Jessy, Golden Finance

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

Currently, when people discuss DeFi under US regulation, they are more referring to RWA (real-world assets) on-chain, US dollar stablecoins, and PayFi, etc. These practices are generally based on Ethereum and its Layer 2, 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 emerged. BTCFi refers to the financial service platform and protocols built around Bitcoin and its ecosystem, combining decentralized financial technology to expand Bitcoin's financial functionalities.

Specifically, this enables Bitcoin itself to participate in on-chain financial activities, enhancing the previously sparse smart contract functionality of Bitcoin. The Bitcoin ecosystem now has more complex DeFi protocols similar to other public chains, such as centralized exchanges, over-collateralized stablecoins, and re-staking. Moreover, besides BTC itself, some BTC ecosystem-related assets, such as inscriptions, runes, and RGB++, are also participating in DeFi-related activities.

According to DefiLlama data, the total TVL of BTC is currently $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, star projects like Babylon have emerged in BTCFi, primarily through introducing Bitcoin staking protocols that allow users to stake Bitcoin on another PoS blockchain and earn returns without using third-party custody, bridging solutions, or wrapping services. What other projects deserve attention?

Overall Development Status of BTCFi

According to DefiLlama data, the total TVL of representative projects in the BTCFi track, 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's predictions, by 2030, the BTCFi market size is expected to grow to about $1.2 trillion. This year has been a rapid development year for the BTC ecosystem; at the beginning of 2024, the total TVL of BTC was $300 million, but by the end of 2024, it had reached $6.5 billion, increasing 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 enable Bitcoin to be used as collateral for decentralized lending. Typical projects include Liquidium and Shell Finance.

Next is the stablecoin protocol. The stablecoin protocols in BTCFi use Bitcoin and its derivative assets (such as Ordinals and Rune) as collateral to issue stablecoins pegged to the price of Bitcoin. There are Bitcoin-pegged stablecoins like Shell Finance's and Babylon's stablecoins backed by Bitcoin.

The re-staking mechanism is also an innovation in the current BTCFi ecosystem. This year, these projects have achieved significant milestones in locked assets, 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 the Lombard Protocol in the Babylon ecosystem, both of which support re-staking.

Introduction to Leading BTCFi Projects

Babylon

When mentioning BTCFi, Babylon is definitely a project that cannot be ignored. It is the first project in the industry to introduce Bitcoin's own standard Staking, essentially a staking, security, and liquidity protocol.

The main innovation lies in introducing Bitcoin's own standard Staking, achieved through Bitcoin Improvement Proposals, such as Schnorr signatures, Taproot upgrades, and Tapscript updates, which improve the efficiency and privacy of Staking transactions. This allows Bitcoin holders to lock BTC assets in a self-custodied manner using opcode contracts on the Bitcoin mainnet without needing third-party custody, providing rich yield opportunities through a secure consensus service on various BTC Layer 2s.

Currently, the TVL exceeds $5 billion, with a rich ecosystem. According to public data, its ecosystem projects cover seven categories, including Layer 2, DeFi, liquidity 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 in the liquidity staking field, forming a large ecosystem around Babylon and driving the diversified development of the Bitcoin ecosystem.

Shell Finance

It is the first decentralized lending and stablecoin protocol built on the Bitcoin first layer, aimed at providing a decentralized lending and stablecoin protocol 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 lending services, where users can use Bitcoin, Ordinals NFTs, BRC-20, Runes, and other Bitcoin ecosystem assets as collateral to borrow a synthetic asset called BTCX. This process does not require trust in a third party, achieved 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 borrowers a one-time loan fee 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 above-mentioned Bitcoin ecosystem assets. The launch of this stablecoin enhances the liquidity of BTC Layer 1 assets, laying the foundation for the development of BTCFi, which will further expand to networks with Bitcoin Fractal and other UTXO models, broadening usage scenarios.

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

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

Liquidium

A lending platform based on the Bitcoin blockchain that allows users to use native ordinal numbers as collateral to borrow and lend native Bitcoin, thereby eliminating the need for intermediaries or custodians.

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

Technically, it is based on the Bitcoin network, and all lending operations occur directly on the first layer of Bitcoin. The project token LIQUIDIUM was launched on July 22, 2024, and is the first governance token of the Rune 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 over-collateralized stablecoin protocol bitUSD, which benchmarks DAI, allowing users to over-collateralize native BTC to mint the stablecoin bitUSD at the bitSmiley Treasury.

The second is the native trustless lending protocol bitLending, which uses peer-to-peer atomic swap technology for trade matching and introduces an insurance system to optimize the traditional lending liquidation process.

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 the risk of debt default) pays periodic fees 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 agreed-upon underlying debt (such as debts arising from borrowing related Bitcoin ecosystem assets), the party assuming the risk must compensate the other party according to the agreement to manage and hedge against debt default risks. In operation, it integrates NFT slicing CDS, using aggregated bidding methods to enhance market efficiency and fairness.

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

Chakra

The Bitcoin re-staking protocol has the following technical innovations: first is self-custodied staking, which uses time-lock scripts, allowing Bitcoin holders to stake without transferring assets out of their wallets, avoiding third-party risks and 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 a trusted setup, enhancing security compared to Snark.

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

Solv Protocol

The highlights of the Bitcoin staking protocol are its collaboration with leading protocols in various ecosystems to provide diverse yield scenarios.

The SolvBTC launched by this project is the first BTC product that allows for self-generated yields. By staking, it creates secure base yields from Bitcoin that would otherwise be idle in users' wallets. SolvBTC captures staking yields from BTC Layer 2, re-staking yields, and DeFi yields from ETH Layer 2, seamlessly integrating various protocols at the application layer to provide rich yield opportunities for Bitcoin holders. Its yields are generated through staking, re-staking, and trading strategy yields.

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, allowing users to mint SolvBTC from various BTC assets across different chains, simplifying asset management experiences.

This is equivalent to integrating liquidity opportunities for different Bitcoin assets, with a SolvBTC traversing the chain, forming a unified asset pool that brings more diversified 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 outstandingly, successfully capturing 297.8 BTC in staking quotas, accounting for nearly 30% of the total initial staking amount in Babylon.

Using this product, users can stake WBTC on Babylon via the ETH chain, receiving a 1:1 certificate—uniBTC. Users' uniBTC can be exchanged for WBTC at any time. Babylon provides core technical support in this process. Users staking WBTC and holding uniBTC can earn Bedrock and Babylon points. By minting uniBTC, the stability and security of the Babylon chain are ensured, further expanding Bedrock products to the BTC chain.

Bouncebit

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

Bouncebit Protocol: Users deposit BTC and other assets to receive corresponding Liquid Custody Tokens, with assets managed through a secure custody account and mirroring mechanism on the Binance platform, generating returns for users.

Bouncebit Chain: A Layer1 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, supporting applications like Bridge, Oracle, Sidechain, etc.

Bouncebit launched at the beginning of 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.

By providing Bitcoin staking and timestamp protocols through Babylon, a foundation is laid for scalable and high-performance Bitcoin application layers, enhancing Bitcoin's scalability and enabling functionalities such as smart contract execution.

The project features an innovative token system, including Liquidity Principal Tokens (LPTs, such as stBTC) and Yield Accumulation Tokens (YATs). stBTC is pegged 1:1 to the staked BTC, unifying BTC liquidity across different ecosystems, and holders can redeem their principal after staking ends. YAT has its own re-staking plan, with start and end times, and can be traded or transferred before maturity. Holders can receive POS chain rewards, and YATs of the same staking plan can be exchanged, with their value derived from accumulated yields and speculation on future yields.

This project supports multiple staking methods, such as circular and leveraged staking. Circular staking utilizes external DEX partnerships, 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 one click, enhancing capital efficiency and optimizing staking yields.

Current Issues in BTCFi

Currently, there are not a few projects in this sector, and the total TVL saw explosive growth in 2024, but the BTCFi track itself has yet to truly spark a trend in the industry.

Currently, the development of this sector faces several issues, with the most core issue being that discussions within the Bitcoin community regarding some technical upgrades and innovative solutions often struggle to reach consensus, leading to difficulties in advancing Bitcoin ecosystem-related projects.

On the technical level, there are also significant difficulties. First, Bitcoin itself lacks block scalability, which cannot achieve 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 to achieve cross-chain interaction.

Moreover, the transaction fees of BTCFi projects are relatively high, significantly increasing the costs for participants. For example, Babylon has revealed high transaction fee issues during the staking process, including soaring miner fees due to the FOMO effect, as well as 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 the wrapped version of BTC still exists. For example, in the Babylon protocol, the Wrapped BTC provided by participating staking nodes does not completely match the liquidity of the aggregated native BTC, relying on the reputation of various aggregation platforms to maintain. On the other hand, the liquidity provision methods for financial activities like Bitcoin staking and lending are relatively singular, mainly relying on capital lending and have yet to form a diversified, 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, with the market showing low acceptance and participation, leading to significant challenges in 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, where users can achieve high yields, making it a very convenient way for ordinary users to participate in BTCFi.

Looking at the projects mentioned above, we find that the current BTCFi ecosystem has a rich variety of asset types participating in BTCFi beyond BTC itself. For example, inscriptions and runes are first-layer assets based on BTC; RGB++, taproot assets are second-layer assets based on the BTC network; and WBTC on the ETH chain and various wrapped/stake assets representing staked BTC. The liquidity of these assets expands the scope of BTCFi, making its scenarios increasingly rich.

Looking ahead, as technology advances, solutions like Layer 2 technology will continue to develop and mature, with Rollups and other schemes becoming more mature, significantly enhancing Bitcoin's transaction processing capabilities.

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

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

The advancements in these technologies will provide stronger technical support for decentralized financial services in the Bitcoin ecosystem, enabling more flexible staking, lending, derivative trading, and other financial products.

With the revival of DeFi, we may see the connection between BTCFi and real finance becoming closer, as the application of stablecoins in the BTCFi ecosystem will continue to expand, providing more efficient and cost-effective solutions for cross-border payments and international trade. For example, the USDi stablecoin supported by RGB++, which is pegged 1:1 to the US dollar and complies with AML/KYC requirements, is becoming an important tool in the international payment field and is expected to be widely adopted in global cross-border e-commerce and international settlement scenarios, promoting the widespread application of Bitcoin in the global financial system.