BTCFi is dead?

Author: Kevin, GOAT Network

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

Recently, there has been a lot of talk about BTCFi being "dead" in various conferences and on social media, especially after a group of BTCFi protocols represented by Babylon performed poorly in Token issuance, which has intensified this sentiment.

While Babylon has indeed pioneered a new narrative path, it has also exposed many structural issues. Its core idea is to use Bitcoin as an underlying asset, leveraging its "digital gold" security as a public good. From a supply-side logic perspective, this is understandable, but aside from technical feasibility, the key question is: where is the real market demand? Large chains often will not adopt it (as this would undermine the value and role of their own native Tokens), while smaller chains may choose to do so, but their market scale is limited, making it difficult to support high valuations. If the value capture of BTC security is only through these altcoins, it will not only continue to exert selling pressure on these altcoins but also make it hard for this economic model to sustain itself.

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 incentives or third-party Tokens, lacking real, native BTC yield support.

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

1. How to achieve the native security of BTC?
2. From an economic perspective, how to establish the sources and sustainability of native BTC yields?

Bitcoin's "OP Moment"

Just as Ethereum L2 experienced an explosion after the Optimistic Rollup model was truly operational, Bitcoin also needs its own "OP moment." Due to the limitations of Bitcoin's scripting language and the extremely high demand for native security from users, achieving "truly native" L2 security is the first pillar for the establishment of BTCFi. The reason why the so-called BTC L2 has failed to gain recognition from the mainstream BTC community and why BTCFi has not developed is largely due to this technical issue.

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

Although OP_CAT is technically reasonable, it 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, changing its underlying logic could lead to a significant decline in its stability and trustworthiness.

In contrast, BitVM2 does not require modifications to the Bitcoin protocol and combines the OCP (Optimistic Challenge Process) model, which is logically simple and stable in performance. It has a solid foundation for broad implementation while addressing the economic model.

A little spoiler: The breakthroughs in BitVM2 technology have come faster than expected, so stay tuned for our release. We believe this is Bitcoin's "OP moment."

All Problems Ultimately Are Economic Problems (It's the economy, stupid)

But security is not everything; the real challenge for BTCFi lies in the economic model.

The essence of the economic model is supply-demand matching: What value can BTC provide? What real needs can these values satisfy? The process of matching the value to be provided with demand is the process of generating returns. Moreover, aside from the returns themselves, we must also pay attention to the cost of obtaining these returns to ensure their sustainability rather than being one-time incentives.

From the supply side, the core values of Bitcoin mainly include two points:

1. The security brought by its decentralization and strong consensus;
2. The liquidity value as a mainstream crypto asset.

From the demand side, BTC holders generally hope for "passive income." However, regardless of the asset size, everyone hopes BTC can generate more returns. This demand is very strong and has a broad base. Products developed to meet these needs must be based on the native security of Bitcoin while leveraging the scale, efficiency, and arbitrage opportunities brought by liquidity.

Therefore, L2 built on the foundation of native BTC security is the starting point for the sustainable development of BTCFi. By integrating ZK Rollup bridges, BTC can safely and efficiently introduce second layers for economic activities. The revenues generated from the transaction volume of the second layer (such as Gas fees) should be partially returned to BTC holders as a reward for providing liquidity and security.

If the Gas fees of the second layer are priced in BTC, this constitutes an extremely pure "native BTC yield" model. Prior to this, BTC had almost no truly native yield scenarios, except for funding rates in CeFi.

The Babylon model, in essence, is about harvesting third-party Tokens, which is neither native nor sustainable.

Furthermore, to 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 bear different responsibilities, and the revenue structure also varies. How to control overall costs while ensuring the incentive mechanism will determine whether L2 has the capability for sustainable operation.

GOAT Network will soon release a new "Economic Brown Paper," detailing our solutions, so stay tuned.

In Conclusion

Although the market is still in a period of turbulence, 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 native BTC security, we anticipate the emergence of more refined BTCFi products targeting different risk preferences, meeting the diverse yield demands of BTC holders.

We are excited to walk alongside everyone, leading the innovative exploration of BTC L2 and BTCFi.

LFGOAT!