1. Background
With the introduction of the Ordinals protocol and the BRC-20 standard, Bitcoin has not only revolutionized payment methods and value storage, but also changed the traditional financial system.
The exploration of the ecosystem has become more diverse, especially in the context of Bitcoin staking. While BitVm is still far from being realized, projects like Babylon and PStake are already pushing for the use of Bitcoin's security features to operate POS chains without changing the core Bitcoin protocol.
The staking layer has been initially breached, and traditional staking has brought security borrowing. Now, PStake further expands the evolution of liquidity staking, allowing BTC to maintain its liquidity while staking, making BTCFI seem not far away.
2. BTCFi 2.1 What is BTCFi
Bitcoin has never been considered an active asset, and its market value of trillions of dollars has mostly been idle. BTC's ecosystem places far greater emphasis on "security" than other ecosystems, so any attempt to expand BTC seems particularly cautious.
BTCFi, decentralized finance built on the Bitcoin public chain, refers to the introduction of decentralized finance (DeFi) functions into the Bitcoin ecosystem, allowing Bitcoin to not only serve as a store of value, but also to play a role in financial applications.
In essence, BTC and ETH users are fundamentally different. For C-end users, they are more concerned about equal profit opportunities, decentralized culture, and equal power, so they are less sensitive to gas fees and often prefer to explore the potential of assets. In contrast, institutions and large holders who have been deeply involved in BTC infrastructure and stable finance for many years tend to adopt a long-term and conservative approach to earning profits, prioritizing security and stability.
BTCFi can meet the needs of B-end users and non-fomo ordinary users, transforming Bitcoin from a passive asset to an active one.
The author has explored various DeFi infrastructures on Ethereum, most of which rely on over-collateralization models, including various stablecoin lending protocols. It seems that over-collateralization is no longer a consensus.
Speaking of over-collateralization models, the difference lies in whether the operating platform has the native contractual constraint of smart contracts. So, do Bitcoin holders also have the opportunity to participate in staking, lending, and liquidity provision to gain new revenue opportunities? Currently, BTCFi's total value locked (TVL) accounts for only 0.09%, which is very low compared to other public chains. DeFi accounts for as much as 14% in the Ethereum ecosystem, 6% in Solana, and 3% in Ton.
3. Dilemma of BTC Expansion Solutions
BTCFi often relies on various BTC expansion solutions. The current attempts to expand BTC include:
Many projects are already well-known. The expansion solutions may seem diverse, but ultimately they all share a commonality, which stems from the cautiousness of BTC's native protocol evolution.
3.1 Community Game of BTC from BIP-300
Let me briefly explain the evolution of BIP-300. BIP-300, also known as Bitcoin Improvement Proposal 300, is usually referred to as Drivechain. It was initially introduced in 2017, building a sidechain concept called "Drivechain" on the Bitcoin blockchain, allowing BTC to be transferred in a trustless manner between the main network and these Drivechains. Technically, it is not much of a challenge because Drivechain is based on BIP, which essentially means modifying the BTC source code through a soft fork, rather than relying on additional extensions that do not depend on soft forks.
However, BIP-300 quickly became the subject of repeated discussions and could not be smoothly promoted. The advantages are obvious, but opponents argue that it deviates from the definition of digital storage, making it easy to open the door to Bitcoin network fraud and leading to more scrutiny by regulatory agencies. They also argue that bidirectional pegging may completely disrupt the economics and assumptions of Bitcoin. There were even discussions about the profitability of miners, as merged mining essentially allows miners to earn "free funds" by doing what they are already doing.
Ultimately, it became difficult to continue to promote due to the classic debate on the legitimacy of BTC. Looking back on this process, the core community fundamentally guards the idea that Bitcoin needs another system to complement it, rather than trying to create new alternatives to compete with it.
So, it is more difficult to gain consensus from the BTC Core community than to conquer the ZK holy grail (laugh). Therefore, it is not difficult to understand why many subsequent innovative ideas no longer rely on directly modifying BTC itself, but continue to innovate in terms of gameplay.
3.2 Limitations of Native Programming Capabilities
Although the exploration directions are diverse, they face similar dilemmas, mainly in two aspects:
Lack of native smart contract functionality: Bitcoin itself does not support complex smart contracts, only basic functionalities such as time locks or multi-signature locks using BTCscript.
Limited interoperability: There is limited interoperability between Bitcoin and other blockchains, and most solutions rely on centralized institutions.
Constrained by these two points, it also leads to liquidity dispersion. Currently, in the minds of users, Bitcoin on-chain is mainly for storage, while liquidity is concentrated in centralized exchanges or wrapped tokens such as Wbtc on ETH, which also limits users' ability to efficiently trade and provide liquidity in the decentralized finance ecosystem.
Although Bitcoin's original design is relatively simple, the two important updates in recent years have brought possibilities to BTC.
SegWit (Segregated Witness)
Activated in August 2017, its core change is to separate the signature (Witness Data) from the transaction data, making the transaction data smaller, reducing transaction fees, and increasing the capacity of the Bitcoin network. With SegWit, Bitcoin's capacity limit increased from 1MB to 4MB.
Taproot Upgrade
Similar to the SegWit upgrade, the Taproot upgrade is also a soft fork upgrade, aiming to enable Bitcoin to deploy smart contracts and expand use cases. Although Bitcoin itself does not have smart contract functionality, Taproot allows multiple parties to sign a single transaction using Merkle trees. Taproot introduces a new script type called "Tapscript," which supports conditional payments, multi-party consensus, and other functionalities.
In fact, the development of these BTC-native technology-based solutions has been relatively slow. For example, RGB has been developed for over 4 years, Lightning has been developed for many years, and Babylon's "timestamp protocol" took several years. Perhaps making money is the best driver in the market. If there is a secure solution that allows most users to make money during the participation process, it can attract many people. After all, driving wealth through technical dreams alone has long been difficult for the geek community.
You might criticize the lengthy development of these upgrades, but even Taproot, which almost achieved the fastest consensus in the community (proposed in 2018, launched in 2020), took more than 2 years from start to finish.
However, even so, the ecosystem infrastructure is still incomplete, and the recent hotspots are still focused on exploring possibilities such as BitVM, BitVM2, and RGB++.
Of course, let's put aside the old story of BTCL2 and the typical multi-signature wallet staking wrapped BTC model for now, and let's not discuss the future of BitVM. Returning to the present, the current explorations all have significant limitations.
3.3 Limitations of Other Models
Overlay Protocols such as Inscriptions
4. Bitcoin's pSTAKE Finance
Since the popularity of BRC-20 has brought traffic and attention to the Bitcoin ecosystem, subsequent standards such as ARC-20, Trac, SRC-20, ORC-20, Taproot Assets, and Runes have emerged to address the issues of BRC-20 from different perspectives. However, the core problem of such overlay protocols ultimately lies in the decentralized indexing challenge, which may lead to discrepancies between indexers and the risk of indexers being unable to recover after an attack.
The biggest issue with the Lightning Network is the limitation of its use cases, as it can only facilitate transaction activities and cannot support more scenarios.
Not to mention various scaling protocols, RGB, DLC, and sidechains like Rootstock and Stacks, which are still in the early stages and relatively weak in terms of scaling effects and smart contract functionality, or rely on security primarily through multi-signature wallets.
As a result, more and more voices in the community are suggesting that Bitcoin should not simply replicate Ethereum's applications on the Bitcoin network.
Therefore, a more practical on-chain liquidity staking solution has gradually emerged, which does not rely on external smart contracts or sidechains, but directly implements staking mechanisms on the Bitcoin network, introducing liquidity to earn rewards.
In my opinion, this model cleverly leverages the strongest security of the BTC network and achieves a relatively balanced speed and returns.
Recently, a Binance Research report mentioned four heavyweight BTCFi protocols: Babylon, Bouncebit, PSTAKE Finance, and Lorenzo.
4.1 pSTAKE Finance on Bitcoin
pSTAKE has been providing staking and yield services on various chains since 2021, and within BTC, pSTAKE is built on top of Babylon. This system is not rejected by the BTC core community (unlike Inscriptions, which has been heavily rejected and even once faced a soft fork to eliminate the Inscriptions protocol). This original chain liquidity staking solution does not transfer BTC to other chains. It utilizes Babylon's Remote Staking mechanism, which involves staking on the Bitcoin chain while transmitting the security effects of BTC assets to other chains.
Through this bidirectional security sharing protocol, it provides security validation for POS chains and generates rewards for BTC holders participating in staking.
So, how does Babylon achieve this, and what exactly is pSTAKE on top of it?
4.2 pSTAKE Bitcoin Liquid Staking
pSTAKE is a liquidity staking protocol that operates similarly to Babylon in terms of mechanism. Essentially, it operates within the Proof of Stake (PoS) ecosystem. Its main feature is allowing users to stake their cryptocurrency assets while maintaining liquidity, similar to Lido's sETH.
The key difference between liquidity staking and traditional staking is liquidity. Traditional staking involves sacrificing liquidity when users deposit tokens into a PoS protocol to increase economic security. This means their tokens are locked and cannot be used elsewhere, which is the current situation with Babylon, as it focuses more on security.
In contrast, liquidity staking allows stakers to retain the liquidity of their assets and continue using them elsewhere, addressing the liquidity dilemma in traditional staking.
In practice, when users deposit assets in BTC, the platform mints Liquidity Staking Tokens (LST) for users on the POS chain. Users can freely trade or use these tokens on other DeFi platforms, and they can also redeem them for the underlying assets at any time.
So, where does the revenue come from?
- Users first stake BTC with pSTAKE, which then stakes the assets with Babylon to generate rewards, which are then distributed to users.
- When users stake BTC, pSTAKE also distributes a liquidity token called pToken, which users can continue to use, similar to sETH generated by Lido.
- When users want to redeem their BTC, they simply destroy the pToken through pSTAKE's application, which stops the rewards and exchanges the assets back from the liquidity pool to the user's BTC.
The BTC staked with pSTAKE is also provided with associated services by MPC providers such as Cobo for custody. This is similar to what Merlin offers.
Ultimately, this creates a dual-token system, where pTOKENs represent unstaked assets that can be freely used in DeFi, and stkTOKENs represent staked assets that accumulate staking rewards.
4.3 Conclusion
pSTAKE itself has years of asset management experience and multiple secure audit records for its contracts, especially after collaborating with Babylon.
Further enhance liquidity: In collaboration with Babylon, a platform focused on improving asset utilization efficiency through advanced blockchain technology, it can further optimize and expand this liquidity.
Increased potential for earnings: Babylon's platform and technical expertise may provide more value-added opportunities for assets staked in pSTAKE. Through Babylon's network, the assets in pSTAKE may be able to access a wider range of DeFi protocols and yield strategies, which may include more complex trading algorithms or high-yield liquidity pools. This can not only provide users with more diversified investment choices but also potentially increase the overall return on these assets.
Improved security and compliance: Collaboration with Babylon may bring additional security and compliance advantages. Due to Babylon's high asset management security and the support of MPC service providers such as CoBo, the system can be further strengthened to ensure profitability.
In summary, through pSTAKE's Bitcoin liquidity solution, BTC holders can stake their assets, and the source of income is derived from Babylon's services, providing liquidity tokens to users to maintain liquidity.
Currently, pSTAKE has not fully launched its official version, and the current experience can only be tested on the testnet. Therefore, many asset management mechanisms and profit expansion mechanisms have not been disclosed, and there is no TVL data to reveal.
However, with the support of Binance Labs, it has caught the attention of the author, as Binance has always been heavily involved in staking, understanding that what users need is financial gameplay, which is the most practical demand in the blockchain industry.
Therefore, the long-term idle trillions of BTC is ultimately not a problem.
Finally, returning to the focus on security of BTC, now that MPC asset management service providers such as CoBo have been further understood and recognized by users in projects like Merlin, it is better to cherish the present and operate the system optimistically through the certainty of underlying returns to provide asset management security.
Appendix
Why pSTAKE is Building BTC Liquid Staking on Babylon - pSTAKE
https://blog.pstake.finance/2024/05/23/why-we-are-building-on-babylon/
pSTAKE | Bitcoin Liquid Staking and Yields
https://pstake.finance/?lang=cn
pSTAKE Finance: The Orange Road Ahead x Bitcoin Yields
https://blog.pstake.finance/2024/06/25/pstake-finance-the-orange-road-ahead-x-bitcoin-yields/
Bitcoin Liquid Staking Testnet Now Live on Babylon - pSTAKE
https://blog.pstake.finance/2024/06/21/pstake-btc-liquid-staking-testnet-chinese-guide/
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