In-depth discussion about BTCFi

A deep discussion about BTCFi is very unfavorable for ordinary investors to read, the content is very boring, almost no investment secrets, not suitable for most investors, and there is no effect of getting rich quickly.

I am very happy that more and more buddies have followed into the field of #BTCFi recently. I almost receive a lot of inquiries from industry buddies every day, especially for the definition of BTCFi, everyone is very confused. So what is BTCFi, and what problems can BTCFi solve? Let’s chat together.

First: Is it native #Bitcoin.

This question may seem silly, but if you think about it carefully, you might break out in a cold sweat. Many friends believe that the second-layer network of #BTC, or the stake of BTC, is part of BTCFi. The key here is whether the supported assets are native BTC or mapped BTC.

The reason for raising this question is based on the core asset of BTC in the BTC ecosystem, who controls BTC, and whether the way of control is secure enough. Many partners believe that sufficient Decentralization is the most important, but in the financial field, security is often a necessary condition for large capital entry, even a primary condition.

To put it in simple terms, the question is about who holds the BTC in custody. Currently, almost all BTC in decentralized protocols like WBTC exist in a similar manner. While controversial, the recognition of WBTC is the biggest issue. We can discuss this further later, but what you need to know is that when SAB121 is passed, banks can only support native BTC.

Therefore, it can be concluded that in the actual application of BTCFi, non-native BTC not only cannot guarantee security, but also cannot guarantee acceptance and Liquidity, especially after SAB121, the reserve in banks is the biggest ‘second-layer network’ for BTCFi, and the BTC bills guaranteed by banks are the ‘BTC TOKEN’ that can circulate in the blockchain.

Second: Does the native #Bitcoin only have Bitcoin?

The answer is no. In different contexts, ‘native’ actually has different interpretations. In the world of blockchain, it is beyond doubt that BTC=BTC. This is also what we mentioned earlier. The reason why banks only recognize native BTC. However, in the financial world, BTC is a financial asset under Compliance.

For example, the SpotETF of BTC currently, although it cannot be used as actual assets in mainstream banks in the United States, the law does give these ETF assets compliance. For example, BlackRock’s $IBIT itself tracks the price of BTC assets, and even under the current Delivery conditions, it does not support BTC-based Delivery. However, because there needs to be enough BTCSpot as the acceptance asset, it needs to correspond to the ETF assets, so it can be considered that SpotETF itself is BTC.

Secondly, whether it’s BTC Spot or BTC Spot ETF, they are not directly available for purchase by all investment institutions, especially in the trading of US stocks, where Bitcoin cannot be traded directly. Therefore, the inclusion of a large amount of BTC in Market Cap can be seen as the only compliant way to hold BTC in the US stock market.

Before SAB121 is passed, not only BTC itself cannot be custodied and used for collateral and lending in banks, even the assets of BTC spot ETF cannot be re-financed, but MSTR can be custodied in banks, used for collateral, and participate in re-financing schemes.

So in a broad sense, native BTC should be assets recognized by law and the blockchain world that can be linked to BTC. The significance of legal recognition is very important, which is one of the most important thresholds for the entry of large funds. Only with sufficient Compliance can more funds be willing to enter. This is also one of the necessary conditions for BTCFi, as a large amount of funds poured in after the SpotETF, Compliance, is one of them.

Third: Who will provide Liquidity for stake #Bitcoin.

This problem feels more foolish, but if you think about it carefully, currently staking BTC provides stablecoins in the crypto world. Apart from certain specific channels, can these stablecoins safely enter the Web2 world? In plain language, can you seamlessly switch to investing assets obtained by staking BTC in the Web2 world?

The answer is yes, but comprehensive financial proof needs to be provided. The larger the assets, the higher the risks they face. In the current BTCFi ecosystem, without the asset’s acceptance, it’s like a flower in a mirror or the moon in water.

But! But! But! There is one crucial issue here: almost all BTC lending protocols require borrowers to collateralize BTC, with the protocol or LP providing funds, and lenders using BTC as collateral to earn Interest on the lent funds. Am I wrong?

So for those who hold BTC but don’t want to sell it like investors, does their BTC have no Liquidity at all? This is not the true meaning of BTCFi. BTCFi should provide Liquidity for all BTCholders to earn profits, not just for collateral loans.

In plain language, for Liquidity providers, web2 or web3 is not the most important thing. They all need to solve the KYC problem of assets. However, for current Liquidity, the fact that it is only based on fund lending does not mean that it provides Liquidity for BTC.

Fourth: How to provide Liquidity to #Bitcoin.

The essence of Liquidity is not collateralized lending. In fact, the crypto world has one of the best Liquidity providers, which is Curve. The mechanism of Curve itself is similar to that of a central bank. If we imagine the 3 Pool in Curve as in the real world, what 3 Pool does is the acceptance between different countries’ Fiat Currency, not collateralized lending.

Including Uniswap actually provides a Liquidity solution, but our default Liquidity is the buying and selling relationship between assets and stablecoins, so in fact, BTCFi’s Liquidity relationship should not only be a lending relationship, but based on the Liquidity acceptance of BTC itself, and only after BTC is securitized can the equivalent acceptance between assets allow more investors holding BTC to enjoy the benefits of holding BTC, rather than just selling or staking benefits.

This is the real source of income for BTC. In the #BTCFi principle I designed, #BTC $MSTR and $IBIT are all native BTC. Whether injecting BTC, MSTR, or IBIT, it provides Liquidity for BTC. The relationship between this liquidity is not just collateral borrowing, but helping users convert into different BTC under different circumstances.

So, whether it’s BTC, MSTR, or the provider of IBIT, they can obtain Fi benefits without reducing the ‘BTC’ share, just like the Curve 3 Pool to some extent, combining Bitcoin, MSTR, and IBIT into a liquidity pool.

Injecting BTC is equivalent to obtaining 33.33% BTC, 33.33% MSTR, and 33.33% IBIT at the same time, of course, it can also be directly exchanged for 100% BTC, 100% MSTR, and 100% IBIT, and provide Delivery, providing users with a seamless switch between virtual assets and real assets.

Fifth: On the chain? Not on the chain? If Equity Confirmation is achieved

If you haven’t read the previous content, you might think it’s a stupid question. How can a financial application be called Decentralization without being on-chain? But after carefully reading the previous content, do you have a new understanding of BTCFi? Do you think that being on-chain doesn’t have practical significance? After all, for MSTR and IBIT, they are not native assets on-chain, and according to SEC regulations, there is no way to directly issue Tokens for MSTR and IBIT on-chain.

However, in reality, on-chain is still necessary, especially providing hedging and Liquidity solutions for small-scale investors. Furthermore, the verification solution for BTCFi is to put BTC back on the bank’s “bills”. Of course, in this protocol, it is no longer necessary to have the support of BTC or the BTC layer 2 network. As long as there are “native BTC” bills, it is sufficient. Therefore, in practice, BTCFi does not need to be on the BTC-related network. This is similar to the fact that USDC does not necessarily have to be on #Ethereum, as long as it is a native asset, it is the same anywhere.

Of course, there is no problem if the native assets of BTC can be provided on the BTC network.

Sixth: The relationship between BTCFi, RWA, and RWAFi

With further research on BTCFi, many buddies can understand that the underlying logic of BTCFi is actually RWA, and RWA is transformed into RWAFi through RWA’s on-chain, so BTCFi is essentially part of RWA, but the idea of RWA will be more complex than the current one. If only the traditional U.S. stocks and U.S. bonds are on-chain, then BTCFi now integrates the bridge between virtual assets and real assets, including virtual assets and real assets.

The most interesting thing is that both virtual assets and real assets are the same underlying assets, which is why they can form mutual integration between BTCFi and RWAFi, especially in terms of Compliance. It may be slightly more difficult in the current US Compliance system, but it will be relatively simpler in countries like Singapore, Switzerland, and Germany.

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