Author: Jessy, Jinse Finance
With the gradual clarification of U.S. regulations on virtual currencies, DeFi has also become one of the main lines of this bull market.
Currently, what people discuss regarding DeFi under U.S. regulation mainly refers to RWA (real-world assets) on-chain, USD stablecoins, and PayFi, etc. These practices are generally built on Ethereum and its second layers, or some high-performance new public chains. The relationship between all this and Bitcoin seems 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 emerged. The so-called BTCFi refers to financial service platforms and protocols built around Bitcoin and its ecosystem, combined with decentralized finance technologies, allowing the financial functions of Bitcoin to be expanded.
Specifically, this enables Bitcoin itself to participate in on-chain financial activities, enhancing the originally barren smart contract capabilities of Bitcoin. The Bitcoin ecosystem now has more complex DeFi protocols such as centralized exchanges, over-collateralized stablecoins, re-staking, similar to other public chains. Moreover, apart from BTC itself, some assets related to the BTC ecosystem, such as inscriptions, runes, RGB++, and others, have also participated in DeFi-related activities.
According to data from DeFiLlama, the total TVL of BTC currently stands at $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 introduces Bitcoin staking protocols, allowing users to stake Bitcoin on another PoS blockchain and earn returns without using third-party custody, bridging solutions, or wrapping services. What other projects are worth paying attention to?
Overall development situation of BTCFi
According to data from DeFiLlama, representative projects in the BTCFi track, such as Babylon, have a total TVL exceeding $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 will grow to around $1.2 trillion. This year has been a rapid development year for the BTC ecosystem, with the overall BTC TVL at $300 million at the beginning of 2024, and by the end of 2024, it had already reached $6.5 billion, an increase of 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, the BTCFi protocol allows Bitcoin to be used as collateral for decentralized lending. Typical projects include Liquidium and Shell Finance.
Then there is the stablecoin protocol, where 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. In terms of stablecoin practices, there are Bitcoin-pegged stablecoins from Shell Finance, stablecoins collateralized by Bitcoin from Babylon, etc.
Re-staking mechanisms are also an innovation in the current BTCFi ecosystem. This year, these projects have also achieved considerable success in terms of locked amounts. Currently, there are many re-staking protocols in the BTCFi ecosystem. Users can re-stake already staked Bitcoin or other crypto assets to earn additional rewards. For example, BounceBit and Lombard Protocol in the Babylon ecosystem both support re-staking.
Overview of leading BTCFi projects
Babylon
When it comes to BTCFi, Babylon is certainly a project that cannot be ignored, as it is the first project in the industry to introduce Bitcoin's own standard Staking. Essentially, it is a staking, security, and liquidity protocol.
The main innovation lies in the introduction of Bitcoin's own standard Staking, achieved through technical upgrades implemented by Bitcoin Improvement Proposals, 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-custody manner without third-party custody, and output 'secure consensus services' on many BTC layer2, thus obtaining rich yields from other extension supplies.
Currently, the total TVL exceeds $5 billion, with a rich ecosystem. According to publicly available information, its ecosystem projects cover 7 categories including Layer2, 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 Layer2 field; Kina Finance and LayerBank in DeFi; Bedrock, Chakra, and Lombard in the liquidity staking field. These projects have formed a vast ecosystem around Babylon, promoting diversified development of the Bitcoin ecosystem.
Shell Finance
It is the first decentralized lending and stablecoin protocol built on Bitcoin's first layer, aiming to provide 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, allowing users to 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 third parties and is 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 a one-time loan fee to the borrower rather than continuously charging interest through floating rates, achieving 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 BTC mainnet. After users collateralize the aforementioned Bitcoin ecosystem assets, they can obtain stablecoins. The launch of this stablecoin enhances the liquidity of Bitcoin's first-layer assets, laying the foundation for the development of BTCFi, and will further expand to Bitcoin Fractal and other UTXO model networks, broadening the usage scenarios.
Technically, it adopts the careful logging contract (DLC) technology and PSBT technology, the former proposed by Tad Gredryja, a co-creator of the Bitcoin Lightning Network, making the contract execution process more private, secure, and fully automated, such as automatically liquidating to repay loans when the value of staked assets falls below a critical point.
On December 4, 2024, the Shell Finance mainnet has already gone live.
Liquidium
A lending platform based on the Bitcoin blockchain, which 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 choices and further expanding the application scenarios of Bitcoin assets.
Technically, it is based on the Bitcoin network, with all lending operations conducted directly on the first layer of Bitcoin. The project 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
The project has three main components. The first is the over-collateralized stablecoin protocol bitUSD, which benchmarks DAI. Users can over-collateralize native BTC to mint stablecoin bitUSD with bitSmiley Treasury.
The second is the native trustless lending protocol bitLending, which uses peer-to-peer atomic swap technology to facilitate transaction matching and also introduces an insurance system to optimize the deficiencies in traditional lending clearing 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 the one concerned about debt default risk) pays regular fees to another party (the one willing to bear the risk for certain returns), similar to insurance premiums. If a default event occurs regarding the agreed underlying debt (such as debt situations arising from borrowing Bitcoin ecosystem assets), the party bearing the risk must compensate the party paying the fees according to the agreement, thus managing and hedging debt default risk. In operation, it integrates NFT slicing CDS, using 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, self-custody staking, which allows Bitcoin holders to stake without transferring assets out of their wallets through time-lock scripts, avoiding third-party risks, adhering to the principle of 'not your keys, not your coins,' and ensuring asset security. Second, it adopts zero-knowledge proof technology, specifically using Stark to implement the proof system. The staking events of Bitcoin are verified off-chain through zero-knowledge proof to access on-chain information without connecting to the Bitcoin network and without trusted setups, enhancing security compared to Snark.
By integrating fragmented Bitcoin liquidity, Chakra offers a more secure and seamless 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
Bitcoin staking protocols, with the core highlight being collaboration with leading protocols in various ecosystems to provide diverse yield scenarios.
The SolvBTC launched by the project is the first BTC product that allows self-generated yields. By staking, it creates secure base yields from Bitcoin that would otherwise be idle in user wallets. SolvBTC captures staking yields, re-staking yields from BTC Layer2, and DeFi yields from ETH Layer2, seamlessly integrating various protocols in the application layer to provide rich yield opportunities for Bitcoin holders. Its yields are generated through three strategies: staking, re-staking, and trading strategy yields.
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; regardless of whether it is BTCB, FBTC, MBTC, or other different BTC assets on different chains, they can all be minted into SolvBTC, simplifying the user asset management experience.
This effectively integrates liquidity opportunities from different Bitcoin assets. A SolvBTC traverses the chain, forming a unified asset pool and providing holders with more diverse yield 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 outstandingly, successfully seizing a staking quota of 297.8 BTC, accounting for nearly 30% of Babylon's initial staking total.
Using this product, users can stake wBTC on Babylon on the ETH chain, 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. By staking wBTC and holding uniBTC, users can earn Bedrock and Babylon points. Through uniBTC's collaboration with Babylon, Bedrock provides liquidity staking services to support Babylon's PoS chain. By minting uniBTC, 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-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. Assets are managed on the Binance platform through secure custodial accounts and mirroring mechanisms, generating returns for users.
Bouncebit Chain: A Layer1 blockchain that uses proof-of-stake delegated service consensus mechanism and is fully compatible with the Ethereum Virtual Machine, allowing users to delegate tokens to validator nodes for staking, with the obtained 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 to support applications such as Bridge, Oracle, Sidechain, etc.
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.
By using Babylon's Bitcoin staking and timestamp protocol, it lays the foundation for scalable and high-performance Bitcoin application layers, enhancing the scalability of Bitcoin and enabling functions such as smart contract execution.
The project has 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 BTC liquidity across different ecosystems, and holders can redeem the principal after staking ends; YAT has its own re-staking plan, with start and end times, and can be traded and transferred before maturity. Holders can receive POS chain rewards, and YAT from the same staking plan can be exchanged, with its value derived from accumulated yields and speculation on future yields.
The 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 processes by providing internal liquidity, allowing users to apply maximum leverage with one click, increasing capital efficiency and optimizing staking yields.
Current issues in BTCFi
Currently, there are not few projects in this track, and by 2024, its total TVL has also seen explosive growth, but the BTCFi track itself has not yet truly sparked a trend in the industry.
Currently, the development in this track still faces many issues. The most core problem is that discussions within the Bitcoin community regarding some technical upgrades and innovative solutions often struggle to reach consensus, leading to difficulties in advancing projects related to the Bitcoin ecosystem.
On a technical level, there are also significant challenges. Firstly, Bitcoin itself lacks sufficient block expandability, making it impossible to achieve automated financial transactions and complex business logic like Ethereum. Additionally, the interoperability between Bitcoin and other blockchains is limited, with most solutions relying on centralized institutions to implement cross-chain interactions.
Moreover, the transaction fees of the BTCFi project are relatively high, which greatly increases the costs for participants. For example, Babylon has exposed the issue of high transaction fees during the staking process, including soaring miner fees caused by FOMO effects, as well as high fees for unlocking and withdrawing after staking.
Insufficient liquidity is also a common problem in this track. On the one hand, the liquidity risk of Wrapped BTC still exists. For example, in the Babylon protocol, the Wrapped BTC provided by the staking nodes does not fully match the native BTC liquidity it aggregates, relying on the credibility of various aggregation platforms to maintain it. 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 and efficient liquidity provision mechanism like 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 acceptance and participation are not high, facing significant challenges in project development and promotion.
Looking to the future
Currently, exchanges such as Binance and OKX have collaborated with Babylon, Chakra, Bedrock, B², Solv Protocol, and others to carry out a series of pre-staking, farming activities. Users can achieve high yields by participating, which is also a very convenient way for ordinary users to engage in BTCFi.
Looking at the projects mentioned above, it can be found that the current BTCFi ecosystem, apart from BTC itself, has a rich variety of asset types participating in BTCFi. For example, inscriptions, runes, and other first-layer assets based on BTC; RGB++, taproot assets, and other second-layer assets based on the BTC network; WBTC on the ETH chain, various representative staking BTC's LST or LRT certificates, and other wrap/stake assets; these asset liquidities expand the scope of BTCFi and make the scenarios of BTCFi increasingly rich.
Looking to the future, as technology develops, technologies such as Layer2 will continue to evolve and improve, and solutions like Rollups will become more mature, significantly enhancing 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 extensively in DeFi applications across different chains.
With the help of solutions such as rsk, avm, bitvm, the smart contract capabilities of Bitcoin will be enhanced, thus supporting more complex financial business logic and applications.
All these technological advancements will provide more robust technical support for decentralized financial services within the Bitcoin ecosystem, enabling more flexible staking, lending, derivatives trading, and other financial products.
With the resurgence of DeFi, we may see a closer connection between BTCFi and real finance. 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 example, the USD stablecoin supported by rgb++, pegged 1:1 to the dollar, meets AML/KYC compliance requirements, making it an important tool in the international payment field. It is expected to be widely deployed in global cross-border e-commerce and international settlement scenarios, promoting the widespread application of Bitcoin in the global financial system.
