chain through zero-knowledge proofs to access on-chain information without connecting to the Bitcoin network and without needing a trusted setup, enhancing security compared to Snark.
By integrating dispersed Bitcoin liquidity, Chakra provides a more secure and smooth settlement experience. Users can easily stake Bitcoin with one click, leveraging 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 partnership with leading protocols across various ecosystems to provide diverse yield scenarios.
The project launched SolvBTC, the first BTC product that allows for self-generated returns, creating a secure base yield from Bitcoin that was previously idle in users' wallets through staking. SolvBTC captures staking returns from BTC Layer2, restaking returns, and DeFi returns from ETH Layer2, seamlessly integrating various protocols at the application layer to provide rich return opportunities for Bitcoin holders, with returns generated through staking, restaking, and trading strategy returns.
We can understand it as a unified Bitcoin liquidity matrix aimed at consolidating the trillion-dollar liquidity of Bitcoin through SolvBTC. It acts as a yield aggregator for Bitcoin assets; regardless of different BTC assets across different chains like BTCB, FBTC, MBTC, etc., they can be minted into SolvBTC, simplifying the user asset management experience.
This also effectively integrates liquidity opportunities for different Bitcoin assets, allowing one SolvBTC to traverse the chain, forming a unified asset pool that brings more diverse yield opportunities for holders.
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 remarkably, successfully capturing 297.8 BTC in staking capacity, accounting for nearly 30% of Babylon's initial staking total.
Using this product, users can stake wBTC on the ETH chain to Babylon, and after staking their WBTC, they will receive a 1:1 certificate—uniBTC. Users' uniBTC can be exchanged for wBTC at any time. Babylon provides core technical support in this process. Users who stake wBTC and hold uniBTC can earn points from Bedrock and Babylon. Through the collaboration of uniBTC and Babylon, Bedrock provides liquid staking services to support Babylon's PoS chain. By minting uniBTC, it ensures the stability and security of the Babylon chain and further expands 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 can deposit assets like BTC and receive corresponding Liquid Custody Tokens in return. Assets are managed on the Binance platform through a secure custody account and mirroring mechanism via multiparty computation, generating returns for users.
Bouncebit Chain: A Layer 1 blockchain that adopts a proof of stake delegated service consensus mechanism and is fully compatible with the Ethereum Virtual Machine, allowing users to delegate tokens to validation nodes for staking, with the obtained staking proofs 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, providing support for applications such as Bridge, Oracle, Sidechain, and others.
Bouncebit went live in early 2024, raising a total of $7.98 million. In May 2024, its native token BB was launched on Binance.
Lorenzo protocol
A modular Bitcoin L2 infrastructure based on Babylon, aimed at providing a liquidity financial layer for Bitcoin.
Through Babylon's Bitcoin staking and timestamp protocol, it lays the foundation for scalable and high-performance Bitcoin application layers, enhancing Bitcoin's scalability and enabling the execution of smart contracts 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 principal after staking ends; YAT has its own re-staking plan, start and end times, can be traded or transferred before maturity, and holders can receive POS chain rewards. YAT of the same staking plan can also be exchanged, with its value derived from accumulated returns and speculation on future earnings.
The project supports multiple 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, enabling users to apply maximum leverage with a click, improving capital efficiency and optimizing staking returns.
Current Issues in BTCFi
Currently, there are a number of projects in this space, and its total TVL saw explosive growth in 2024, but the BTCFi space itself has not yet genuinely sparked a trend in the industry.
Currently, there are still many issues in the development of this space. The first and most critical issue is that there is often a lack of consensus within the Bitcoin community regarding discussions on certain technological upgrades and innovative solutions, leading to difficulties in advancing Bitcoin ecosystem-related projects.
On the technical level, there are also significant challenges. First, Bitcoin itself has insufficient block scalability, making it unable to achieve automated financial transactions and complex business logic like Ethereum. Furthermore, the interoperability between Bitcoin and other blockchains is limited, and most solutions rely on centralized institutions to enable cross-chain interactions.
Moreover, the transaction fees for BTCFi projects are relatively high, significantly increasing the costs for participants. For example, Babylon has exposed high transaction fee issues during the staking process, including miner fee surges caused by the FOMO effect, as well as high fees for unlocking and withdrawing after staking.
Insufficient liquidity is also a common problem in this space. On one hand, the liquidity risks of Wrapped BTC still exist. For instance, in the Babylon protocol, the Wrapped BTC provided by participating staking nodes does not fully match the liquidity of the aggregated native BTC, relying on the credibility of various aggregation platforms for maintenance. 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 yet formed a diversified and efficient liquidity provision mechanism like in traditional financial markets.
In this context, the total locked value of BTCFi projects remains relatively small compared to mainstream public chains like Ethereum, with the market showing low acceptance and participation, posing significant challenges for project development and promotion.
Looking ahead
Currently, exchanges like Binance and OKX are collaborating with Babylon, Chakra, Bedrock, B², Solv Protocol, and others to carry out a series of pre-staking, farming, and other activities, where users can achieve high returns, making this a very convenient way for ordinary users to participate in BTCFi.
Looking at the projects mentioned above, the current BTCFi ecosystem, in addition to BTC itself, already has a rich variety of asset types participating in BTCFi. For example, inscriptions, runes, and other layer assets based on BTC; rgb++, taproot assets, and other layer assets based on the BTC network; WBTC on the ETH chain and various proof of stake BTC LST or LRT certificates, etc.; these assets expand the liquidity of BTCFi and enrich the scenarios available within BTCFi.
Looking ahead, with technological advancements such as Layer2 technology continuously evolving and maturing, solutions like Rollups will bring significant improvements to Bitcoin's transaction processing capacity.
With the emergence of reliable cross-chain bridges, this 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 such as RSK, AVM, and BitVM, the smart contract functionality of Bitcoin will be enhanced, thus supporting more complex financial business logic and applications.
All these technological advancements will provide robust technical support for decentralized financial services in the Bitcoin ecosystem, enabling more flexible staking, lending, and derivative trading financial products.
With the revival of DeFi, we may see a closer connection between BTCFi and real financial systems, such as the expanding applications of stablecoins in the BTCFi ecosystem, which will provide more efficient and lower-cost solutions for cross-border payments and international trade. For instance, the USDI stablecoin supported by rgb++, designed to be pegged 1:1 to the US dollar and compliant with AML/KYC requirements, becomes an important tool in the international payment field and is expected to be widely deployed in global cross-border e-commerce and international settlement scenarios, promoting Bitcoin's extensive application in the global financial system.
