BTCFi: The Financial Innovation Path of the Bitcoin Ecosystem

Overview

• Background of BTCFi's rise: The narrative of public chains like Ethereum is weakening, infrastructure is becoming saturated, and the industry lacks fresh narratives; the Bitcoin ecosystem has not yet formed a comprehensive resource monopoly, and opportunities still exist.

• The main scaling solutions for BTC include state channels, sidechains, Rollups, UTXO + client verification, and large blocks. Each solution faces technical challenges to comply with "orthodox" requirements.

• Key conditions for the development of BTCFi: cross-chain interoperability, layer two scaling solutions, smart contract functionality, and完善的开发工具和基础设施

• The main challenges faced by BTCFi: limitations of the Bitcoin protocol, insufficient liquidity, security of cross-chain bridges, accuracy of oracles, and how to form a unique development path.

1. Overview of BTCFi

Definition of 1.1 BTCFi

BTCFi aims to build a decentralized financial market within the Bitcoin ecosystem, allowing BTC holders to directly use Bitcoin-related staking, lending, market-making, and other financial derivative tools to generate profits, thereby activating the financial value of Bitcoin.

1.2 Background of the Rise

The year 2023 is an important year for the development of the Bitcoin ecosystem, with tokens like BRC20 causing a significant wealth effect. The reasons for the rise of BTCFi include:

1. The narrative of public chains like Ethereum is weakening, and the infrastructure is becoming saturated.
2. The industry as a whole lacks fresh narratives.
3. The Bitcoin ecosystem is still full of opportunities and has not formed a resource monopoly.

As of October 1st, Bitcoin ecosystem has publicly raised funds 14 times, totaling over 71.1 million USD. In addition to financing, various protocol assets such as BRC20, ORC20, and ARC20 have also emerged.

1.3 Index Asset Protocol

Indexed assets are mainly divided into:

• BRC20: Non-UTXO bound asset
• ARC20: UTXO bound assets, based on the Atomicals protocol
• ORC20: Token standard based on the Ordinals protocol
• SRC20: Emphasizes a simple and efficient token issuance mechanism
• CAT20: Focus on personal/business custom token creation

2. BTCFi's Expansion Plan

The development of BTCFi requires blockchain scalability, but there is still controversy over the current scalability paths. The main expansion plans include:

2.1 State Channel

Like the Lightning Network, it allows users to conduct multiple transactions off the mainnet, only submitting to the mainnet when opening and closing channels.

2.2 Sidechains and Rollup

Sidechains and Rollups are more suitable for the development of the Bitcoin ecosystem, enabling fast transactions, Turing completeness, and interoperability.

2.3 UTXO+ client verification

The RGB protocol, based on the Bitcoin UTXO model, shifts transaction validation off-chain to improve efficiency and privacy.

2.4 Large Block

Like BCH, it increases throughput by increasing block size, but it requires changing the original consensus and faces many challenges.

3. The Development Conditions and Challenges of BTCFi

3.1 Prerequisites for Development

1. Cross-chain interoperability
2. Layer 2 Scaling Solutions
3. Smart Contract Functionality
4. Comprehensive development tools and infrastructure

3.2 The main challenges faced

1. Limitations of the Bitcoin Protocol
2. Insufficient liquidity issue
3. The Security of Cross-Chain Bridges
4. The Accuracy of Oracles
5. Forming a unique development path

BTCFi may focus more on financial products related to payments and value storage in the future, and the PayFi concept may be more suitable for the Bitcoin ecosystem. During its development, how to provide innovative features while ensuring security will be a long-term challenge for BTCFi.