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

Author: Phyrex Source: X, @Phyrex_Ni

The in-depth discussion about BTCFi is not conducive to ordinary investors to read. The content is very boring, there is almost no investment code, it is not suitable for most investors, and there is no effect of getting rich quickly.

Very happy that more and more friends have paid attention to this field of BTCFi recently. I receive many inquiries from friends in the industry almost every day, especially for the definition of BTCFi. Everyone is very confused. So what is BTCFi, and what problems can BTCFi solve? Let's talk about it together.

First: Is it native Bitcoin?

This question seems stupid, but if you think about it carefully, you may break out in a cold sweat. Many friends think that #BTC's second-layer network, or BTC's pledge is part of BTCFi. The most critical core here is whether the supported assets are native BTC or mapped BTC.

The reason for raising this question is based on who controls BTC, the core asset in the BTC ecosystem, and whether the control method is safe enough. Many friends believe that sufficient decentralization is the most important, but in the financial field, security is often a necessary condition for large funds to enter, or even the primary condition.

In layman's terms, who holds the BTC in custody? Now, almost all BTC in the decentralized BTCFi protocol is similar to WBTC. While it is controversial in itself, the biggest problem is the recognition of WBTC. We can talk about this later, but what we need to know is that when SAB121 is passed, the only BTC that banks can support is native BTC.

Therefore, it can be concluded that in the actual application of BTCFi, non-native BTC cannot guarantee not only security, but also acceptance and liquidity. Especially after SAB121, the bank's central bank is the largest "second-layer network" of BTCFi, and the BTC bills guaranteed by the bank are the "BTC TOKEN" that can circulate in the blockchain.

Second: Is the only native Bitcoin Bitcoin?

The answer is no. In different environments, "native" is actually understood differently. In the world of blockchain, BTC=BTC is beyond doubt. This is also the reason why we said earlier that banks only recognize native BTC, but in the financial world, BTC financial assets are also BTC under compliance.

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

Secondly, not all investment institutions can directly purchase BTC spot or BTC spot ETF, especially in the US stock market, Bitcoin cannot be traded directly, so $MSTR, which contains a large amount of BTC in its market value, can be regarded as the only legal way to hold BTC in the US stock market.

Before SAB121 was passed, not only BTC itself could not be custodied and mortgaged in banks, but even the assets of BTC spot ETFs could not be refinanced, but MSTR can be custodied in banks, mortgaged and refinancing schemes such as loans.

So native BTC, in a broad sense, should be an asset that can be linked to BTC in the world of legal recognition and blockchain. The significance of legal recognition is very important. This is one of the most important thresholds for large funds to enter. Only with sufficient compliance can more funds be willing to enter. This is also the reason why a large amount of funds poured in after the spot ETF was passed. Compliance is one of the necessary conditions for BTCFi.

Third: Who will provide the liquidity of pledged Bitcoin?

This question seems even more stupid, but if you think about it carefully, the current pledged BTC is provided on the basis of stablecoins in the currency circle, and can these stablecoins enter the Web2 world safely except for certain specific channels? In other words, can you make seamless switches in the Web2 world by investing in assets obtained by pledging BTC?

The answer is yes, but you need to provide a complete proof of funds. The larger the assets, the higher the risk you need to face. In the current BTCFi ecosystem, throwing away the asset acceptance is like a flower in the mirror and a moon in the water.

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But! But! But! There is a most important question here. Almost all BTC lending agreements are pledged BTC. There are agreements or LPs to provide funds. Borrowers pledge BTC to obtain funds. Fund providers use BTC as collateral and obtain interest income on the lent funds. Is this right?

Then for investors who have BTC but do not want to sell BTC, their BTC does not have any liquidity. This is not the true meaning of BTCFi. BTCFi should provide liquidity to all BTC holders to obtain income, and should not be just mortgage lending.

To put it simply, for liquidity providers, web2 or web3 is not the most important method. They all need to solve the KYC problem of assets, but for the current liquidity, only capital-based lending does not mean providing liquidity for BTC.

Fourth: How to provide liquidity for Bitcoin

The essence of liquidity is not mortgage lending. In fact, there is a best liquidity provider in the currency circle, which is Curve. Curve's mechanism itself is the mechanism of the central bank. If you imagine the 3 Pools in Curve as the real world, what 3 Pools do is the acceptance between legal currencies of different countries, not mortgage lending.

Including Uniswap, it 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 lending relationship, but based on the liquidity acceptance of BTC itself. Only after BTC is assetized and then accepted between assets of equivalent value can more investors holding BTC enjoy the benefits of holding BTC, rather than just selling or staking.

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

So whether it is BTC, MSTR or IBIT providers, they can get Fi benefits without reducing the "BTC" share, but to some extent, just like Curve 3 Pool, Bitcoin MSTR and IBIT form a liquidity pool together.

When injecting BTC, it is equivalent to obtaining 33.33% of BTC, 33.33% of MSTR and 33.33% of IBIT. Of course, it can also be directly exchanged into 100% BTC, 100% of MSTR and 100% of IBIT, and delivery is provided, providing users with a financial tool that seamlessly switches between virtual assets and real assets.

Fifth: On-chain? Not on-chain? If you haven't read the previous content, you may think this is a stupid question. How can it be called a decentralized financial application without being on the chain? But after reading the previous content carefully, do you have a new understanding of BTCFi? Do you think that there is no practical significance in going on the chain? After all, MSTR and IBIT are not native assets on the chain, and according to SEC regulations, there is no way to issue tokens for MSTR and IBIT directly on the chain. But in fact, it is still necessary to go on the chain, especially to provide hedging and liquidity solutions for small-scale investors. In addition, putting BTC on the chain of the bank's "notes" is the verification solution of BTCFi. Of course, in this protocol, it is no longer necessary to support BTC or the BTC second-layer network, as long as there are "native BTC" notes, so in fact BTCFi does not need to be on the BTC-related network. This is just like USDC does not have to be on #Ethereum. As long as it is a native asset, it is the same everywhere.

Of course, if BTC's native assets can be provided, there will be no problem in the BTC network.  

Sixth: The relationship between BTCFi, RWA and RWAFi

With further research on BTCFi, it is estimated that many friends can understand that in fact, the underlying logic of BTCFi is RWA, and RWA is turned into RWAFi through the chain of RWA, so BTCFi is essentially a part of RWA, but it is more complicated than the current RWA idea. If it is just the traditional chain-up method of US stocks and US bonds, then the current BTCFi is a bridge that integrates virtual assets and real assets, that is, it includes both virtual assets and real assets.

The most interesting thing is that both virtual assets and real assets are the same underlying assets. It is precisely because of this that BTCFi and RWAFi can be integrated, especially in terms of compliance. The current compliance system in the United States will be a little more difficult, but it will be relatively simpler in countries like Singapore, Switzerland, and Germany.