In-depth discussions about BTCFi are very unfavorable for ordinary investors to read; the content is very dry and lacks investment secrets, and is not suitable for most investors, let alone the wealth effect.
I am very happy that more and more people are paying attention to the field of BTCFi. I receive many inquiries from industry peers almost every day, especially regarding the definition of BTCFi, which many people find confusing. So what exactly is BTCFi and what problems can it solve? Let’s discuss it together.
First: Is it native Bitcoin?
This question may seem silly, but if you think carefully, you might break into a cold sweat. Many people believe that the second layer network of #BTC or the staking of BTC is part of BTCFi. The key point here is whether the supported asset is native BTC or wrapped BTC.
The reason for raising this question is based on who controls the core asset of BTC in the BTC ecosystem, and whether the method of control is secure enough. Many believe that sufficient decentralization is the most important, but in the financial field, security is often a necessary condition for large funds to enter, and even a primary condition.
To put it simply, it's about who holds the BTC in custody. Currently, almost all BTC in decentralized BTCFi protocols exists similarly to WBTC, which itself is controversial. The biggest issue is the recognition of WBTC, which we can discuss later. However, it is important to know that when SAB121 passes, the only BTC that banks can support is native BTC.
Therefore, it can be concluded that in the actual application of BTCFi, non-native BTC cannot guarantee safety, nor can it guarantee acceptance and liquidity, especially after SAB121. The only 'second layer network' of BTCFi supported by banks is the custodial BTC notes, which can circulate as 'BTC TOKEN' on the blockchain.
Second: Is native Bitcoin just Bitcoin?
The answer is no. In different environments, 'native' is understood differently. In the blockchain world, BTC=BTC is indisputable, which is also why we previously mentioned that banks only recognize native BTC. However, in the financial world, BTC is also BTC under compliant conditions.
For example, the current BTC spot ETF, although it cannot be used as a real asset in mainstream banks in the US, indeed the law grants these ETF assets compliance. For instance, BlackRock's $IBIT itself is an asset that tracks BTC prices, and even under the current delivery conditions does not support BTC-based delivery. However, because there needs to be sufficient BTC spot as acceptance assets corresponding to ETF assets, it can be considered that the spot ETF itself is BTC.
Moreover, neither BTC spot nor BTC spot ETFs can be directly purchased by all investment institutions, especially in US stock trading where Bitcoin cannot be traded directly. Therefore, $MSTR, which contains a large amount of BTC in its market value, can be seen as the only compliant way to hold BTC in US stocks.
Before SAB121 passes, not only can BTC itself not be custodied and collateralized for loans in banks, but even the assets of BTC spot ETFs cannot be refinanced. However, MSTR can be custodied, collateralized, and refinanced in banks.
Therefore, in a broad sense, native BTC should be assets that are legally recognized and can connect with BTC in the blockchain world. The legal recognition is very important, as it is one of the most critical thresholds for large funds to enter. Only with sufficient compliance will more funds be willing to enter. This is also the reason for the influx of large amounts of funds after the spot ETF passes; compliance is one of the necessary conditions for BTCFi.
Third: Who will provide liquidity for staking Bitcoin?
This question seems even sillier, but think about it carefully. The BTC being staked currently is based on stablecoins in the crypto space, and other than certain specific channels, is it safe to enter the Web2 world? Simply put, can the assets obtained through staking BTC be seamlessly switched for investment in the Web2 world?
The answer is yes, but it requires providing complete proof of funds. The larger the assets, the higher the risks faced. In the current BTCFi ecosystem, dismissing asset acceptance means it is like flowers in a mirror and the moon in water.
But! But! But! Here is the most important question: almost all BTC lending protocols are collateralized BTC. There are agreements or LPs providing funds, and borrowers collateralize BTC to obtain funds, while fund providers use BTC as collateral and earn interest from the lent funds. Is that right?
So for investors holding BTC who do not wish to sell it, does that mean their BTC has no liquidity? This is not the true meaning of BTCFi. BTCFi should provide liquidity for all BTC holders to obtain returns, rather than just being limited to collateralized lending.
In simple terms, for liquidity providers, the method of Web2 or Web3 is not the most important. Both need to address the KYC issue of assets, but for the current liquidity, merely based on the borrowing of funds does not equate to providing liquidity for BTC.
Fourth: How to provide liquidity for Bitcoin?
The essence of liquidity is not collateralized lending. In fact, the best liquidity provider in the crypto space is Curve. The mechanism of Curve itself is that of a central bank. If we imagine the 3 Pool in Curve as the real world, what the 3 Pool does is the acceptance between different national fiat currencies, and not collateralized lending.
Uniswap also provides liquidity solutions, but we assume that the liquidity is a buying and selling relationship between assets and stablecoins. Therefore, the liquidity relationship in BTCFi should not be limited to borrowing and lending but should be based on the liquidity acceptance of BTC itself. After assetizing BTC, the acceptance between equal value assets can allow more BTC holders to enjoy the benefits of holding BTC, rather than just selling or staking it.
This method truly provides a source of returns for BTC. In the #BTCFi principles I designed, both #BTC $MSTR and $IBIT are native BTC, regardless of the injection of BTC.
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