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, what people refer to as DeFi under U.S. regulation mostly pertains to RWA (Real World Assets) on-chain, USD stablecoins, and PayFi, etc. These practices are generally built on Ethereum and its Layer 2 solutions, or some high-performance new public chains. The relationship with 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 was born. The so-called BTCFi refers to a financial service platform and protocol built around Bitcoin and its ecosystem, integrating decentralized financial technology to expand Bitcoin's financial functionality.
Specifically, this enables Bitcoin itself to participate in on-chain financial activities, enhancing the originally barren smart contract functionality of Bitcoin. The Bitcoin ecosystem now has more complex DeFi protocols like centralized exchanges, over-collateralized stablecoins, and re-staking, similar to other public chains. Moreover, aside from BTC itself, some BTC ecosystem-related assets, such as inscriptions, runes, RGB++, etc., have also participated 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 can be seen that BTCFi is still a blue ocean with high development potential.
Currently, BTCFi has birthed star projects like Babylon, which mainly allows 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 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 Rankings (Data as of December 24, 2024)
According to DefiLlama's forecast, by 2030, the BTCFi market size will grow to about $1.2 trillion. This year marks a year of rapid growth for the BTC ecosystem. At the beginning of 2024, the overall TVL of BTC was $300 million, but by the end of 2024, it had reached $6.5 billion, an increase of over 20 times.
In the BTCFi track, lending protocols are one of the most important applications. Traditionally, Bitcoin, as a digital asset, did not participate in the lending market. However, the BTCFi protocol enables Bitcoin to be used as collateral for decentralized lending. Typical projects include Liquidium, Shell Finance, etc.
Then there are stablecoin protocols. The stablecoin protocol in BTCFi uses Bitcoin and its derivative assets (such as Ordinals and Rune) as collateral to issue stablecoins pegged to the price of Bitcoin. There are practices with stablecoins like Shell Finance's Bitcoin-pegged stablecoin, Babylon's Bitcoin-collateralized stablecoin, etc.
The re-staking mechanism is also an innovation in the current BTCFi ecosystem. This year, these projects have also achieved significant results in terms of locked amounts. There are currently many re-staking protocols in the BTCFi ecosystem. Users can re-stake already staked Bitcoin or other crypto assets to obtain additional rewards, such as BounceBit and Lombard Protocol in the Babylon ecosystem, which both support re-staking.
Introduction to leading BTCFi projects
Babylon
When mentioning BTCFi, Babylon is definitely a project that cannot be overlooked. It is the first project in the industry to introduce Bitcoin's own standard Staking, essentially being a staking, security, and liquidity protocol.
The main innovation point is the introduction of Bitcoin's own standard Staking, achieved through technical upgrades realized by Bitcoin Improvement Proposals, such as Schnorr signatures, Taproot upgrades, and Tapscript updates, improving the efficiency and privacy of Staking transactions, allowing Bitcoin holders to lock BTC assets in the Bitcoin mainnet in a self-custodial manner using opcode contracts without third-party custody, and in many BTC layer 2s, output 'secure consensus services', thus obtaining rich returns from other expansion supplies.
Currently, the TVL exceeds $5 billion and has a rich ecosystem. According to publicly available information, its ecosystem projects cover 7 categories: Layer 2, DeFi, liquidity staking, wallets and custodians, Cosmos, finality providers, and Rollup infrastructure, totaling 91 projects, including numerous well-known projects, such as BisonLabs and BSquared Network in the Layer 2 field; Kina Finance and LayerBank in the DeFi field; Bedrock, Chakra, Lombard in the liquidity staking field. These projects have formed 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 layer one, aimed at providing decentralized lending and stablecoin protocols for the Bitcoin ecosystem, allowing Bitcoin and related asset holders to manage assets and obtain liquidity more flexibly.
One of its core functions is lending services. 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 and is realized through a unique peer-to-protocol lending mechanism, with Shell Finance acting as the counterparty for borrowers. Unlike traditional lending protocols, Shell Finance charges borrowers a one-time loan fee instead of continuously collecting interest through floating rates, enabling interest-free instant loans and providing unique earning opportunities for inscription holders.
The second core function is stablecoin issuance. Shell Finance is the first decentralized stablecoin protocol on the BTC mainnet. After users collateralize the above Bitcoin ecosystem assets, they can obtain stablecoins. The launch of this stablecoin enhances the liquidity of layer one Bitcoin assets, laying a foundation for the development of BTCFi, and will expand to networks like Bitcoin Fractal and other UTXO models in the future, further expanding use cases.
Technically, it employs careful log contracts (DLC) technology and PSBT technology. The former is proposed by Tad Gredryja, co-creator of the Bitcoin Lightning Network, allowing for more private, secure, and fully automated contract execution, such as automatic liquidation to repay loans when the value of staked assets falls below a threshold.
On December 4, 2024, the Shell Finance mainnet has gone live.
Liquidium
A lending platform based on the Bitcoin blockchain that allows users to use native ordinals as collateral to lend and borrow native Bitcoin, thereby eliminating the need for intermediaries or custodians.
This product supports various collateral types, not only Bitcoin Ordinals as collateral but also plans to support BRC-20 tokens, providing users with more options and further expanding the application scenarios of 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, and is 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
The project has three main components. The first is the over-collateralized stablecoin protocol bitUSD, which is comparable to DAI. Users can over-collateralize native BTC to mint the stablecoin bitUSD from bitSmiley Treasury.
The second is the native trustless lending protocol bitLending, which uses peer-to-peer atomic swap technology for transaction matching and introduces insurance systems to optimize traditional lending liquidation process shortcomings.
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 the one concerned about default risk) periodically pays a fee to another party (willing to bear that 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 related Bitcoin ecosystem asset lending, etc.), the party assuming the risk must compensate the party paying the fees as agreed, in order to manage and hedge against default risk. In operation, it integrates NFT slicing 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
Bitcoin re-staking protocol has the following technical innovations: First is self-custodied staking, allowing Bitcoin holders to stake without transferring assets out of their wallets through time-lock scripts, avoiding third-party risks and adhering to the principle of 'not your keys, not your coins' to ensure asset security. Second, it uses zero-knowledge proof technology, specifically using Stark to implement the proof system. Bitcoin staking events are verified off-chain using zero-knowledge proofs to access on-chain information without needing to connect to the Bitcoin network or requiring a trusted setup, enhancing security compared to Snark.
By integrating decentralized 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 within the Babylon ecosystem.
Solv Protocol
Bitcoin staking protocols, with the core highlight being cooperation with leading protocols across ecosystems to provide diverse yield scenarios.
The SolvBTC launched by this project is the first BTC product that allows self-generated returns. By staking, it creates a secure base return for Bitcoin that was originally idle in users' wallets. SolvBTC captures staking returns, restaking returns from BTC Layer 2, and DeFi returns from ETH Layer 2, seamlessly integrating various protocols in the application layer, providing rich earning opportunities for Bitcoin holders, with returns generated through staking, restaking, and trading strategy earnings.
We can understand it as a unified Bitcoin liquidity matrix, aiming to unify the fragmented trillion-dollar liquidity of Bitcoin through SolvBTC. It serves as a yield aggregator for Bitcoin assets, allowing different BTC assets on different chains, such as BTCB, FBTC, MBTC, to be minted into SolvBTC, simplifying the user asset management experience.
This also integrates liquidity opportunities from different Bitcoin assets, allowing a SolvBTC to traverse the chain, forming a unified asset pool, providing holders with more diversified earning opportunities.
Bedrock
Bedrock is a multi-asset liquidity re-staking protocol.
In BTCFi, it uses uniBTC supported by Babylon for re-staking. In the Babylon War, Bedrock performed remarkably, successfully capturing 297.8 BTC in staking quotas, accounting for nearly 30% of Babylon's initial total staking amount.
Using this product, users can stake wBTC on Babylon on the ETH chain and receive a 1:1 certificate—uniBTC. Users' uniBTC can be exchanged for wBTC at any time. Babylon provides core technical support in this process. By staking wBTC and holding uniBTC, users can earn Bedrock and Babylon points. Through the partnership between uniBTC and Babylon, Bedrock provides liquidity 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
Committed 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 BTC and other assets to receive corresponding Liquid Custody Tokens, with assets managed on the Binance platform through secure custodial accounts and mirroring mechanisms, generating returns for users.
Bouncebit Chain: A Layer 1 blockchain that uses a proof of stake delegation consensus mechanism and is fully compatible with the Ethereum Virtual Machine, allowing users to delegate tokens to validation nodes for staking, with the staking proofs usable in on-chain DApps.
Share Security Client: Its logic is consistent with Eigenlayer, allowing the security of Bouncebit Chain to be leased, providing support for Bridge, Oracle, Sidechain, and other applications.
Bouncebit was 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.
Through Babylon's Bitcoin staking and timestamp protocol, a foundation for scalable and high-performance Bitcoin application layers is laid, enhancing Bitcoin's scalability and enabling features like smart contract execution.
This project has an innovative token system, including Liquid Principal Tokens (LPT, such as stBTC) and Yield Accumulation Tokens (YAT). stBTC is anchored 1:1 with staked BTC, unifying BTC liquidity across different ecosystems, allowing holders to redeem their principal after staking ends; YAT has its own re-staking plan, start and end time, can be traded before maturity, and holders can collect POS chain rewards. YAT from the same staking plan can also be exchanged, with its value derived from accumulated earnings and speculation on future earnings.
This project supports various staking methods, such as supporting 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 a single click, improving capital efficiency and optimizing staking yields.
Current issues in BTCFi
Currently, there are not a few projects in this track. In 2024, its total TVL also experienced explosive growth, but the BTCFi track itself has not yet really triggered a wave in the industry.
Currently, there are still quite a few issues in the development of this track. The first core issue is that there is often a lack of consensus within the Bitcoin community regarding discussions on some technical upgrades and innovative solutions, which makes it difficult to advance Bitcoin ecosystem-related projects.
From a technical perspective, there are also significant difficulties. Firstly, Bitcoin itself lacks sufficient block scalability, making it impossible to achieve automated financial transactions and complex business logic like Ethereum. Furthermore, interoperability between Bitcoin and other blockchains is limited, and most solutions rely on centralized institutions to achieve cross-chain interactions.
Moreover, transaction fees for the BTCFi project are also relatively high, significantly increasing the costs for participants. For example, Babylon has exposed the issue of high transaction fees during the staking process, including skyrocketing miner fees caused by FOMO effects, as well as high fees for unlocking and withdrawing operations after staking.
Insufficient liquidity is also a common issue in this track. On one hand, the liquidity risk of wrapped BTC still exists. For example, in the Babylon protocol, the wrapped BTC provided by participating staking nodes does not completely match the native BTC liquidity they aggregate, relying on the credibility 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 borrowing, and have not yet formed as diversified and efficient liquidity provision mechanisms as seen 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 to the development and promotion of projects.
Looking to the future
Currently, exchanges like Binance and OKX have collaborated with Babylon, Chakra, Bedrock, B², Solv Protocol, and others to carry out a series of pre-staking, farming, and other activities, where users can obtain high yields. This is also a very convenient way for ordinary users to participate in BTCFi.
Looking across the aforementioned projects, it can be found that the current BTCFi ecosystem has already included a rich variety of asset types participating in BTCFi, aside from BTC itself. For instance, inscriptions and runes as layer 1 assets based on BTC; RGB++, taproot assets as layer 2 assets based on the BTC network; WBTC on ETH chain, various wrap/stake assets representing staked BTC, etc. These assets expand the liquidity of BTCFi, making its scenarios increasingly rich.
Looking to the future, as technology advances, solutions like Layer 2 technology will continue to develop and mature, and Rollups will become more mature, bringing significant improvements to Bitcoin's transaction processing capabilities.
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 widely in DeFi applications across different chains.
With the aid of solutions like rsk, avm, bitvm, etc., the smart contract functionality of Bitcoin will be enhanced, enabling support for more complex financial business logic and applications.
All these technological advancements will provide stronger technical support for decentralized financial services in the Bitcoin ecosystem, enabling more flexible staking, lending, derivatives trading, and other financial products.
With the revival of DeFi, we might see the connection between BTCFi and real finance becoming tighter, as the application of stablecoins in the BTCFi ecosystem will continue to expand, providing more efficient and low-cost solutions for cross-border payments and international trade. For instance, the USDi stablecoin supported by RGB++ has a 1:1 peg to the dollar, making it an important tool in the international payment field, and is expected to see large-scale deployment in global cross-border e-commerce and international settlement scenarios, which will promote the widespread application of Bitcoin in the global financial system.
