Author: @kevinliub
Compiled by: Blockchain in Plain Language
Is BTCFi Dead?
Certainly not. In fact, the era of BTCFi hasn't even truly begun.
Recently, discussions about "BTCFi is dead" have been prevalent at various conferences and social media platforms, especially after the poor Token performance of projects like Babylon, intensifying negative sentiment. Although Babylon and other BTCFi projects have indeed created a new narrative direction, they have also exposed some serious structural problems. Their core concept - using Bitcoin as a base asset and outputting its "digital gold" security as a public good - is reasonable on the supply side. However, the problem lies on the demand side: Where is the actual demand for BTC security?
Large blockchain networks are unlikely to adopt this model (as it would weaken the utility and value of their native Token), while smaller chains might be interested but have a limited market size, making it difficult to support Babylon's high valuation. If BTC security is only absorbed by Altcoins, it would not only continue to create selling pressure on these Altcoins but might also lead to an unsustainable economic model.
As for Babylon's LST (Liquid Staking Token), although it has liquidity, the value it captures is minimal. Current yields primarily depend on platform or third-party Token incentives, lacking genuine native BTC returns.
However, this doesn't mean the BTCFi track is hopeless. Instead, these phenomena highlight two core unresolved issues:
- How to achieve truly native Bitcoin-level security?
- From an economic perspective, what is the source of native BTC returns? How can sustainability be ensured?
Bitcoin's "OP Moment"
Ethereum's Layer 2 (L2) solutions only truly took off after Optimistic Rollup proved its simplicity, efficiency, low cost, and inheritance of mainnet security. That was Ethereum's "OP moment". Bitcoin also needs a similar breakthrough.
Due to Bitcoin script limitations and users' high requirements for native security, solving this technical challenge is the first pillar of BTCFi feasibility. Many past "Bitcoin L2" solutions failed to gain core BTC community recognition precisely because they couldn't provide native security.
Currently, there are two main technical routes: OP_CAT and BitVM2.
Although OP_CAT is logically feasible, it requires changing Bitcoin's operation codes (OpCodes), which Satoshi Nakamoto deliberately disabled for security reasons. Given the Bitcoin core development team's commitment to minimalism, advancing this path is extremely difficult. Moreover, as Bitcoin is widely accepted by the public, financial institutions, regulators, and even major governments, any changes to its underlying logic could seriously undermine its stability and credibility.
In contrast, BitVM2 doesn't require changing existing Bitcoin scripts. It integrates the Optimistic Challenge Process (OCP), providing a simple and robust technical model. Once paired with a reasonable economic design, BitVM2 has broad implementation potential.
(Spoiler: BitVM2's progress is faster than expected, stay tuned for our announcement. We believe this will be Bitcoin's "OP moment".)
Ultimately an Economic Issue
Security is just the foundation; the real challenge of BTCFi lies in its economic model.
The core of any economic system is supply-demand matching:
- What value can BTC provide?
- What real needs can it meet?
The process of matching value with demand is the process of creating returns. To make returns sustainable, their generation costs must be considered and controlled.
Supply Side: Bitcoin's two core advantages are:
- Security from decentralization and community consensus.
- Liquidity as the most mainstream crypto asset.
Demand Side: BTC holders generally want passive income. Regardless of position size, they want Bitcoin to "work" for them. This is a strong and widespread demand.
To meet this demand, BTCFi products must be built on native BTC security and fully leverage the scale, efficiency, and arbitrage potential of liquidity. Therefore, Bitcoin's native L2 is the cornerstone of sustainable BTCFi.
Through a zk rollup bridge, Bitcoin can be safely transferred to L2 for economic activities. Income generated by L2 (such as gas fees) can be returned to BTC holders as a reward for providing capital (liquidity) and security. If L2 gas fees are denominated in BTC, this creates a powerful native BTC return model. Previously, Bitcoin had almost no true native return scenarios, limited to centralized exchange funding rates.
Babylon's model essentially relies on third-party Token value capture, which is neither native nor sustainable.
To maintain returns, cost control is the next key. In the zk rollup framework, roles like Sequencer, Prover, Challenger, Operator, and Committee each have different responsibilities and reward structures. Balancing these roles and minimizing friction will determine whether L2 can operate efficiently and cost-effectively in the long term.
Conclusion
Even in market turbulence, true value will ultimately emerge. We firmly believe that the era of BTC L2 and BTCFi is just beginning.
Architectures based on native Bitcoin security will give birth to a series of BTCFi products catering to different risk appetites, meeting the diverse needs of BTC holders.
We are honored to journey alongside everyone, leading the innovation wave of BTCFi and Bitcoin Layer 2.
Article link: https://www.hellobtc.com/kp/du/05/5844.html
Source: https://x.com/kevinliub/status/1919499375035756580
