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

As Bitcoin's position in the financial market becomes increasingly consolidated, BTCFi( Bitcoin finance) is rapidly becoming the forefront of cryptocurrency innovation. BTCFi encompasses a range of Bitcoin-based financial services, including lending, staking, trading, and derivatives. This article delves deep into several key sectors of BTCFi, exploring stablecoins, lending services( Lending), staking services( Staking), re-staking services( Restaking), as well as the integration of centralized and decentralized finance( CeDeFi).

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, and their roles in the BTCFi ecosystem. In the lending sector, it analyzes how users obtain liquidity through Bitcoin lending while evaluating the main 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 revenue opportunities for Bitcoin holders. Restaking services (Restaking) further unlock the liquidity of staked assets, providing users with additional sources of income.

In addition, the research report also explores 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. As the BTCFi sector continues to evolve, it is expected to see more innovations and capital inflows, further solidifying Bitcoin's leadership position in the financial arena.

BTCfi Track Overview

BTCFi( Bitcoin Finance) is like a mobile Bitcoin bank, a series of financial activities centered around Bitcoin, including Bitcoin lending, staking, trading, futures, and derivatives. According to data from CryptoCompare and CoinGecko, the market size of BTCFi reached approximately $10 billion in 2023. Predictions from Defilama suggest that by 2030, the BTCFi market will reach a size of $1.2 trillion, a figure that includes the total locked value( 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 shown significant growth potential, attracting more institutional participation, such as Grayscale(, BlackRock), and JPMorgan( beginning to engage in the Bitcoin and BTCFi market. The participation of institutional investors has not only brought substantial capital inflow, 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 ) BTC Lending (, Stablecoin ) Stablecoin (, Staking Service ) Staking Service (, Restaking Service ) Restaking Service (, and the combination of centralized and decentralized finance known as CeDeFi ) CeDeFi (. Through detailed introductions and analyses of these areas, we will understand their operational mechanisms, market developments, major platforms and products, risk management measures, and future development trends.

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BTCFi Track Segmentation

) 1. Stablecoin

(# Introduction

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 backing with reserve assets or algorithmic adjustments to supply, and are widely used in trading, payments, and cross-border transfers, allowing users to enjoy the advantages of blockchain technology while avoiding the severe fluctuations of traditional cryptocurrencies.

In economics, there is an impossible trinity: a sovereign nation cannot simultaneously achieve a fixed exchange rate, free capital movement, and an independent monetary policy. Similarly, in the context of Crypto stablecoins, there is also an impossible trinity: price stability, decentralization, and capital efficiency cannot be achieved at the same time.

Classifying stablecoins by the degree of centralization and by collateral type are two relatively intuitive dimensions. Among the current mainstream stablecoins, classified by degree of centralization, we can divide them into centralized stablecoins represented by USDT, USDC, and FDUSD, and decentralized stablecoins represented by DAI, FRAX, and USDe. Classified by collateral type, they can be divided into fiat/physical collateral, crypto asset collateral, and under-collateralized.

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

Centralized stablecoins are mostly fiat/physical collateralized, essentially representing fiat/other physical assets as RWA. For example, USDT and USDC are pegged to the US dollar at a 1:1 ratio, while PAXG and XAUT are pegged to the price of gold. Decentralized stablecoins are generally either collateralized by crypto assets or are uncollateralized ) or under-collateralized ###. DAI and USDe are both collateralized by crypto assets, which can further be divided into equal collateralization or over-collateralization. Uncollateralized ### or under-collateralized ( are usually referred to as algorithmic stablecoins, represented by FRAX and the former UST. Compared to centralized stablecoins, decentralized stablecoins have a lower market value, are slightly more complex in design, and have given rise to several star projects. In the BTC ecosystem, noteworthy stablecoin projects are all decentralized stablecoins, so below we will introduce the mechanisms of decentralized stablecoins.

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)# Decentralized Stablecoin Mechanism

Next, we will introduce the CDP mechanism represented by DAI ( over-collateralization ) and the contract hedging mechanism represented by Ethena ( equivalent collateral ). 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 in decentralized financial systems to generate stablecoins by collateralizing crypto assets. After its creation by MakerDAO, it has been applied in many different categories of projects such as DeFi and NFTFi.

DAI is a decentralized, over-collateralized stablecoin created by MakerDAO, designed to maintain a 1:1 peg with the US dollar. The operation of DAI relies on smart contracts and the decentralized autonomous organization ###DAO( to maintain its stability. Its core mechanisms include over-collateralization, collateralized debt positions )CDP(, 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. Below is a detailed operation process of CDP/Vault:

i. Generate DAI: Users deposit their encrypted assets ) such as ETH( into the MakerDAO 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 borrowed by the user, with the collateral serving as security for the debt.

ii. Over-collateralization: To prevent liquidation, users must maintain the collateralization ratio of their CDP/Vault above the minimum collateralization ratio set by the system, for example, 150%. This means that if a user borrows 100 DAI, they need to lock at least 150 DAI worth of collateral.

iii. Repayment/Liquidation: 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 derivatives relative to the price of the underlying asset. For example, if the Delta of an option is 0.5, when the price of the underlying asset increases by $1, the price of the option is expected to increase by $0.5. A Delta-neutral position is an investment strategy that involves holding a certain amount of the underlying asset and derivatives to offset the risk of price changes. The goal is to make the overall Delta value of the portfolio zero, thus keeping the value of the position unchanged when the price of the underlying asset fluctuates. 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 the stablecoin USDe, which represents the value of Delta neutral positions. Therefore, their stablecoin USDe has the following two sources of yield:

Staking rewards

Basis Differential and Funding Rate

Ethena achieves equivalent collateral and additional returns through hedging.

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)# Project One, Bitsmiley Protocol

(## Project Overview

The first native stablecoin project of the BTC ecosystem.

On December 14, 2023, OKX Ventures announced a strategic investment in the BTC ecosystem stablecoin protocol bitSmiley, which allows users to mint the stablecoin bitUSD by over-collateralizing native BTC on the BTC network. Additionally, bitSmiley encompasses lending and derivatives protocols, aiming to provide a brand new financial ecosystem for Bitcoin. Previously, bitSmiley was selected as a premium project in the BTC hackathon co-hosted by ABCDE and OKX Ventures in November 2023.

On January 28, 2024, it was announced that the first round of token financing was completed, with OKX Ventures and ABCDE leading the investment, along with participation from CMS Holdings, Satoshi Lab, Foresight Ventures, LK Venture, Silvermine Capital, and relevant individuals from Delphi Digital and Particle Network. On February 2, LK Venture, a subsidiary of the Hong Kong-listed company Blue Focus Interactive, announced on platform X that it has participated in the first round of financing for bitSmiley through the Bitcoin network ecological investment management fund BTC NEXT. On March 4, KuCoin Ventures released a tweet announcing a strategic investment in the Bitcoin DeFi ecological project bitSmiley.

)## Operating Mechanism

bitSmiley is a Bitcoin native stablecoin project based on the Fintegra framework. It consists of the decentralized over-collateralized stablecoin bitUSD and the 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. The bitUSD has added Mint and Burn operations to meet the needs for stablecoin minting and burning.

bitSmiley launched a new DeFi inscription protocol called bitRC-20 in January. The first asset of this protocol, OG PASS NFT, is also known as bitDisc. bitDisc is divided into two levels: Gold Card and Black Card. The Gold Card is allocated to Bitcoin OGs and industry leaders, with a total number of holders being less than 40. Starting from February 4, the Black Card will be made available to the public 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 compensation would be provided for unsuccessful inscriptions.

$bitUSD stablecoin operation mechanism

The operating mechanism of $bitUSD is similar to that of $DAI. First, users over-collateralize, and then the bitSmileyDAO on L2, after receiving oracle information and performing consensus verification, issues a Mint bitRC-20 message to the BTC mainnet.

The logic of liquidation and redemption is similar to MakerDAO, and liquidation is conducted in the form of a Dutch auction.

(## Project Progress & Participation Opportunities

bitSmiley will launch Alphanet on BitLayer on May 1, 2024. Among them, the maximum loan-to-value ratio ) LTV ### is 50%, and to prevent users from being liquidated, a relatively low one has been set.