Is BTCFi dead? Three perspectives to analyze its value reconstruction in the infrastructure era

As for whether BTCFi is dead, I believe it is too early to make a judgment, and there is a misunderstanding of the evolution logic of the BTCFi track.

Author:Haotian

I didn't expect the topic of "BTCFi is dead" to come so quickly. Indeed, since @babylonlabs_io went online, the market expected Babylon to boost the BTCFi track, but obviously, things did not go as planned. As for whether BTCFi is dead, I believe it is too early to make a judgment, and there is a misunderstanding of the evolution logic of the BTCFi track. Following the text, I will share a few observations:

1) First, linking Babylon's market performance after going online with the prospects of the BTCFi track is clearly biased.

Because Babylon can lock users' BTC assets in script contracts on the BTC mainnet while outputting "security consensus services" on many BTC layer2s and obtaining rich returns from other extended chains. From the supply side, Babylon's technical innovation service is indeed useful, but from the demand side, who will purchase this security consensus service, and who will provide continuous returns?

Clearly, from the B-end demand perspective of some large, medium, and small new chains for "security consensus", the prospects of BTCFi are not as expected. However, from the C-end user demand perspective, every BTC holder needs to generate continuous income for their held BTC. The goal of BTCFi technical solutions is to access trillions of dollars in traditional financial capital, and how to integrate Bitcoin's unique decentralized consensus with global financial liquidity is the ultimate goal of this BTCFi narrative.

Following this logic, in the post-ETF era, the BTCFi narrative has just begun. How can it be considered dead?

2) In fact, technical solutions around BTCFi have been maturing, from the initial EVM-Compatible to UTXO Stack architecture, and then to zkVM protocol framework, RGB client verification framework, Optimistic Challenge Proof (OCP) architecture, etc. BTC's technical solutions once presented a chaotic scene, but while seemingly scattered and chaotic on the surface, they are actually evolving and choosing directions naturally according to market trends.

The following text compares the OP_CAT_ and BitVM2 technical paths and believes that BitVM2 has more potential because it does not require changing existing BTC scripts:

1. OP_CAT path - logically reasonable but requires changing BTC OpCodes, with high difficulty in being accepted by core developers.

2. BitVM2+OCP mechanism - achieves off-chain computation and interaction through the OCP challenger mechanism. When a "challenge" occurs, the protocol is executed on the BTC mainnet, with Bitcoin layer1 acting as an arbiter to ensure security.

Immature solutions will be eliminated or corrected under market pressure. For example, early Bitcoin cross-chain solutions generally used centralized custody models, while now the combination of BitVM2 and OCP can provide a trustless native secure cross-chain mechanism.

When technical solutions like BitVM2 that do not require changing BTC core code mature, Bitcoin will usher in its "OP moment", just as Ethereum's value in Optimistic Rollups was recognized, directly triggering a wave of market ecosystem explosion.

3) Let the technical solutions continue to evolve and iterate, because there is another layer of logic: the biggest challenge facing BTCFi is not technical feasibility, but a sustainable Tokenomics economic model.

Many current solutions rely on token issuance and incentives, which is clearly unsustainable. A truly sustainable BTCFi economic model should be built on its network use value. When the second-layer network processes transactions and charges fees, with part of the revenue fed back to BTC stakers, a value cycle based on actual needs is formed.

This model does not depend on external chain purchases but obtains revenue through serving its own ecosystem, which is obviously more sustainable in terms of economic model.

In summary, looking from a different perspective, the prospects of BTCFi become clear. It is just that the track is currently in the early stage of infrastructure construction, with technical solutions converging, Tokenomics economic models being improved, and the door to global financial liquidity through ETF just opening.

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