Yala uses native BTC as collateral to generate a circulating stablecoin YU through over-collateralization, and controls the supply of YU by adjusting the dynamic staking rate and the arbitrage space around the liquidation mechanism, ultimately stabilizing its price around 1 dollar.

Written by: Haotian

As the first Bitcoin-native stablecoin YU, @yalaorg announced last night a $8M Seed round financing led by @polychaincap and @etherealvc, officially declaring its grand vision of leveraging stablecoins to tap into the BTCFi liquidity yield market. How should we view what Yala is doing? It is somewhat similar to Ethereum's "DAI moment"; Yala aims to bring a "YU moment" to the BTCFi ecosystem. Next, I will briefly share my understanding:

1) If I remember correctly, the last time these two firms co-led was during the seed round of Eigenlayer. This time, Yala's co-investors also include Galaxy, Anagram, Amber Group, etc., making it a relatively serious financing round—most of the funds are from top-tier U.S. institutions.

2) The narrative wave of BTCFi has been surging, and Yala attempts to use a "stablecoin" with high liquidity and stability as a lever to enter the market, allowing users to gain some liquidity to participate in the DeFi ecosystem without having to sell their native BTC.

Its positioning is simply understood as being particularly similar to how MakerDAO once ignited a spark for Ethereum DeFi by building "DAI"; Yala's stablecoin YU is conceptually very much like DAI.

Yala uses native BTC as collateral to generate a circulating stablecoin YU through over-collateralization, and controls the supply of YU by adjusting the dynamic staking rate and the arbitrage space around the liquidation mechanism, ultimately stabilizing its price around 1 dollar, thereby becoming a unified liquidity target across BTC chains, EVM chains, and other multi-chain environments.

3) How exactly does it work? Based on the white paper, I summarize the general logic as follows:

1. Yala employs a mechanism that indexes data based on the Bitcoin mainnet. Users can send transactions on the Bitcoin mainnet and directly include target chain and receiving address information in OP_RETURN.

2. Users directly deposit native BTC assets to a specific address, and Yala's Bridge system monitors these transactions, directly minting the corresponding yBTC (1:1) on the target chain. To prevent data abuse, there will be a default waiting time of 6 blocks.

3. The generated yBTC can be collateralized to the Yala protocol, over-collateralizing to generate the stablecoin YU, with the staking rate dynamically adjusted like DAI.

4. If users want to withdraw BTC, they only need to create a Burn transaction on the corresponding chain. The destruction of yBTC triggered by a smart contract will be responded to in the Bitcoin mainnet staking pool. For safety reasons, the mainnet waits for 12 blocks, and BTC will ultimately be returned to the user's designated Bitcoin address.

It is not difficult to see that Yala uses the decentralized and immutable data of Bitcoin as a basis and applies it to manage the Mint token behavior of smart contracts on other target chains through a cross-chain bridge, which Yala defines as MetaMint. This method leverages the native characteristics of the Bitcoin mainnet, differing from Ordinals, which directly issue assets on the Bitcoin mainnet; this method is more about using data indexing generated by Bitcoin to coordinate operations on other integrated chains.

4) Due to the inherent limitations of Bitcoin's scripting language, this Mint behavior of native BTC stablecoin assets will reserve necessary safety block confirmation time to maximize security. YU faces challenges regarding liquidation risks in high volatility markets, the system's execution requirements for handling liquidation in dynamic staking rates, and the user's need for timely margin adjustments.

In response, Yala, in addition to over-collateralization as a buffer against market volatility, also stabilizes prices through stable fee adjustments, liquidation systems, and a series of market incentive operations.

For example: Users generating YU need to pay a stable fee. When the price of YU falls below 1 dollar, appropriately increasing the stable fee can suppress the generation of YU, and vice versa; furthermore, a series of incentive operations related to market making, arbitrage, auctions, etc., are introduced to use the market's own energy to mitigate the uncertainties brought by volatility. Specific details will be revealed next week when Yala's testnet goes live.

In summary, the BTCFi track tells the story of "yield generation," from the security consensus output of @babylonlabs_io, to the ZK universal protocol framework construction of @GOATRollup, to the liquidity unified abstraction layer emphasized by @SolvProtocol, including Yala's attempt to prosper the DeFi infrastructure through stablecoins. The entire BTCFi market is becoming increasingly robust, and there is much to look forward to in the subsequent market developments.

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