Comprehensive Interpretation of BTCFi: From Lending to Staking, Build Your Own Mobile Bitcoin Bank

Summary

As Bitcoin's position in the financial market continues to strengthen, the BTCFi sector is rapidly becoming the forefront of cryptocurrency innovation. BTCFi encompasses a range of Bitcoin-based financial services, including lending, staking, trading, and derivatives. This research report provides an in-depth analysis of several key areas within BTCFi, exploring stablecoins, lending services, staking services, re-staking services, and the integration of centralized and decentralized finance.

The report first introduces the scale and growth potential of the BTCFi market, emphasizing how the participation of institutional investors brings stability and maturity to the market. It then explores in detail the mechanisms of stablecoins, including the different types of centralized and decentralized stablecoins, as well as their roles in the BTCFi ecosystem. In the lending sector, it analyzes how users can obtain liquidity through Bitcoin lending, while evaluating the major lending platforms and products.

In terms of staking services, the report highlights key projects such as Babylon, which provide staking services for other PoS chains by leveraging the security of Bitcoin, while also creating earning opportunities for Bitcoin holders. Re-staking services further unlock the liquidity of staked assets, providing users with an additional source of income.

In addition, the research report also discusses the CeDeFi model, which combines the security of centralized finance with the flexibility of decentralized finance, providing users with a more convenient financial service experience.

Finally, the report reveals the unique advantages and potential risks of BTCFi compared to other areas of crypto finance by comparing the security, yield, and ecological richness of different asset classes. With the continuous development of the BTCFi sector, more innovations and capital inflows are expected, further consolidating Bitcoin's leadership position in the financial sector.

Keywords: BTCFi, stablecoin, lending, staking, re-staking, CeDeFi, Bitcoin finance

BTCfi Track Overview

BTCFi refers to a series of financial activities centered around Bitcoin, including Bitcoin lending, staking, trading, futures, and derivatives. According to data from CryptoCompare and CoinGecko, the BTCFi market size reached approximately $10 billion in 2023. Data from Defilama predicts that by 2030, the BTCFi market will reach a scale of $1.2 trillion, which includes the total value locked (TVL) of Bitcoin in the decentralized finance (DeFi) ecosystem, as well as the market size of Bitcoin-related financial products and services. Over the past decade, the BTCFi market has gradually shown significant growth potential, attracting more institutional participation, such as Grayscale, BlackRock, and JPMorgan entering the Bitcoin and BTCFi market. The involvement of institutional investors has not only brought in a significant influx of funds, increasing market liquidity and stability, but also enhanced the maturity and regulation of the market, bringing higher recognition and trust to the BTCFi market.

This article will delve into several popular areas in the current cryptocurrency financial market, including Bitcoin lending, stablecoins, staking services, re-staking services, and the combination of centralized and decentralized finance known as CeDeFi. Through detailed introductions and analyses of these areas, we will understand their operational mechanisms, market development, major platforms and products, risk management measures, and future development trends.

BTCFi Track Segmentation

1. Stablecoin stablecoin track

Stablecoins are a type of cryptocurrency designed to maintain a stable value. They are typically pegged to fiat currencies or other valuable assets to reduce price volatility. Stablecoins achieve price stability through reserve-backed assets or algorithmic supply adjustments, widely used in trading, payments, and cross-border transfers, allowing users to enjoy the benefits of blockchain technology while avoiding the extreme fluctuations of traditional cryptocurrencies.

Classifying stablecoins by their degree of centralization and collateral type are two relatively intuitive dimensions. Among the mainstream stablecoins currently, when classified by degree of centralization, they can be divided into centralized stablecoins (represented by USDT, USDC, FDUSD) and decentralized stablecoins (represented by DAI, FRAX, USDe). When classified by collateral type, they can be divided into fiat/physical asset collateral, crypto asset collateral, and under-collateralized.

According to DefiLlama's data on July 14, the total market capitalization of stablecoins is currently reported at $162.372 billion. In terms of market capitalization, USDT and USDC are far ahead, with USDT leading significantly, accounting for 69.23% of the entire stablecoin market. DAI, USDe, and FDUSD follow closely behind, ranking 3rd to 5th in market capitalization. All other stablecoins currently account for less than 0.5% of the total market capitalization.

Centralized stablecoins are mostly fiat/physical collateralized, essentially being RWA of fiat/other physical assets. For example, USDT and USDC are pegged 1:1 to the US dollar, while PAXG and XAUT are pegged to the price of gold. Decentralized stablecoins, on the other hand, are generally collateralized by crypto assets or are uncollateralized (or under-collateralized). DAI and USDe are both collateralized by crypto assets, which can further be subdivided into fully collateralized or over-collateralized. Uncollateralized (or under-collateralized) typically refers to what is commonly known as algorithmic stablecoins, represented by FRAX and the former UST. Compared to centralized stablecoins, decentralized stablecoins have a lower market capitalization and are slightly more complex in design, while also giving rise to several star projects. In the BTC ecosystem, the stablecoin projects worth paying attention to are all decentralized stablecoins, so below we will introduce the mechanisms of decentralized stablecoins.

Decentralized Stablecoin Mechanism

Next, I will introduce the CDP mechanism represented by DAI (over-collateralization) and the contract hedging mechanism represented by Ethena (equal collateralization). In addition, there are algorithmic stablecoin mechanisms, which will not be detailed here.

CDP (Collateralized Debt Position) represents a Collateralized Debt Position, which is a mechanism for generating stablecoins by collateralizing crypto assets within a decentralized financial system. It was pioneered by MakerDAO and has since been applied in various categories of projects such as DeFi, NFTFi, and others.

DAI is a decentralized, over-collateralized stablecoin created by MakerDAO, aimed at maintaining a 1:1 peg with the US dollar. The operation of DAI relies on smart contracts and decentralized autonomous organizations (DAOs) to maintain its stability. Its core mechanisms include over-collateralization, collateralized debt positions (CDPs), liquidation mechanisms, and the role of the governance token MKR.

CDP is a key mechanism in the MakerDAO system used to manage and control the process of generating DAI. In MakerDAO, CDP is now referred to as Vaults, but its core functions and mechanisms remain the same. Here is a detailed operation process of CDP/Vault:

1. Generate DAI: Users deposit their crypto assets (such as ETH) into MakerDAO's smart contract to create a new CDP/Vault, and then generate DAI based on the collateral assets. The generated DAI is part of the debt that the user borrows, with the collateral serving as the guarantee for the debt.

2. Over-Collateralization: To prevent liquidation, users must maintain their CDP/Vault collateralization ratio above the system's minimum collateralization ratio (e.g., 150%). This means that if a user borrows 100 DAI, they must lock up collateral worth at least 150 DAI.

3. Repayment/Clearing: Users need to repay the generated DAI and a certain stability fee (priced in MKR) to redeem their collateral. If users fail to maintain sufficient collateralization, their collateral will be liquidated.

Delta represents the percentage change in the price of a derivative relative to the price of the underlying asset. For example, if the Delta of a certain option is 0.5, when the price of the underlying asset increases by $1, the option price is expected to increase by $0.5. A Delta-neutral position is an investment strategy that holds a certain amount of the underlying asset and derivatives to offset the risk of price fluctuations. The goal is to make the overall Delta value of the portfolio zero, thereby keeping the value of the position unchanged during price volatility of the underlying asset. For example, for a certain amount of spot ETH, buy an equivalent ETH short perpetual contract.

Ethena tokenizes "Delta neutral" arbitrage trading of ETH by issuing a stablecoin USDe that represents the value of Delta neutral positions. Therefore, their stablecoin USDe has the following two sources of income:

• Staking Rewards
• Basis spread and funding rate

Ethena achieves equivalent collateral and additional returns through hedging.

Project One, Bitsmiley Protocol

Project Overview

The first native stablecoin project in the BTC ecosystem.

On December 14, 2023, an investment institution announced a strategic investment in the stablecoin protocol bitSmiley on the BTC ecosystem. This protocol allows users to over-collateralize native BTC to mint the stablecoin bitUSD on the BTC network. At the same time, bitSmiley also includes lending and derivatives protocols, aiming to provide a brand new financial ecosystem for Bitcoin. Previously, bitSmiley was selected as a quality project in the BTC hackathon jointly organized by a certain institution and an investment institution in November 2023.

On January 28, 2024, it was announced that the first round of token financing was completed, with participation from multiple institutions and investors. On February 2, an investment institution under a listed company announced on a social platform that it had participated in the first round of financing for bitSmiley through a Bitcoin network ecological investment management fund. On March 4, an investment institution released information announcing a strategic investment in the Bitcoin DeFi ecological project bitSmiley.

Operating Mechanism

bitSmiley is a Bitcoin native stablecoin project based on a certain framework. It consists of a decentralized over-collateralized stablecoin, bitUSD, and a native trustless lending protocol (bitLending). bitUSD is based on bitRC-20, which is a modified version of BRC-20, and is also compatible with BRC-20. bitUSD introduces Mint and Burn operations to meet the needs of stablecoin minting and burning.

bitSmiley launched a new DeFi inscription protocol called bitRC-20 in January. The first asset of this protocol is the OG PASS NFT, also known as bitDisc. bitDisc is divided into two levels: Gold Card and Black Card, with the Gold Card allocated to Bitcoin OGs and industry leaders, totaling fewer than 40 holders. Starting from February 4, the Black Card will be publicly available through a whitelist event and public minting event in the form of BRC-20 inscriptions, which once caused congestion on the chain. Subsequently, the project team announced that they would compensate for unsuccessful inscriptions.

The $bitUSD stablecoin operates similarly to $DAI, where users first over-collateralize, and then the bitSmileyDAO on L2, after receiving oracle information and conducting consensus verification, issues a Mint bitRC-20 message to the BTC mainnet.

The logic of liquidation and redemption is also similar to MakerDAO, with liquidation taking the form of a Dutch auction.

Project Progress & Participation Opportunities

bitSmiley will launch Alphanet on a certain L2 on May 1, 2024. The maximum loan-to-value ratio ( LTV ) is set at 50%. To prevent user liquidation, a relatively low LTV ratio has been established. As the adoption rate of bitUSD increases, the project team will gradually raise the LTV.

bitSmiley and a certain community will launch an exclusive liquidity incentive grant starting from May 15, 2024, to increase the liquidity of bitUSD. The detailed rules are as follows:

• bitSmiley will provide up to 3,150,000 $BIT tokens as rewards to community members. Rewards will be unlocked based on user behavior in the community. Season 1 timeframe: May 15, 2024 --- August 15, 2024.

• Reward method: the minting of bitUSD reaching the target and adding liquidity to the bitUSD pool on bitCow, the details of the two incentive methods are shown in the figure below. The liquidity incentive fund will be distributed based on the bitPoints obtained by users on a certain chain. The more points a user earns, the more token incentives they will receive.

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