As the price of BTC continues to reach new highs and the Bitcoin ecosystem technology continues to improve, BTCFi is expected to experience a surge in the next six months.
Host: Joe Zhou, Deputy Chief Editor of Foresight News
Guests: Core DAO core contributor Chanel, founder of Crypto Wersearch Alvin Hung, Product Director of Cactus Alice Du, founder of WaterDrip Capital Jademont, independent researcher Ningning, head of ecosystem collaboration at Solv Protocol Catherine
Host: Please introduce yourselves, six guests.
Chanel: I am Chanel, mainly responsible for the ecological growth of Core in the Chinese region and the Asia-Pacific. Recently, the Core mainnet was upgraded, and I am glad to share some insights about BTCFi with everyone.
Alvin Hung: I am Alvin Hung from Crypto Wersearch. We have our own website that provides project analysis across various sectors, and we have also established a TG community.
Alice Du: I am Alice from Cactus. As a compliance custody service provider focused on institutional users, Cactus has taken the lead in supporting Core's dual staking in wallets, providing users with a safe and convenient BTC staking experience.
Jademont: Hello everyone, I am Jademont, the founding partner of WaterDrip Capital. The BTC ecosystem has made a lot of progress recently, and I hope to share with you all later.
Catherine: I am a partner at Solv Protocol, mainly responsible for Solv's ecological growth. Solv is a multi-chain deployed Bitcoin staking platform that has established partnerships with several blockchain networks and built Bitcoin liquidity pools, including the re-staking pool of Babylon. We also have some product collaborations with Core.
Host: What new perspectives do you have on the BTCFi market?
Chanel: Currently, BTC holders hope to have more on-chain profit opportunities, and many Bitcoin projects have developed under this premise. The non-custodial staking of Bitcoin launched by Core in April this year has achieved quite good results. Our goal is to allow all participants to stake Bitcoin and earn profits with the lowest risk. In our communication with many institutions, partners, and the community, we found that there is an expectation for more profit opportunities in the entire Bitcoin market. We have upgraded two products: the first is non-custodial Bitcoin re-staking, which allows users to further re-stake Bitcoin back to Core after staking, increasing their profit opportunities and overall annualized yield. The second is that we are about to launch LSTBTC, allowing users to re-stake Bitcoin to other protocol layers while staking Bitcoin to gain more profit opportunities.
Alvin Hung: Although most of the market's attention in this cycle has been on memes, we have been researching the Bitcoin ecosystem since the beginning of the year. At that time, Merlin brought the first wave of enthusiasm for the Bitcoin ecosystem, introducing new assets such as inscriptions, runes, and NFTs. Later, Babylon also sparked a trend of BTC re-staking, and we published some summarizing articles regarding Babylon. Among the top 30 blockchains by TVL, 7 are related to the BTC ecosystem. Although BTC is not the hottest ecosystem in the market right now, it still holds weight. Whether it is Bitcoin whales or institutions, they have always been participating in the market.
If you haven't held Bitcoin this year, it would be relatively difficult. Bitcoin is clearly the best-performing mainstream asset in this market. Both national governments and large companies have strategies to increase their Bitcoin holdings. I think this is somewhat influenced by MicroStrategy. As Bitcoin's price gradually breaks new highs, the attention on BTCFi will rise again. Sui and Aptos may be the relatively outstanding public chains in the past few months, with good progress in their on-chain DeFi. Sui focuses more on lending or derivatives, while Aptos has also started to see some BTCFi projects emerge. Users and funds from these two Move ecosystems will transition to the upcoming Movement. For retail investors, BTCFi may not be the first choice, as everyone currently prefers protocols that can yield returns in a short time. However, for medium to long-term investors, or those who already hold Bitcoin, there are still on-chain profit opportunities to consider, and players originally in the EVM ecosystem are also beginning to integrate various BTCFi protocols.
Jademont: Recently, we have been discussing BTCFi with some institutions in the West. First, the BTCFi track is somewhat different from DeFi on Ethereum, as the participating clients or groups are different. Over the past year, Bitcoin has increased by about three times, but MicroStrategy's stock has increased by 14 times. MicroStrategy, which initially was a company purely hoarding Bitcoin, mentioned a few months ago that it wanted to do BTCFi, which means integrating its hoarded Bitcoin with DeFi. If more players of this level come in, BTCFi will definitely be different from the public chain ecosystems or Ethereum protocols we have experienced in the past. Galaxy has already expanded its business to Hong Kong, and they also place great importance on the BTCFi sector, managing many BTC assets and looking to provide value-added services in the BTC ecosystem.
The second point I want to briefly mention is the necessity of BTCFi's development. Have you ever thought about what the biggest crisis is after Bitcoin rises? Or what the biggest risk for Bitcoin is? In fact, this risk is becoming increasingly significant, but I see that hardly anyone discusses it on Chinese Twitter. The reality is that the Bitcoin network is becoming less secure. The security of the Bitcoin network is guaranteed by miners, and we know that there is a risk of a 51% attack on the Bitcoin network, meaning that if you control 51% of the hash power, you can attack a specific transaction. Of course, controlling 51% of the hash power does not mean you have to put all 21 million Bitcoins in your pocket. It is roughly estimated that there are currently about $15 billion worth of mining machines ensuring the security of the entire network. When Bitcoin's market value was relatively low, for example, below $1 trillion, a single transaction generally could not exceed $10 billion. Assuming Bitcoin is at $30,000, the Bitcoin on the network is only worth $6-7 billion, but to attack the network, you would need at least $10 billion worth of mining machines. This means that spending $10 billion to attack a potential return of only $6-7 billion would not be cost-effective, so Bitcoin is relatively secure. However, now that Bitcoin has tripled to over $90,000, and it may rise to $100,000, $200,000, or $300,000 later, while the value of mining machines has not increased, it may still be $10 billion. The possibility of spending $10 billion to attack a potential return of $18 billion or $20 billion increases, making the Bitcoin network less secure. How can we make the Bitcoin network secure? Simply put, we need to increase miner income, increase on-chain profits, and increase on-chain activities. This way, everyone will have the motivation to deploy more mining machines, and the cost of mining machines will increase, thereby reducing the risk of being attacked.
Many people say that BTC L2 and BTCFi are repeating Ethereum's path. In fact, within the Bitcoin community, people do not place much importance on Ethereum ecosystem protocols. The development of the BTC ecosystem is entirely aimed at protecting the Bitcoin network. Therefore, BTCFi is not something people want to do, but something they have to do. Moreover, as more major players enter the space, the demand for network security is increasing, so the future of BTCFi will definitely be very bright.
Ningning: I am Ningning, currently an independent researcher. I previously worked on investment research and listing at Tron. I am now also involved in a BTC L2 project with Western capital backing for staking. What impressed me is that a publicly listed mining company in the U.S. supports them, possibly because this mining company believes Bitcoin needs some applications to generate fee income to maintain the network's status. Bitcoin halving has also passed for more than half a year, and the countdown to the next round of halving is about to begin. If the value of Bitcoin cannot continue to increase as costs rise, and if miners' costs and hash power continue to rise exponentially, a problem will arise. If the scale of hash power grows with the value of the network, but the income from hash power cannot continue to grow, and the growth rate of hash power declines, the market will become very panicked. There will be a time window of 4 to 8 years before this problem arises.
However, we cannot deny that the entire market is currently being siphoned off by memes and the rise of Bitcoin. Not only the Bitcoin ecosystem and Ethereum ecosystem but even the recently popular prediction markets are showing signs of stagnation.
Of course, some may argue that Bitcoin's second layer is not valid, and it cannot be denied that the market is indeed experiencing a relatively low period and bottleneck. I believe this is a longer-term issue, but in the current market environment, people may not pay much attention to it. However, I see that many partners or developers are still working diligently on the development of Bitcoin's second layer. For example, the data growth of Babylon is still very evident, possibly because it has limited the overall scale, combined with the current market situation, leading to its market influence not being as significant as expected.
The most typical aspect of our industry is the cycle, and another is rotation. When the cycle rotates, the infrastructure in this area may be more developed than it is now, and there will be a strong explosive growth.
Host: What is the evolution of LST (Liquid Staking Tokens) in Ethereum, and how will it show similar and different development paths in the BTCFi track?
Chanel: I still have liquidity after staking, and then I can re-stake to gain additional profits, which is the charm of decentralized finance. Core's focus in the upcoming development is to launch an LSTBTC product that allows more people to maintain on-chain liquidity.
Alvin: Before the emergence of re-staking in the Ethereum ecosystem, the EigenLayer ecosystem had a volume of $15 billion, and at that time, there was only a part of liquid staking. They were also one of the earliest protocols to do liquid staking, and the innovation of LST is quite interesting. For example, some DeFi projects during this cycle are using LST products for on-chain collateral lending and contracts. In the future, BTCFi may also have such applications, thereby increasing the usage and liquidity of staked or re-staked assets. This is also something that BTCFi protocols need to consider. In the future, DeFi and AI agents may have significant integration space, and all ecosystems will have the opportunity to participate, which is something I look forward to happening.
Jademont: We see an opportunity in the Bitcoin ecosystem, where various BTC assets are participating in staking or re-staking protocols, which is actually a trend that wasn't present in the last bull market or two years ago. Previously, there might have only been WBTC, but now, after a simple count, we have at least five or six, such as TBTC, FBTC, and solvBTC, including BTC on the Lightning Network that people don't pay much attention to. Bitcoin is approaching $100,000, but the entire EVM ecosystem is actually struggling because there isn't enough new capital coming in, and there are too many options for new funds. Retail investment is quite limited; when everyone PvP's a project, it caps out at several hundred million, making it hard to go higher. Overall, the altcoin market is now over a trillion, and for a market to rise as a whole, it needs several hundred billion or even a trillion in capital; relying on retail investors alone is impossible.
Currently, traditional institutional funds have too many choices; they can directly buy large ETFs, buy Bitcoin spot, or invest in various crypto-related company stocks. Many U.S. crypto concept stocks have far outperformed most mainstream altcoins. However, there is another opportunity in the altcoin market, such as wrapping native on-chain BTC into EVM-compatible BTC, and then using the EVM-compatible wrapped BTC to participate in DeFi protocol staking, lending, or forming LPs, even selling it to buy altcoins. This is actually a very important entry channel, meaning many people may not be able to buy altcoins directly but can first buy Bitcoin and then use Bitcoin to buy altcoins. Therefore, if the market for wrapped BTC can grow to, say, several hundred thousand BTC, it will significantly boost the altcoin market, allowing funds to flow into it.
Host: What are your thoughts on the future development of the Core chain after the issuance of SolvBTC.CORE?
Catherine: For Solv, we are the recipients of wrapped Bitcoin assets, which means we may consider accepting assets beyond wrapped BTC. The current competitive landscape is quite interesting because cBTC started issuing a month after some negative information came out, and it is now following a multi-chain deployment strategy. There are also decentralized wrapped BTC like TBTC, which have gained some traction, as WBTC was the absolute leader before. We are also starting to see other exchanges having similar ideas, issuing their own wrapped BTC.
However, we face the same challenges as these centralized exchanges as issuers of wrapped Bitcoin: there is no real profit model. On-chain, it is a public good and cannot generate profit.
So when we communicate with cBTC, we hope they can provide us with some support, but they actually don't have the resources to give us because they are doing this for free, and there is no revenue from it; it is just a wrapped Bitcoin asset, but the lending rate is only 1%, making it somewhat unprofitable. Therefore, these wrapped assets will heavily rely on protocols that are particularly adept at DeFi. For example, if you are accepted by Solv as our underlying asset, you transform from an asset with one or two application scenarios into an asset with 20 application scenarios, and then you also have returns. Besides solvBTC, we currently have four LSTs available for users to choose from. LST itself is a highly composable asset.
Jademont: Wrapped BTC may not necessarily be unprofitable; it just might not be very profitable right now, but once the capital scale increases, it will definitely become profitable. I want to share a new trend; there is a project called Ethena that you should know about. It is actually a combination of CeFi and DeFi, and more and more BTCFi projects are learning from Ethena's approach, wrapping BTC through custodial methods to manage wealth while ensuring the safety of the principal. This can indeed be profitable. It is essentially a platform mindset; you get wrapped BTC, and then you can engage in wealth management or various value-added services, for example, earning 10 points, giving 8 points to users, and keeping 2 points as profit.
Host: After the Fusion upgrade, Core's Bitcoin staking has joined CORE staking with Cactus as a Core institutional partner. What prospects do you see for dual staking?
Alice Du: Fusion is also one of the most important highlights today because it brings new application scenarios. First, we definitely connected with the service provider for dual staking institutional custody right away. We believe Core's dual staking is a very good innovation and attempt. Core itself has a non-custodial staking protocol for BTC, which utilizes the time-lock mechanism of the Bitcoin main chain, allowing users to enjoy returns without worrying about the safety of their Bitcoin assets. Additionally, through extra staking, they can earn more rewards.
BTC dual staking can attract more project parties to enter the Core ecosystem. Moreover, as Core's native staking progresses, the price of Core will also be very stable, and with the promotion of a virtuous cycle, every role in the ecosystem can reap endless benefits over time. When institutional users want to participate in staking for high returns, they definitely need to rely on a very secure tool and channel. As a professional custody platform, Cactus helps everyone achieve the highest industry standards in terms of private key management and security confirmations during the use of private keys, preventing blind signing and other issues, allowing users to enjoy returns while avoiding asset losses.
Host: For BTC holders, security is often the top priority. What risks should investors be aware of when participating in BTCFi projects?
Ningning: Because Bitcoin itself cannot deploy smart contracts and lacks mutability, we need to have mechanisms to bridge Bitcoin from the main chain to L2 or other chains. This is a very complex issue. We may have many solutions, such as centralized custodial wallets, enterprise-level multi-signature wallets, MPC solutions, and various cross-chain bridge solutions and non-bridge cross-chain solutions. Although the absolute leader WBTC faced a wave of trust issues, it has clarified things to the community and is still adopted by Aave. From the industry's perspective, many people actually dislike seeing a monopoly; they prefer a more decentralized wrapped BTC asset that is fully secured on-chain.
If relying on centralized institutions, institutions or whales may prefer more native custodial solutions. Currently, there are some developing solutions, such as Babylon, EOTS, and Bitlayer's proposed BTVM cross-chain custody solutions, but these all require time to mature the technology and to educate the community.
Chanel: The technical construction has come to a point where everyone is quite meticulous about auditing, unlike a year or two ago when vulnerabilities were frequent. However, it cannot be denied that when Bitcoin whales seek to earn returns through cross-chain, not everyone can accept or bear the risks of cross-chain bridges. Even if on-chain players are quite familiar with these processes, we cannot say it is risk-free. Here, I will spend a bit more time introducing Core's non-custodial staking.
In simple terms, non-custodial means that the assets do not leave the staker's wallet. Using a time-lock mechanism, users can decide how long they want to lock their assets, and then they contribute BTC to the Core chain's validation nodes, for which we provide some token rewards, thus creating a potential return. Our non-custodial staking solution has also received wide recognition from institutional partners. Additionally, regarding auditing, how to conduct code open-sourcing is a particularly important aspect for developers and users when participating.
Alvin: On-chain applications inherently carry certain risks because when we decide to withdraw Bitcoin from exchanges and perform more operations on-chain, these operations themselves bring some additional risks. Users should be particularly cautious of phishing websites and common hacking methods when using DeFi or various on-chain protocols. Incidents where users click on fake websites leading to wallet asset theft are very frequent.
Jademont: For the BTC network, BTCFi carries no risks, only benefits, but for users, BTCFi does indeed have risks. Current BTCFi can be divided into two categories: one is on the BTC network, and the other is through custodial methods with trusted third parties. On the Bitcoin network, I know of two projects: one is Babylon, developed by a Stanford professor, which has yet to launch but claims to be able to lock on the BTC chain in a decentralized manner. The other competitor locks BTC on the Bitcoin network through a smart contract-like method, DRClink. The risks of these two projects lie in the contracts themselves, but it seems that there shouldn't be any issues since these contracts have withstood the test of time for over three years since 2021.
The other type is through custodial methods, which I believe can be further divided into two categories: one is managed by larger centralized institutions. Although centralized, it does not necessarily mean it is unsafe; if the institution's reputation is good enough or the cost of wrongdoing is high enough, we can consider it safe. When the scale is relatively small, it is completely fine to have them manage it. However, if the scale is large enough, this method may not be as good as multi-signature methods. Multi-signature is a very good solution, but it depends on how you design it. If all three signatures are controlled by one person, it is definitely unsafe. However, there are now many decentralized multi-signature solutions. For example, a project proposed a multi-signature protocol using a dynamic committee, where this multi-signature could be controlled by dozens of private keys. I believe this method is already sufficiently decentralized and can be considered safe.
Host: How will BTCFi develop next?
Ningning: BTCFi mainly has two trends: one is to provide economic security for BTC L2, oracles, and cross-chain bridges through re-staking to earn native staking rewards. Eigenlayer has already been validated in the market, so the Bitcoin ecosystem will go through this process again. The other is that Bitcoin will earn interest through lending. One of the biggest differences between Bitcoin and Ethereum is that Bitcoin itself does not have the ability to earn interest; Ethereum can earn around 3% annualized returns through native staking, while Bitcoin lacks this capability.
Chanel: We launched dual staking with the hope that they can stake rewards on our validation nodes while maintaining non-custodial Bitcoin staking, thereby supporting the positive development of the entire economic network. In addition to issuing LSTBTC, we hope to attract more AVS to Core, enabling more applications on-chain through wrapped Bitcoin assets. Core's layout is not just for retail investors but also for institutional miners, aiming to align with the entire Bitcoin community. The community is relatively complex and diverse, and the value of Bitcoin lies in its role as a bridge between traditional finance and digital finance. Our strategy is to view Bitcoin, traditional finance, and digital finance as a whole.
Alice Du: Cactus is very optimistic about the prospects of BTCFi. Over the past few years, we have observed that BTCFi first appeared on centralized wealth management platforms, and then many wrapped BTC began to enter DeFi protocols. This trend has become even more pronounced this year. BTCFi is entering a phase of explosive growth, with a surge of financial activities based on the Bitcoin underlying protocol. We also believe that as technology matures, Bitcoin can enter more scenarios in a more native way and serve as a foundational asset to build a more robust blockchain financial system.
The development of BTCFi relies on large holders, institutions, mining pools, and computing power platforms, which are also the main customer groups for Cactus. Their demand is very strong, especially for miner clients who, with the Bitcoin halving factor, hope to find ways to earn interest or generate returns without sacrificing control over their Bitcoin. Therefore, Cactus is actively laying out this year, collaborating with communities like Core and Babylon, and supporting Core's dual staking right away. Miners or large holders are most concerned about security; by staking through our plugin wallet, they can perform staking operations via the block explorer. We will also implement measures such as address verification, whitelist checks, audit mechanisms, and hardware signing to avoid blind signing or asset loss.
Alvin: The most challenging aspect of a project is not just executing it well, but also how to gain market attention. A significant portion of the BTCFi ecosystem consists of institutions that seek to obtain more returns, while retail investors have different concerns. At the beginning of the year, during the first wave of BTC's explosive growth, many new asset issuance methods emerged, such as inscriptions, runes, and even BTC NFTs. I think these are all interesting cycles and do not simply involve earning returns through wallet operations on-chain.
New assets will also emerge in the BTCFi space; it won't just be about depositing assets and earning returns. In the future, BTCFi may also combine with AI to create various innovative applications and generate more application scenarios.
Jademont: I believe that the time for BTCFi to explode is indeed getting closer for several reasons. First, we can see that this bull market is primarily driven by BTC and meme coins. Meme coins operate in a PvP market, and the capital volume is actually not large; although many people become wealthy, each target tends to cap out at several hundred million, which is a typical sign of liquidity shortage. In contrast, BTC has ample liquidity. When people feel that the price of Bitcoin is relatively high, holding Bitcoin and trading other assets becomes a straightforward path, which is BTCFi.
We previously discussed this issue with some foreign institutions. The recent legitimization of Bitcoin or regulatory benefits has allowed many previously illegal Bitcoins to circulate normally using wallets. After downloading a BTC wallet, users may find some ecosystem elements in their wallets, as well as payment options like the Lightning Network. This means that the BTC ecosystem can easily accommodate the influx of traffic brought by BTCFi. Another reason is that, from a technical perspective, several representative projects in the BTC ecosystem have matured. For example, the Lightning Network's Taproot went live on the mainnet in July, but there are still some minor issues being fixed. From what we understand, most of these issues have now been resolved. The RGB off-chain computation and client verification smart contracts are also very well developed. I estimate that within the next quarter, or at most within six months, we will see the launch of leading BTCFi projects, such as Babylon, which are also nearing launch. Additionally, I saw that the ICP project team has launched a BTC L2 recently, and these projects have received significant funding, starting from tens of millions of dollars. With so much money in the hands of the project teams and tokens about to launch, I believe this will create a synergistic effect. Therefore, I am quite looking forward to the development of BTCFi in the next quarter.
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