In-depth discussion of BTCFi: How to define it? What problems can it solve?

Author: Phyrex Source: X, @Phyrex_Ni

A in-depth discussion about BTCFi, which is very unfavorable for ordinary investors to read. The content is very dry and boring, with almost no investment secrets. It is also not suitable for most investors, and there is no effect of getting rich quickly.

I’m very happy that more and more buddies have been following the BTCFi field recently. I receive a lot of inquiries from industry buddies almost every day, especially about the definition of BTCFi. Everyone is confused. So what is BTCFi and what problems can BTCFi solve? Let’s chat.

First: Is it native Bitcoin

This question may seem foolish, but if you think carefully, you may break out in a cold sweat. Many friends think that the second layer network of #BTC or the stake of BTC is part of BTCFi. The key here is whether the supported asset is native BTC or mapped BTC.

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

Speaking in plain language, it refers to who holds the BTC in custody. Now, almost all BTC in decentralized protocols such as WBTC are controversial. The recognition of WBTC is the biggest issue. We can discuss this later, but it’s important to know that when SAB121 is passed, banks can only support native BTC.

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

Second: Does native Bitcoin only have Bitcoin?

The answer is no. In different contexts, ‘native’ actually has different interpretations. In the world of blockchain, BTC=BTC is without doubt, as we mentioned earlier, the reason why banks only recognize native BTC. However, in the financial world, BTC is also a financial asset in 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 indeed give compliance to these ETF assets. 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 accepted asset, it needs to correspond with the ETF assets, so it can be considered that SpotETF itself is BTC.

Secondly, whether it’s Spot for BTC or BTCSpotETF, they are not directly purchasable by all investment institutions, especially in the trading of US stocks, where Bitcoin cannot be directly traded. Therefore, the large amount of BTC in $MSTR in Market Cap can be regarded as the only compliant way to hold BTC in US stocks.

Until SAB121 is passed, not only can BTC itself not be held in custody and used as collateral for loans in banks, even the assets of BTC spot ETF cannot be refinanced. However, MSTR can be held in custody in banks and used for refinancing schemes such as collateralized borrowing and lending.

So, in a broad sense, native BTC should be assets that are legally recognized and can be linked to BTC in the world of blockchain. The significance of legal recognition is very important, and it is one of the most important thresholds for large capital to enter. Only with sufficient Compliance can more funds be willing to enter. This is also one of the reasons why a large amount of capital has poured in after the launch of Spot ETF, Compliance is one of the necessary conditions for BTCFi.

Third: Who will provide Liquidity for stake Bitcoin.

This question feels even more stupid, but if you think about it carefully, currently what stake BTC provides is based on stablecoins in the crypto world, and except for some specific channels, can these stablecoins safely enter the Web2 world? In plain language, can you seamlessly switch the assets obtained by staking BTC to invest in the Web2 world?

The answer is yes, but it requires comprehensive financial proof. The larger the assets, the higher the risks. In the current BTCFi ecosystem, without asset acceptance, it’s like a flower in a mirror and the moon in the water.

But! But! But! There is one most important issue here, almost all BTC lending protocol is collateralized with BTC, with protocol or LP providing funds, borrowers collateralizing BTC to obtain funds, fund providers using BTC as collateral and earning Interest income from the borrowed funds. Isn’t that right?

So for BTC holders who do not want to sell their BTC, does this mean that their BTC has no Liquidity at all? This is not the true meaning of BTCFi. BTCFi should provide Liquidity for all BTC holders to earn profits, not just for collateralized borrowing.

In plain language, for Liquidity providers, whether it’s web2 or web3 doesn’t matter most. Both need to solve the KYC problem of assets. However, for current Liquidity, providing liquidity for BTC is not just about fund borrowing.

Fourth: How to Provide Liquidity for Bitcoin

The essence of Liquidity is not collateral lending. In fact, the crypto world has the best Liquidity provider, which is Curve. The mechanism of Curve itself is the mechanism of central banks. If we imagine the 3 Pool in Curve as in the real world, what 3 Pool does is the acceptance between different country’s Fiat Currency, not collateral 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, the Liquidity relationship of BTCFi should not only be a borrowing relationship, but based on the Liquidity acceptance of BTC itself, after the securitization of BTC assets, the acceptance between equivalent assets can enable more investors holding BTC to enjoy the benefits of holding BTC, rather than just selling or staking benefits.

This is the true 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, they all provide liquidity for BTC. The relationship between this liquidity is not only collateralized lending, but also helping users convert into different BTC under different circumstances.

So whether it’s BTC, MSTR, or the provider of IBIT, they can earn Fi benefits without reducing the ‘BTC’ share, just like 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, you can also directly exchange them for 100% BTC, 100% MSTR, and 100% IBIT, and provide Delivery, offering users a seamless switch between virtual and real assets.

Fifth: On-chain? Not on-chain? If you achieve Equity Confirmation

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 any practical significance? After all, for MSTR and IBIT, they are not native on-chain assets, and according to SEC regulations, it is not possible to directly issue Token for MSTR and IBIT on-chain.

But in fact, on-chain is still necessary, especially providing hedging and Liquidity solutions for small-scale investors. In addition, putting BTC on the bank’s “bills” is the verification plan for BTCFi. 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 possible. Therefore, BTCFi does not actually 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, if native assets of BTC can really be provided, there will be no problem in the BTC network.

Six: The relationship between BTCFi, RWA, and RWAFi

With further research on BTCFi, many friends should be able to understand that the underlying logic of BTCFi is actually RWA, and through the on-chain of RWA, RWA becomes RWAFi. So BTCFi is essentially a part of RWA, but the current train of thought for RWA will be more complex. If only the traditional way of on-chaining US stocks and bonds, then BTCFi now integrates the bridge between virtual assets and real assets, including virtual assets as well as real assets.

The most interesting thing is that whether it is virtual assets or real assets, they are the same underlying assets. It is precisely because of this that the mutual integration between BTCFi and RWAFi can be formed, especially in terms of Compliance. Under the current Compliance system in the United States, it may be slightly more difficult, but countries like Singapore, Switzerland, and Germany will be relatively simpler.