Exploring the new potential of BTCFi: How the Core dual stake mechanism affects the BTC ecosystem

With the continuous new high of BTC prices and the continuous improvement of BTC ecosystem technology, BTCFi will usher in a wave of outbreak in the next six months.

Host: Joe Zhou, Foresight News Deputy Chief Editor

Guests: Core DAO Core Contributors Chanel, Crypto Wersearch Daily Coin Research Founder Alvin Hung, Cactus Product Director Alice Du, WaterDrip Capital Founder Jademont, Independent Researcher Ningning, Solv Protocol Ecological Cooperation Director Catherine

Host: Please let the six guests introduce themselves.

Chanel: I am Chanel, mainly responsible for the rise of Core in the Chinese and Asia-Pacific regions. Recently, the Core Mainnet has been upgraded, and I am very happy to be able to share some views on BTCFi with everyone here.

Alvin Hung: I am Alvin Hung, the daily coin research of Alvin Hung, and the daily coin research has its own website, providing project analysis for various tracks, and we have also opened a TG community.

Alice Du: I am Alice from Cactus. As a Compliance custodial service provider focusing on institutional users, Cactus has been the first to support Core’s dual stake in Wallet, bringing a secure and convenient BTC stake experience to users.

Jademont: Hello everyone, I am Dashan, the founding partner of Waterdrop Capital. There have been many recent developments in the BTC ecosystem, and I hope to share them with you later.

Catherine: I am a partner of Solv Protocol, mainly responsible for the rise of Solv’s ecosystem. Solv is a multi-chain deployed BTC stake platform, currently cooperating with more than a dozen blockchain networks and building BTC liquidity pools, including the Babylon restake pool. At the same time, there are also some product collaborations with CORE.

Host: What are some new perspectives on the BTCFi market?

Chanel: Currently, BTC holders hope to have more on-chain profit opportunities, and many BTC projects have developed under this premise. Core’s non-custodial stakeBTC, launched in April this year, has achieved quite good results. Our goal is to allow all participants to stake BTC and earn profits with the lowest risk. During our communication with many institutions, partners, and communities, we found that everyone has expectations for the entire BTC market and more profit opportunities. We have made upgrades to two products. The first is non-custodial BTC restaking. After staking BTC, it can be further restaked back to Core, increasing both individual profit opportunities and the overall Annual Percentage Rate (APR). The second is the upcoming LSTBTC, which allows users to stake BTC and stake it to other protocol layers to gain more profit opportunities.

Alvin Hung: Although most of the attention in this cycle is focused on memes, we have actually been studying the BTC ecosystem since the beginning of the year. At that time, Merlin brought about the first wave of the BTC ecosystem, and new assets such as inscription, rune, and Non-fungible Tokens (NFTs) emerged. Later on, Babylon also sparked a trend of staking BTC, and we have published some summary articles on Babylon. Among the top 30 blockchains in terms of Total Value Locked (TVL), 7 of them are related to the BTC ecosystem. Although BTC is not the hottest ecosystem in the market right now, it still carries weight in the market. Both large investors and institutions have been participating in the market.

If you didn’t hold BTC this year, you would actually be relatively sad. BTC is clearly the best-performing mainstream asset in this market, and both national governments and large companies have strategies to increase their BTC holdings. I think this is also influenced by MicroStrategy. When BTC’s price gradually breaks through new highs, the attention to BTCFi will rise again. SUI and Aptos may be the relatively impressive public chains in these months. Their on-chain decentralized finance has made good progress. SUI focuses more on lending or derivatives, and Aptos has also started to have some BTCFi projects. Both Move and its ecosystem users and funds will transition to the upcoming Movement. For retail investors, BTCFi may not be the first choice because everyone now likes to invest in protocols that can generate short-term returns. However, for medium to long-term investors or those who already hold BTC, there are still opportunities to earn on-chain profits, and players who were originally in the EVM ecosystem are also starting to integrate various BTCFi protocols.

Jademont: Recently, we have been discussing BTCFi with some western institutions. First of all, the BTCF track is somewhat different from Decentralized Finance on the ETH network, because the level of participation of customers is different, or the groups are different. In the past year, BTC has risen by about three times, but the stock of MicroStrategy has risen by 14 times. MicroStrategy, which was originally a company that purely hoarded BTC, mentioned a few months ago that they wanted to do BTCFi, which means to combine the BTC they hoarded with Decentralized Finance. If more and more players of this level come in, BTCFi will definitely be completely different from the public chain ecology or ETH protocol we have experienced in the past. Including Galaxy, which has expanded its business to Hong Kong, they also attach great importance to the BTCFi zone. They manage a lot of BTC assets and want to provide value-added services in the BTC ecosystem.

The second point I want to briefly talk about is the necessity of BTCFi development. Have you ever thought about where the biggest crisis for the crypto world is after BTC rises? Or where is the biggest risk for BTC? In fact, this risk is becoming greater and greater, but I rarely see anyone discussing it on Chinese Twitter. The risk is that the BTC network is becoming increasingly insecure. Currently, the security of the BTC network is guaranteed by Mining Rigs. We know that the BTC network actually has the vulnerability of a 51% Computing Power attack, which means that if you control 51% of the Computing Power, you can attack a specific transaction. Of course, controlling 51% of the Computing Power does not mean that you can put those 21,000,000 BTC in your pocket. Roughly estimated, there are currently about 15 billion USD worth of Mining Rigs to ensure the security of the entire network. When the BTC market cap was relatively low, such as below 1 trillion USD, it was generally difficult for a single transfer to exceed 10 billion USD. Assuming BTC is at 30,000, the value of BTC is only about 6-7 billion USD, but if you want to attack the network, you need at least 10 billion USD worth of Mining Rigs. In other words, you are using 10 billion USD to attack a potential profit of only 6-7 billion USD, which is definitely not cost-effective. Therefore, BTC is relatively safe. However, now that BTC has risen three times, reaching over 90,000, and may even rise to 100,000, 200,000, 300,000 in the future, the value of Mining Rigs has not increased. It may still be 10 billion USD. If I spend another 10 billion USD to attack a target with a potential profit of 18 or 20 billion USD, the possibility will increase. At this time, the BTC network will become less secure. How to make the BTC network secure? In simple terms, it is to increase Miner’s income, increase on-chain revenue, and increase on-chain activities. In this way, everyone will have the motivation to deploy more Mining Rigs, and the cost of Mining Rigs will increase, reducing the risk of being attacked.

Many people say that BTC L2, BTCFi, are they duplicating the route of the ETH network? In fact, in the BTC community, people don’t pay much attention to the protocol of the ETH network. The development of the BTC ecosystem is completely for the protection of the BTC network. So BTCFi is not something that everyone wants or doesn’t want to do, but something that must be done. In addition, with more and more major players and increasing network security requirements, the future of BTCFi will definitely be very bright.

Ningning: I am Ningning, an independent researcher. I used to work on coin listing and research at TRON. I am also involved in a BTC L2 project called stake, which has Western capital support. What impressed me is that a US-listed mining company supports them. This mining company may also believe that BTC needs some applications to generate transaction fee income to maintain the network. The BTCHalving happened more than half a year ago, and the next round of production reduction is about to start counting down. If the value of BTC cannot continue to increase costs like now when the cost of Miner’s Computing Power is pumping exponentially, a problem arises. If the scale of Computing Power cannot continue to maintain income growth with the network’s value, and Computing Power’s growth rate slows down, the market will become very panicked. There will be a time window of 4 to 8 years before this problem occurs.

But we cannot deny that the entire market is completely sucked in by MEME and Bitcoin pump. Not only the BTC and Ethereum ecosystems, but even the previously hot prediction market have shown signs of decline.

Of course, some people may think that the BTC second layer is not established and cannot deny that the market is indeed experiencing a relatively low period and bottleneck period. I think this is a longer cycle thing, but in the current market environment, maybe everyone does not pay much attention to it. However, I see that many docking partners or developers are still actively developing the Bit second layer. For example, the rise of Babylon’s data is still very obvious, maybe because it restricts the overall scale, coupled with the current market situation, resulting in less market influence than everyone expected.

The most typical thing in our industry is the cycle, and another is rotation. When the cycle rotates, the infrastructure construction in this area may be more complete than it is now, and there will be a more intense rise in the future.

Host: What is the evolution of LST (Liquidity Staking Token) on the ETH chain, and how will it demonstrate similar and different development paths in the BTCFi track?

Chanel: After staking, I still have Liquidity and then stake again for additional yield, which is the charm of DeFi. Core’s focus in the next development is to launch an LSTBTC product, which can enable more people to hold on-chain Liquidity.

Alvin: Before staking emerged in the Ethereum ecosystem, EigenLayer had a total value locked of 15 billion USD, with only a portion being liquid staked. They were also one of the earliest protocols to do liquid staking, and the innovation of LST is quite interesting. For example, some projects in Decentralized Finance use LST products for on-chain collateral lending and contracts during this cycle. In the future, BTCFi may also have similar applications, thereby increasing the usage and liquidity of staked or re-staked assets. This is also something that BTCFi’s protocol needs to consider. In the future, there may be significant integration opportunities between Decentralized Finance and AI agents, allowing all ecosystems to participate, which is something I am looking forward to.

Jademont: We see an opportunity in the BTC ecosystem. Currently, there are various BTC assets participating in stake or re-stake protocols, which was not a trend in the previous bull market or two years ago. Previously, there may have only been WBTC, but now we have counted at least five or six, such as TBTC, FBTC, and solvBTC, including BTC on the Lighting Network that many people do not pay much attention to. BTC is approaching $100,000, but in reality, the entire EVM is very sluggish because there is not enough new capital coming in, and there are too many choices for new capital. Retail investors have very little funds, and it is difficult for everyone to pump a project to hundreds of millions of dollars and go further. So overall, the AltCoin market is now over $1 trillion. To pump the market as a whole, it requires hundreds of billions or trillions of funds. It is impossible to rely on retail investors.

And now there are too many options for traditional institutional funds. They can directly buy a large amount of ETF, buy BTCSpot, or buy stocks of various Crypto-related companies. Many U.S. encryption concept stocks actually outperform most mainstream AltCoins by a wide margin. But now the altcoin market presents another opportunity, such as wrapping the on-chain native BTC into EVM-compatible BTC, and then using the EVM-compatible wrapped BTC to participate in Decentralized Finance protocol’s stake lending or LP formation, or even selling it to buy AltCoins. This is actually a very important deposit channel, which means that many people may not be able to buy AltCoins directly, but can do so by first buying BTC and then using BTC to buy AltCoins. So if the market for such wrapped BTC can increase to, for example, several hundred thousand BTC, it will be a significant boost to the AltCoin market, allowing funds to enter the AltCoin market.

Host: What are your thoughts on the further development of Core on-chain after the issuance of SolvBTC.CORE in the future?

Catherine: For Solv, we are the recipient of encapsulated BTC assets, which means we may consider receiving some assets other than encapsulated BTC. The current competitive landscape is quite interesting, because cBTC started issuance a month after some negative information came out, and now it is adopting a multi-chain deployment strategy. There are also some decentralized encapsulated BTCs such as TBTC, which have also gained some traction, as previously WBTC was absolutely leading. We are also beginning to see other exchanges with the idea of issuing their own encapsulated BTC.

But we face the same problem as these centralized exchanges when it comes to packaging BTC issuance, that is, there is no profitable model. On-chain, it is a public product and cannot generate profits.

So when we communicate with cBTC, we hope they can provide us with some support. But actually, they don’t have the resources internally because they do this for free and don’t have any profit. It’s just a wrapped BTC asset, but the interest rate for borrowing is only 1%, so it’s not really worth it. Therefore, these wrapped assets rely heavily on protocols that are good at playing Decentralized Finance. For example, if you are accepted by Solv as our underlying asset, you will go from having assets in one or two application scenarios to having assets in 20 application scenarios, and you will also have profits. Apart from solvBTC, we also have 4 LST options for users to choose from. And LST itself is an asset with high composability.

Jademont: Encapsulated BTC may not necessarily be unprofitable, it just may not be very profitable at the moment. But once the capital scale increases, it will definitely be profitable. Let me share a new trend. There’s a project called Ethena, which is actually a combination of CeFi and Decentralized Finance. Now, more and more BTCFi projects are learning from Ethena’s approach. Encapsulated BTC is managed in a way that ensures the safety of the principal, and it can generate profits. It’s all about a platform mindset. In short, you can obtain encapsulated BTC and use it for financial management or various value-added services. For example, if the return is 10%, you can give users 8% and keep 2% as profit.

Host: After the Fusion upgrade, Core’s BTCstake has joined CORE stake Cactus as a Core institutional partner. What are the prospects for double stake?

Alice Du: Fusion is also a major highlight today because it brings new application scenarios. First of all, we have definitely connected with the service provider of dual-stake institutional custody in the first place. We believe that Core’s dual-stake is a very good innovation and attempt. Core itself comes with a non-custodial stake protocol for BTC, which actually utilizes the time lock mechanism of the BTC main chain. Users can enjoy income without worrying about the security of BTC assets. And additional stake can also earn more rewards.

BTC dual stake can attract more projects to enter the Core ecosystem. And with the native stake of Core, the price of Core will also be very stable. With the promotion of a virtuous cycle, every role in the ecosystem can benefit infinitely. When institutional users want to participate in stake to earn high returns, they must use a very secure tool and channel. As a professional custody platform, Cactus not only ensures the security of Private Key storage but also assists in secure confirmation and prevents blind signatures in the process of using Private Key, meeting the highest industry standards to help everyone enjoy profits while avoiding asset losses.

Host: For BTC holders, security is often the first priority. What risks should investors pay attention to when participating in the BTCFi project?

Ningning: Because BTC itself cannot deploy Smart Contracts, it is not mutable, so we need a mechanism to cross BTC from the original chain to L2 or other chains, which is a very complex problem. We may have many solutions, such as centralized hosted Wallet and enterprise-level multi-signature Wallet, as well as MPC solutions, various Cross-Chain Interaction bridge solutions, and bridgeless Cross-Chain Interaction solutions, etc. Although the absolutely leading WBTC encountered a Crisis of Confidence, it has also been explained to the community and is currently adopted by Aave. From the perspective of the entire industry, many people actually do not like to see a monopoly, and everyone still hopes for a more Decentralization-protected encapsulation of BTC assets completely guaranteed by the chain.

If relying on centralized institutions, institutions or whales may want a more native custody solution. Currently, there are some developing solutions, such as the BTVM Cross-Chain Interaction custody proposed by Babylon, EOTS and Bitlayer, but it takes time to mature the technology and time to popularize it.

Chanel: In terms of technical construction, everyone has been very careful in terms of auditing, unlike a year or two ago when vulnerabilities were frequent. However, it cannot be denied that not everyone can accept or bear the risk of the Cross-Chain Interaction bridge when BTCLarge Investors want to obtain returns through Cross-Chain Interaction. Even if the on-chain players are quite familiar with these processes, we cannot say that it is risk-free. Here, I will take some time to introduce Core’s non-custodial stake.

Non-custodial, in short, means that the assets will not leave the staker’s Wallet, allowing users to decide how long they want to lock their time through time locks, and then contribute BTC to the validation Node of the Core chain, we will provide some Token rewards, thus creating a potential return. Our non-custodial stake solution has also been widely recognized by institutional partners. Another important aspect is how to conduct code Open Source in the audit, which developers and users need to pay special attention to when participating.

Alvin: on-chain applications themselves will have certain risks, because when we decide to withdraw BTC from the exchange and perform more operations on-chain, these operations themselves will bring some additional risks. When using Decentralized Finance or various on-chain protocols, everyone should pay special attention to phishing websites and common hacker attack methods. Incidents where users click on fake websites and have their wallet assets stolen occur very frequently.

Jademont: For the BTC network, BTCFi has no risks, only benefits, but for users, BTCFi does have risks. Currently, BTCFi can be divided into two types: one is on the BTC network, and the other is hosted by a trusted third party. If on the BTC network, I know of two projects. One project is Babylon, developed by a Stanford professor, which has not yet been launched, but claims to be able to be locked on BTC on-chain through Decentralization. Another competitor is DRClink, which locks BTC on the BTC network through a method similar to Smart Contract. The risk of these two projects lies in the contracts themselves, but at present, it seems that there should be no problem, as it has been more than three years since 2021, and these contracts have stood the test of time.

Another way is through custody, which I think can be divided into two categories. One is custody by relatively large centralized institutions. Although it is centralized, it does not necessarily mean it is not secure, because when the reputation of the institution is good enough, or the cost of misconduct is high enough, we can also consider it to be secure. When the scale is relatively small, it is completely fine to have them in custody. But if the scale is large enough, this method may not be as good as the multi-signature method. Multi-signature is a very good solution, it’s just about how you design it. If all three multi-signatures are controlled by one person, then it is definitely not secure. But now there are many Decentralization multi-signature solutions. For example, a project has proposed a protocol using a dynamic committee to achieve multi-signatures, and this multi-signature may be controlled by several dozen Private Keys. I think this method is already sufficiently Decentralized and can be considered secure.

Host: What will be the next step for BTCFi’s development?

Ningning: BTCFi mainly has two trends, one is to provide economic security for BTC L2, Oracle Machine, and cross-chain bridges through staking again, and thus obtain native stake rewards. Eigenlayer has been validated in the market, so it will start all over again in the BTC ecosystem. The other is that BTC generates interest through borrowing. One of the most different aspects between BTC and ETH networks is that BTC itself does not have the ability to generate interest, while Ethereum can obtain an annualized return of around 3% through native stake, which is lacking in BTC.

Chanel: We launched dual stake in the hope that they can stake their rewards on our validation node to maintain the positive development of the entire economic network without custody of BTC stake. In addition to the issuance of LSTBTC, we hope to attract more AVS to Core and enable more on-chain applications through the encapsulation of BTC assets. Core’s layout is not only for retail investors but also for institutional miners, striving to align with the entire BTC community. The entire community is relatively complex and diverse, and the value of BTC lies in its bridging of TradFi and digital finance, while our layout considers BTC, TradFi, and digital finance as a whole.

Alice Du: Cactus is very optimistic about the prospects of BTCFi. In the past few years, we have observed that BTCFi first appeared on centralized financial management platforms, and then many packaged BTC began to enter the Decentralized Finance protocol. This trend has become more obvious this year. BTCFi has entered an explosive rise, and a large number of financial behaviors based on BTC’s underlying protocol have emerged. We also believe that with the maturity of technology, BTC can enter more scenarios in a more native way, and be used as a basic asset to build a more robust blockchain financial system.

The development of BTCFi cannot be separated from Large Investors, institutions, Mining Pools, and Computing Power platforms, which are also the main customer base of Cactus. Their demand is also very strong, especially the Miners who, due to the BTCHalving factor, also hope to have some way to earn income without sacrificing BTC control. So Cactus is actively deploying this year, cooperating with communities such as Core and Babylon, and also supporting Core’s dual stake for the first time. What Miners or Large Investors are most concerned about is security. Through our plug-in wallet stake, stake operations can be performed through the Block blockchain explorer. We will also provide measures such as Address verification, Allowlist verification, review mechanism, hardware signature, etc. to avoid blind signing or asset loss.

Alvin: The most difficult part of the project is not just about doing the project well, but more importantly, how to gain market follow. A large part of the BTCFi ecosystem is composed of institutions, who want to gain more profits. What retail investors follow is different. At the beginning of the year, there were many new asset issuance methods during the first wave of BTC’s outbreak, such as inscription, rune, and even BTC Non-fungible Token, etc. I think these are fun in cycles and are not simply operated through Wallet on-chain to earn profits.

New assets will also appear on the BTCFi track, which will not just be about depositing assets and earning profits. In the future, BTCFi may also combine with AI to create various innovative applications and generate more application scenarios.

Jademont: I think BTCFi is indeed getting closer to the explosion, mainly for several reasons. First of all, everyone can see that this bull market is mainly driven by BTC and MEME. MEME is a PvP market, and the amount of funds is not large. Although everyone is getting rich, once the target reaches a few billion US dollars, it cannot rise anymore. In fact, this is a typical manifestation of lack of Liquidity. BTC has very sufficient Liquidity, so when everyone feels that the price of BTC is relatively high, the shortest path to speculation with BTC is BTCFi.

We have been discussing this issue with some foreign institutions before, the legalization or regulatory dividend of this round of BTC, which allows many previously illegal BTC to be circulated normally using Wallet. After downloading the BTC Wallet, there may be some ecological things in the Wallet, and there may also be Lighting Network for payment, which means that the BTC ecosystem is more capable of accommodating the wave of traffic brought by BTCFi. Another reason is that from a technical perspective, several representative projects in the BTC ecosystem are relatively mature. For example, Lighting Network Taproot went live on the Mainnet in July, but there were still some minor issues being fixed. According to our understanding, they are basically fixed now. Including RGB off-chain calculations and client verification of Smart Contracts are also very well developed. I estimate that within the next quarter, at the latest within half a year, leading projects of BTCFi will be launched, such as Babylon, which are also close to launching. Including the BTC L2 project that the ICP project party did a few days ago, these projects have obtained huge financing, starting from tens of millions of dollars. With so much money in the hands of project parties and Tokens about to go live, I believe there will be a joint effort. So, I am looking forward to the development of BTCFi in the next quarter.