Is BTCFi Dead? When will Bitcoin's "OP Moment" arrive?

Author | @kevinliub

This article reflects the author's views and does not represent the views of Wu's Say.

Of course not. In fact, the era of BTCFi hasn't really begun yet.

Recently, there has been a lot of talk in various meetings and social media about BTCFi being "dead," especially after a group of BTCFi protocols represented by Babylon performed poorly in token issuance; this sentiment has become even more pronounced.

Although Babylon has indeed pioneered a new narrative path, it has also exposed several structural issues. Its core concept is to use Bitcoin as an underlying asset, projecting the security of its "digital gold" as a public good. From the supply-side logic perspective, this is understandable, but apart from the 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), and while small chains may choose to do so, their market scale is limited and cannot support high valuations. If the value capture of BTC security relies solely on these altcoins, it will not only continuously exert selling pressure on these altcoins but also make it difficult for this economic model to operate sustainably.

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

However, this does not mean that the BTCFi sector cannot be traversed. On the contrary, after a thorough analysis of these phenomena, we should focus more on two fundamental issues that have yet to be resolved:

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 as Ethereum L2 ushered in an explosion after the Optimistic Rollup model really ran through, Bitcoin also needs its own "OP moment". Due to the limitations of the Bitcoin scripting language and the extremely high requirements of users for native security, achieving "truly native" L2 security is the first pillar of BTCFi's establishment. One of the core reasons why the so-called BTC L2 could not be recognized by the mainstream BTC community and why BTCfi could not develop was one of the core reasons.

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

OP_CAT, although technically reasonable, requires modifications to the BTC mainnet script instruction set. Given that this change touches the bottom line of Bitcoin fundamentalism, its advancement is extremely difficult. Furthermore, as Bitcoin is increasingly accepted by the public, financial institutions, regulatory bodies, and even major governments, altering its underlying logic could potentially lead to a severe decline in its stability and trust.

In contrast, BitVM2 does not require modifications to the Bitcoin protocol and combines the OCP (Optimistic Challenge Process) model, resulting in a straightforward logic and stable performance. It has a broad foundation for practical applications, provided that the economic model is addressed.

Spoiler alert: 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.

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 satisfy? The process of matching the value provided with the demand is the process of generating profits. Moreover, in addition to the profits themselves, we must also pay attention to the cost of obtaining the profits to ensure that it has 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 inherent security of Bitcoin, while also leveraging the scale, efficiency, and arbitrage opportunities 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 providing liquidity and security.

If the gas fees of the second layer are denominated in BTC, it constitutes an extremely pure "native BTC yield" model. Prior to this, there were almost no truly native yield scenarios for BTC, 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 sustainable returns, 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 overall costs while ensuring the incentive mechanism will determine whether L2 has sustainable operational capabilities.

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

Written at the end

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 expect to see more refined BTCFi products tailored to different risk preferences, meeting the diverse income needs of a wide range of BTC holders.

I am very pleased to walk alongside everyone, leading the innovative exploration of BTC L2 and BTCFi.

LFGOAT!