BTCFi: The Innovative Journey of Bitcoin's Trillion Market Capitalization

Summary

• Background of the rise of BTCFi: The narratives of Ethereum and other public chains are weakening, infrastructure is becoming saturated, the industry lacks fresh concepts, and the BTC ecosystem has yet to form a monopoly.

• BTC's main scaling solutions include state channels, sidechains, Rollup, UTXO + client verification, large blocks, etc., and each solution faces technical challenges.

• Key conditions for the development of BTCFi: cross-chain interoperability, Layer 2 scalability, smart contract functionality, development tools, and infrastructure

• Main challenges faced by BTCFi: limitations of the Bitcoin protocol, liquidity issues, security of cross-chain bridges, oracle problems, and finding a unique development path.

1. Overview of BTCFi

1.1 BTCFi definition

BTCFi aims to establish a decentralized financial market within the Bitcoin ecosystem, allowing BTC holders to directly use financial tools such as staking, lending, and market making to generate returns, thereby activating more financial attribute value of BTC.

1.2 Development Background

In 2023, the Bitcoin ecosystem welcomes important developments, with tokens like BRC20 triggering wealth effects. The industry as a whole lacks fresh concepts, and the Bitcoin ecosystem has copied the Ethereum route, facing the challenge of how to expand without undermining the native consensus.

As of October 1, the Bitcoin ecosystem has frequently raised funds, with a total of 14 public financings exceeding 71.1 million USD. BTCFi still offers opportunities for users and investors and has not yet formed a resource monopoly. Non-financing types have also given rise to numerous protocol assets such as BRC20, ORC20, and ARC20.

1.3 Market Explosion Point: Index-Type Asset Protocol

Indexed assets are mainly divided into BRC20 non-UTXO bound assets and ARC20 UTXO bound assets. Other protocols include ORC20, SRC20, CAT20, etc., each with different characteristics and application scenarios.

2. BTCFi Expansion Plan

The development of BTCFi relies on DeFi, while the expansion of DeFi depends on blockchain scaling. Currently, there is no unified classification for scaling paths, and there are disputes over the feasibility, decentralization, and security of each path, all of which must comply with Bitcoin's "orthodoxy" verification.

The data shows that among the sidechain projects, CORE, Bitlayer, BSquared, and Rootsock have the highest TVL share, totaling 76.56%. BTCFi and ETHFi exhibit similar characteristics, such as coin-based yield models.

2.1 State Channel

Allow users to trade multiple times off the mainnet, only submitting to the mainnet when the channel switch is on. There are implementations such as the Lightning Network and Ark in Bitcoin.

2.2 Sidechains and Rollups

Sidechains and Rollups are more suitable for the development of the Bitcoin ecosystem, enabling fast transactions, Turing completeness, and interoperability. Rollups move complex operations to Layer 2, while the mainnet only validates proofs. Sidechains require additional verification methods to ensure asset security.

2.3 UTXO+ client verification

The off-chain solution based on Bitcoin's UTXO characteristics improves transaction efficiency and privacy. The RGB protocol is a specific implementation that uses UTXO as a "seal" to bind changes in off-chain asset states. There are issues such as data silos that still need improvement.

2.4 Large Block Plan

Changing the existing consensus faces many issues. BCH is a representative case, increasing the block size to 8M, but it is controversial.

3. BTCFi Liquidity Release

3.1 Prerequisites for Development

1. Cross-chain interoperability: Develop trusted cross-chain bridges to enable BTC to participate in DeFi on other chains.

2. Layer2 Solutions: Balancing the triangular problem, considering wealth effect compensation for the lack of decentralization

3. Smart contract functionality: Provides smart contract support for BTC through Layer 2 or sidechains.

4. Development tools and infrastructure:完善但避免重复建设

3.2 Main Challenges

1. Limitations of the Bitcoin protocol: Overcoming BTC design constraints to achieve DeFi functionality

2. Liquidity Issues: Increase BTC liquidity in DeFi

3. Cross-chain bridge security: ensuring the safety and reliability of cross-chain operations.

4. Oracle Problem: Overcoming BTC Architecture Limitations to Achieve Accurate Price Synchronization

5. Unique development path: Focus on financial products related to payment and value storage, develop the PayFi concept.