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

Abstract

As Bitcoin's status in the financial market becomes increasingly solidified, the BTCFi sector is becoming the forefront of cryptocurrency innovation. This research report delves into several key areas of BTCFi, including stablecoins, lending, staking, re-staking services, and the integration of centralized and decentralized finance. The report introduces the market size and growth potential of BTCFi, emphasizing the stability and maturity brought to the market by institutional investor participation. It thoroughly discusses mechanisms of stablecoins, lending platforms, staking services, etc., and analyzes how the CeDeFi model combines the security of centralized finance with the flexibility of decentralized finance. Finally, by comparing the security, yield, and ecological richness of different asset classes, it reveals the unique advantages and potential risks of BTCFi. It is expected that the BTCFi sector will see more innovations and capital inflow, further solidifying Bitcoin's leadership position in the financial domain.

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

BTCfi Track Overview

Bitcoin Finance ( BTCFi ) is a series of financial activities centered around Bitcoin, including Bitcoin lending, staking, trading, futures, and derivatives. According to data, the BTCFi market size reached approximately $10 billion in 2023, and it is expected to reach $1.2 trillion by 2030. Over the past decade, the BTCFi market has shown significant growth potential, attracting more and more institutional participation, such as Grayscale, BlackRock, and JPMorgan. The participation of institutional investors not only brings in substantial capital inflow, increasing market liquidity and stability but also enhances market maturity and regulation.

This article will delve into several popular areas of the BTCFi market, including Bitcoin lending, stablecoins, staking services, re-staking services, and CeDeFi. Through detailed analysis of these areas, we will understand their operating mechanisms, market development, major platforms and products, risk management measures, and future development trends.

BTCFi Track Segmentation

1. Stablecoin track

Introduction

Stablecoins are cryptocurrencies designed to maintain a stable value, typically pegged to fiat currencies or other assets. They achieve price stability through backing by reserve assets or algorithmic adjustments to supply, widely used in scenarios such as trading, payments, and cross-border transfers.

Classified by the degree of centralization, it can be divided into centralized stablecoins ( such as USDT, USDC ) and decentralized stablecoins ( such as DAI, FRAX ). Classified by collateral type, it can be divided into fiat/physical collateral, crypto asset collateral, and under-collateralized.

Currently, USDT and USDC have a significant lead in market capitalization, accounting for most of the total market cap of stablecoins. Decentralized stablecoins such as DAI and USDe have relatively smaller market capitalizations, but their designs are more complex, giving rise to several star projects.

Decentralized Stablecoin Mechanism

The CDP mechanism represented by DAI ( with over-collateralization ) and the contract hedging mechanism represented by Ethena ( with equal collateralization ) are two main decentralized stablecoin mechanisms.

The CDP mechanism allows users to generate stablecoins by collateralizing cryptocurrency assets. Users must maintain a sufficient collateralization ratio to prevent liquidation. During liquidation, the system will sell part of the collateral to repay the debt.

The contract hedging mechanism maintains the stablecoin price through delta-neutral positions. For example, for a certain amount of spot ETH, purchase an equal value of ETH short perpetual contracts to hedge against price risk.

Project 1, Bitsmiley Protocol

BitSmiley is the first native stablecoin project in the BTC ecosystem, allowing users to mint the stablecoin bitUSD by over-collateralizing native BTC on the BTC network. The project has completed multiple rounds of financing and has received support from several well-known institutions.

BitSmiley is based on the Fintegra framework and consists of the decentralized over-collateralized stablecoin bitUSD and a native trustless lending protocol. bitUSD is based on a modified BRC-20 protocol and is compatible with BRC-20.

The project will launch Alphanet on BitLayer in May 2024, with a relatively low maximum loan-to-value ratio of 50% for (LTV). The project also launched a liquidity incentive program, offering users rewards of up to 3.15 million $BIT tokens.

Project Two, Bamk.fi(NUSD)

Bamk.fi is the issuer of NUSD ( Nakamoto Dollar ), NUSD is a synthetic dollar on Bitcoin L1. The project design is divided into two phases: the first phase supports NUSD with USDe 1:1; the second phase is supported by a delta-neutral Bitcoin position and earns native yield.

Currently, NUSD can be minted 1:1 with USDT. The project token BAMK is issued in the form of runes, with a total supply of 21 billion.

Project Three, Yala Labs

Yala has built a modular infrastructure that allows its stablecoin $YU to flow freely across various ecosystems, releasing BTC liquidity. Core products include:

• Over-collateralized stablecoin $YU
• Metamint: Allows users to conveniently mint $YU using native Bitcoin across various ecosystems.
• Insurance Derivatives: Providing comprehensive insurance solutions within the DeFi ecosystem

The technical architecture of Yala revolves around the Liquidity Verification Network (LVN), aimed at providing secure liquidity verification for digital assets.

Project Four, Satoshi Protocol

Satoshi Protocol is the first CDP stablecoin protocol in the BTC ecosystem, based on the BEVM ecosystem. Users can mint the USD stablecoin $SAT by depositing BTC and other BTC-based interest-generating assets with a minimum collateralization ratio of 110%.

The project has completed multiple rounds of financing and received support from well-known institutions. It is currently developing a rune stablecoin based on the Bitcoin mainnet and achieving the vision of a "fully on-chain stablecoin" through collaboration with other projects.

Project Five, BTU

BTU is the first decentralized stablecoin project in the Bitcoin ecosystem, utilizing the collateralized debt position (CDP) model (. It completes all operations within the Bitcoin network without the need for cross-chain bridges and introduces a mechanism to prove BTC holdings without transactions.

BTU provides BTC holders with a trustless and decentralized way to participate in the DeFi ecosystem by unlocking Bitcoin liquidity. Its infrastructure design focuses on decentralization and security.

) 2. Lending track

Introduction

Bitcoin Lending###BTC Lending( is a financial service that allows individuals to obtain loans by using Bitcoin as collateral or to earn interest by lending Bitcoin. Borrowers deposit Bitcoin into the lending platform, which provides loans based on the value of Bitcoin, while borrowers pay interest and lenders earn returns.

BTC lending platforms typically implement the following risk management measures:

1. Control the collateral rate and loan-to-value ratio ) LTV (
2. Supplementary collateral and additional margin
3. Forced Liquidation Mechanism
4. Risk Management and Insurance

The BTC lending sector has become an important part of the cryptocurrency market, covering various cryptocurrencies, with products including collateralized loans, deposit accounts, and unsecured loans.

![Comprehensive Interpretation of BTCFi: From Lending to Staking, Establish Your Own Mobile Bitcoin Bank])https://img-cdn.gateio.im/webp-social/moments-5a2b839d69aad511862449ed31e05391.webp(

)# Project 1, Liquidium

Liquidium is a P2P lending protocol running on Bitcoin, allowing users to use native Ordinals and Runes assets as collateral to lend and borrow native Bitcoin. The project has completed multiple rounds of financing and has received support from several well-known institutions.

Liquidium completes Bitcoin lending in a secure and non-custodial manner through partially signed Bitcoin transactions on Bitcoin L1 ###PSBT( and discrete log contracts )DLC(. Currently supports lending of Ordinals and Runes assets.

)# Project Two, Shell Finance

Shell Finance is a stablecoin protocol based on BTC L1 that supports using BTC, Ordinals NFT, Runes, BRC-20, and ARC-20 assets as collateral to obtain $bitUSD. The project adopts a Peer-to-Pool model ### to maximize utilization.

( 3. Staking Track

)# Introduction

Staking ### is typically recognized for its characteristics of security and stable income. After users stake their tokens, they gain certain access rights, privileges, or reward tokens over time. Staking occurs at the network level and is solely used to secure the network.

The current concept of Staking bringing shared security provides a new dimension for the modular track. Narratively, it not only releases trillions in market value liquidity but also serves as a key core for future scalability.

![Comprehensive Interpretation of BTCFi: From Lending to Staking, Build Your Own Mobile Bitcoin Bank]###https://img-cdn.gateio.im/webp-social/moments-4f11bf9081e7a26f233662a6536eae41.webp(

)# Project 1, Babylon

Babylon is a layer 1 blockchain founded by Stanford University Professor David Tse, aimed at bringing the security of Bitcoin to all PoS blockchains. It is a Bitcoin staking protocol, with the core component being a POS public chain compatible with Cosmos IBC, which allows the locking of Bitcoin on the Bitcoin mainnet to provide security for other POS consumer chains.

Babylon achieves staking contracts through UTXO, called Remote Staking (. The specific steps include: locking funds, condition verification, state updates, and profit distribution.

The overall architecture of Babylon is divided into three layers: Bitcoin ) as the timestamp server ###, Babylon ( as the middleware layer ), and the PoS chain demand layer. The project has achieved multiple important milestones and plans to launch the mainnet in Q2 2024.

( 4. Restaking track

)# Introduction

Restaking is the use of liquid staking token assets to stake with validators on other networks and blockchains to earn more rewards, while also contributing to the security and decentralization of the new network.

The Restaking network accepts not only the original assets but also other assets such as LSD tokens, LP tokens, etc., which increases the network's security. While generating actual income for the protocol and users, it releases an infinite source of liquidity for the DeFi market.

(# Project One, Chakra

Chakra is an innovative modular settlement infrastructure that employs zero-knowledge proof technology to ensure trustless security and efficiency. It offers a highly modular Bitcoin settlement network that enables the free flow of BTC derivative assets across major public chains.

Chakra leverages the finality-enhanced economic security provided by the Babylon network, and offers efficient zero-knowledge proof aggregation for Layer 2 state and liquidity settlement. The project has established deep collaborations with multiple ecosystems and has launched several incentive activities.

)# Project Two, Bedrock

Bedrock is a multi-asset liquidity re-staking protocol supported by a non-custodial solution designed in collaboration with RockX. It utilizes universal standards to unlock the liquidity and maximum value of PoS tokens, and supports existing liquid staked tokens.

Bedrock provides institutional-level services to users, with a peak TVL exceeding $200 million. The project has engaged in deep cooperation with multiple ecological protocols and has received investment support from several well-known institutions.

5. Decentralized Custody

Recently, BitGO, the entity behind wBTC, announced the transfer of control over wBTC, sparking discussions in the market about the security of WBTC. Currently, the main decentralized custody solutions on the market include:

• tBTC: Has a good DeFi adoption rate, with a large number of use cases on Curve Finance.
• FBTC: A new type of synthetic asset on the entire chain, pegged to BTC at a 1:1 ratio, supporting the circulation of BTC across the entire chain.
• dlcBTC: A non-custodial representation of Bitcoin on Ethereum, allowing Bitcoin holders to participate in DeFi protocols while retaining full ownership of their assets.

6. Cedefi

Introduction

CeDeFi combines centralized finance ### CeFi ### and decentralized finance ### DeF