Is BTCFi really dead?

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

Written by: Kevin, Core Contributor of GOAT Network

Recently, at various conferences and on social media, the rhetoric about BTCFi being "dead" has become rampant, especially after a group of BTCFi protocols represented by Babylon performed poorly in token issuance, causing this sentiment to grow even stronger.

Although Babylon indeed pioneered a new narrative path, it also exposed many structural issues. Its core idea is to use Bitcoin as the underlying asset and to project its "digital gold" security as a public good. From a supply-side perspective, this is understandable, but beyond technical feasibility, the key question is: where is the real market demand? Large chains often will not adopt this (because it 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 relies solely on these altcoins, it will not only continuously bring selling pressure from these altcoins but also make it difficult for this economic model to sustain.

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

However, this does not mean that the BTCFi track is not viable. On the contrary, after a deep analysis of these phenomena, we should focus more on the 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 earnings be established?

Bitcoin's "OP Moment"

Just like Ethereum L2 experienced a boom after the Optimistic Rollup model was successfully implemented, Bitcoin also needs its own "OP moment." Due to the limitations of Bitcoin's scripting language and the extremely high demands of users for native security, achieving "truly native" L2 security is the first pillar on 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 has not been able to 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, while technically reasonable, requires modifications to the BTC mainnet script instruction set. Considering that this change touches upon the fundamental principles of Bitcoin, it is extremely difficult to advance. 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 the Optimistic Challenge Process (OCP) model, which is logically simple and stable in performance. It has a solid foundation for widespread application under the premise of solving the economic model.

Slight spoiler: 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 (It’s the economy, stupid)

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

The essence of the economic model is supply and demand matching: what value can BTC provide? What real needs can these values meet? The process of matching the value to be provided with demand is the process of generating profits. Furthermore, in addition to the profits themselves, we must also focus on the cost of obtaining those profits to ensure their 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 the scale of funds, efficiency, arbitrage opportunities, etc., brought by liquidity.

Therefore, the L2 built on the security foundation of native BTC is the starting point for the sustainable development of BTCFi. Combined with the ZK Rollup bridge, BTC can safely and efficiently introduce a second layer for economic activities. The revenue generated from the transaction volume of 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, BTC had almost no real native yield scenarios, except for the funding rates in CeFi.

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

Furthermore, to achieve continuous profits, it is also necessary to effectively control the operating costs of L2.

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

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

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 preferences, satisfying the diverse yield demands of BTC holders.

I am very glad to walk alongside everyone and lead the innovative exploration of BTC L2 and BTCFi.

LFGOAT!