Has BTCFi already perished?

Of course not. In fact, the era of BTCFi has not even truly begun.

Recently, the rhetoric that BTCFi is "dead" has been rampant in various conferences and social media, especially after a batch of BTCFi protocols represented by Babylon performed poorly in Token issuance, this sentiment has intensified.

While Babylon does pioneer a new narrative path, it also exposes a number of structural issues. Its core idea is to use Bitcoin as the underlying asset and export the security of its "digital gold" as a public good. From the perspective of supply-side logic, this is understandable, but in addition to technical feasibility, the key is: where is the real demand of the market? Large chains tend not to adopt them (as this would weaken the value and role of their own native tokens), while smaller chains may have options, but their undertaking market is limited and it is difficult to support high valuations. If the value capture of BTC security is only these altcoins, not only will it continue to bring selling pressure on these altcoins, but it will also be difficult for this economic model to continue to work.

Although the LST issued based on Babylon has liquidity advantages, the actual value it can capture is limited. Currently, LST yields mainly rely on platform itself or third-party token incentives, lacking real, native BTC yield support.

However, this does not mean that the BTCFi sector cannot succeed. On the contrary, after a deep analysis of these phenomena, we should focus more on two fundamental issues that remain unresolved:

1. How is the native security of BTC achieved?
2. From an economic perspective, how should the source and sustainability of native BTC profits be established?

Bitcoin's "OP Moment"

Just like Ethereum L2 experienced a boom after the Optimistic Rollup model was truly implemented, Bitcoin also needs its own "OP moment." Due to the limitations of Bitcoin's scripting language and the users' extremely high demand for native security, achieving "truly native" L2 security is the first pillar upon which BTCFi's establishment depends. The reason why the so-called BTC L2 could not gain recognition from the mainstream BTC community, and why BTCfi could not develop, is that this technical issue is one of the core reasons.

Currently, there are two viable technical routes in the market: OP_CAT and BitVM2.

OP_CAT, although technically reasonable, requires modifications to the BTC mainnet script instruction set. Considering that this change touches the bottom line of Bitcoin fundamentalism, its advancement is extremely difficult. Moreover, as Bitcoin is increasingly accepted by the public, financial institutions, regulatory bodies, and even major governments, altering its underlying logic could lead to a serious decline in its stability and trust.

In contrast, BitVM2 does not require modifications to the Bitcoin protocol and combines with the OCP (Optimistic Challenge Process) model, making it logically simple and stable in performance. Under the premise of solving the economic model, it has a solid foundation for widespread implementation.

Spoiler alert: The breakthrough of BitVM2 technology has come faster than expected, stay tuned for our release. We believe this is Bitcoin's "OP moment."

All problems ultimately boil down to economic issues.

But security is not everything; the real challenge for BTCFi is 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 satisfy? The process of matching the value provided with demand is the process of generating profit. Moreover, in addition to profit itself, we must also pay attention to the cost of obtaining profit, ensuring that it has sustainability rather than being 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 of mainstream crypto assets.

From the demand side, BTC holders generally hope to earn passive income from their assets. However, regardless of the size of their assets, everyone hopes that BTC can generate more returns. This demand is very strong and has a broad foundation. The products developed to meet these needs must be based on the native security of Bitcoin while also leveraging liquidity to provide scale, efficiency, and arbitrage opportunities.

Therefore, the L2 built on the security foundation of native BTC is the starting point for the sustainable development of BTCFi. By combining with the ZK Rollup bridge, BTC can safely and efficiently introduce a second layer for economic activities. The revenue generated from the transaction volume on 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 priced in BTC, it constitutes an extremely pure "native BTC yield" model. Prior to this, there were hardly any truly native yield scenarios for BTC, except for funding rates in CeFi.

The model of Babylon is essentially about harvesting third-party tokens, which are neither native nor sustainable.

To go further and achieve sustainable returns, it is also necessary to effectively control the operational costs of L2.

In ZK Rollup solutions, roles such as Sequencer, Prover, Challenger, Operator, and Committee each have different responsibilities, and their profit structures vary. How to control overall costs while ensuring the incentive mechanism will determine whether L2 has the capability for sustainable operation.

Final Thoughts

Although the market is still in a period of fluctuation, truly valuable products will eventually stand out. We firmly believe that the era of BTC L2 and BTCFi is about to arrive.

Based on the architecture of BTC's native security, we anticipate the emergence of more refined BTCFi products tailored to different risk appetites, meeting the diverse yield demands of BTC holders.

I am very glad to be able to move forward alongside everyone, leading the innovative exploration of BTC L2 and BTCFi.