Author: Kevin Source: X, @kevinliub
Is BTCFi "dead"?
Of course not. In fact, the era of BTCFi has not even really begun.
Recently, at various conferences and on social media, the argument that BTCFi is "dead" has been rampant, especially after a group of BTCFi protocols represented by Babylon performed poorly in token issuance.
Although Babylon has indeed opened up a new narrative path, it has also exposed many structural problems. Its core concept is to use Bitcoin as the underlying asset and export the security of its "digital gold" as a public product. From the supply-side logic, this is understandable, but in addition to technical feasibility, the key is: where is the real demand in the market? Large chains often do not adopt it (because it will weaken the value and role of their own native tokens), and although small chains may choose to do so, their market size is limited and it is difficult to support high valuations. If the value capture of BTC security is only these altcoins, it will not only continue to bring selling pressure on these altcoins, but also make it difficult for this economic model to continue to operate.
Although LST issued based on Babylon has liquidity advantages, the value it can actually capture is limited. At present, LST income basically depends on the platform itself or third-party token incentives, and lacks real, native BTC income support.
However, this does not mean that the BTCFi track is unworkable. On the contrary, after in-depth analysis of these phenomena, we should focus on two fundamental issues that have not yet been resolved:
1. How to achieve the native security of BTC?
2. From an economic perspective, how should the source and sustainability of native BTC income be established?
Bitcoin's "OP Moment"
Just as Ethereum L2 ushered in an explosion after the Optimistic Rollup model was truly run through, Bitcoin also needs its own "OP moment". Due to the limitations of the Bitcoin script language and the extremely high requirements of users for native security, achieving "truly native" L2 security is the first pillar for the establishment of BTCFi. This technical issue is one of the core reasons why the so-called BTC L2 could not be recognized by the mainstream BTC community and why BTCfi could not develop.
There are currently two feasible technical routes in the market: OP_CAT and BitVM2.
Although OP_CAT is technically reasonable, it requires modifying the BTC mainnet script instruction set. Considering that this change touches the bottom line of Bitcoin fundamentalism, it is extremely difficult to promote. In addition, as Bitcoin is accepted by more and more people, financial institutions, regulators and even major governments, if its underlying logic is changed, it may lead to a serious decline in its stability and trust.
In contrast, BitVM2 does not need to modify the Bitcoin protocol, and combined with the OCP (Optimistic Challenge Process) model, the logic is simple and the performance is stable. Under the premise of solving the economic model, it has the foundation for widespread implementation.
Small spoiler: The breakthrough of BitVM2 technology is coming faster than expected, so please look forward to our release. We believe that this is Bitcoin's "OP moment".
All problems are ultimately economic problems (It's the economy, stupid)
But security is not everything, the real challenge of BTCFi is still the economic model.
The essence of the economic model is supply and demand matching: What value can BTC provide? What real needs can these values meet? This process of matching the provided value with demand is the process of generating income. Moreover, in addition to the income itself, we must also pay attention to the cost of obtaining income to ensure that it has a continuous rather than a one-time incentive.
From the supply side, the core value of Bitcoin mainly includes two points:
1. The security brought by its decentralization and strong consensus;
2. The liquidity value as a mainstream crypto asset.
From the demand side, BTC holders generally hope that their assets can "earn money without doing anything". But no matter how big or small the asset is, everyone hopes that BTC can create more income. This demand is very strong and has a broad basis. Products developed to meet these needs need to be based on the native security of Bitcoin, and at the same time, they need to take advantage of the scale of funds, efficiency, arbitrage opportunities, etc. brought by liquidity.
Therefore, L2, which is based on the native BTC security, is the starting point for the sustainable development of BTCFi. Combined with the ZK Rollup bridge, BTC can be safely and efficiently introduced to the second layer for economic activities. The income generated by the transaction volume generated by the second layer (such as Gas fees) should be partially returned to BTC holders as a reward for their provision of liquidity and security.
If the gas fee of the second layer is denominated in BTC, this constitutes an extremely pure "native BTC income" model. Before this, BTC had almost no real native income scenario, except for the funding rate in CeFi.
Babylon's model is essentially to harvest third-party tokens, which is not native and unsustainable.
Going further, to achieve sustainable income, it is also necessary to effectively control the operating costs of L2.
In the ZK Rollup solution, the roles of Sequencer, Prover, Challenger, Operator, and Committee each have different responsibilities and different income structures. How to control the overall cost while ensuring the incentive mechanism will determine whether L2 has sustainable operating capabilities.
GOAT Network will soon release a new "Economic Brown Book" to elaborate on our solution, so stay tuned.
Written at the end
Although the market is still in a period of volatility, truly valuable products will eventually stand out. We firmly believe that the era of BTC L2 and BTCFi is coming.
Based on the architecture of BTC's native security, we expect that there will be more refined BTCFi products targeting different risk preferences to meet the different needs of BTC holders for returns.
I am very happy to work with you to lead the innovative exploration of BTC L2 and BTCFi.
Anais
Alex
Weatherly
Catherine
Kikyo