On the evening of June 13th, Cobo invited Cobo Co-founder and CEO Fish Zhang, Merlin Chain Founder Jeff, Solv Protocol Co-founder Ryan Chow, B2 Network Product Advocate Stan, and independent crypto researcher DaPangDun to discuss the topic “Exploring the Possibilities of the Billion Dollar BTCFi Track Beyond HODL” on the Cobo X Space. Cobo has organized the core viewpoints of the guests and would like to share them with Cobo’s users and readers.
In the past two years, the crypto industry has undergone significant changes, especially in the Bitcoin ecosystem, which has shown new ecological characteristics. This is reflected not only in the emergence of BTC Layer 2 networks that support Total Value Locked (TVL), allowing Bitcoin to participate in on-chain DeFi activities such as lending, stablecoins, and innovative models like Solv Protocol and CeDeFi, but also in the emergence of a new group of active users and the gradual formation of an ecosystem and infrastructure around these players.
New demands bring new opportunities. The scale of Bitcoin assets is much larger than that of Ethereum and stablecoins, so the growth of Bitcoin’s Total Value Locked (TVL) and the participation of funds in specific products will bring enormous volume. Fish Zhang believes that the potential of the BTCFi track is huge and has not been fully developed, and the market size is considerable. In the short term, the total market value of BTCFi is expected to reach billions of dollars and may even surpass the historical peak of the Ethereum ecosystem. In the long term, the total market value of BTCFi is expected to surpass the trillion-dollar mark.
This edition of Cobo X Space brings together various Bitcoin players to explore the “Unlocking the Billion Dollar BTCFi Possibilities Beyond HODL” theme. The diverse Bitcoin ecosystem is showing new features, user segmentation, and user profiles.
Merlin Chain Founder Jeff believes that the number of active Bitcoin users is estimated to be in the range of hundreds of thousands to millions. Unlike Ethereum players, a new group of Bitcoin on-chain users has emerged from the BTCFi ecosystem. They do not care about gas fees and are more focused on discovering potential assets, especially in the areas of NFTs, tokens, and meme culture. They are passionate about Bitcoin culture and the concept of fair distribution, eager for equal profit opportunities, highly active and loyal, inclined towards high-risk and high-reward opportunities, more familiar with Bitcoin wallet usage, and find Ethereum wallets like MetaMask more challenging. The rise of these users may inject new vitality into the Bitcoin ecosystem.
In addition to the emergence of new active on-chain users, another mainstream user group in BTCFi is institutions and large holders. They hold a large amount of Bitcoin and hope to passively earn stable income. However, the market currently does not provide suitable value-added channels, and most Bitcoin assets are still lying dormant in cold wallets.
How to tap into this market demand and enable institutions, large holders, and some individual users to better utilize the underlying infrastructure of the Bitcoin ecosystem and unlock the billions of dollars of BTC assets lying dormant in cold wallets is a key issue that BTCFi development needs to focus on.
Bitcoin whales and institutional users are naturally more risk-sensitive. To capture the needs of these BTC users, Fish Zhang, Cobo’s Co-founder and CEO, believes the following points should be considered:
In the long run, as user demand increases, the development and technological upgrades of Bitcoin’s scripting language will gradually improve over the next 3-5 years, ultimately achieving fully decentralized and permissionless solutions. But before that, we will see a large number of multiparty collaborative custody solutions based on Multi-Party Computation (MPC) technology as transitional solutions.
These transitional solutions can activate institutions, large holders, and some individual users, allowing them to better utilize the underlying infrastructure of the Bitcoin ecosystem. By guaranteeing the security of underlying assets through multiparty custody and reducing the risk of single point failures, users can be provided with income opportunities. This may be more suitable for risk-averse large holders and institutions.
The biggest weakness of the Bitcoin network is its inability to build smart contracts on the main chain, which has become a key constraint factor for the industry due to ownership issues of underlying network assets, leading to vulnerabilities and moral hazards.
Ryan, Co-founder of Solv Protocol, said that by adopting hybrid centralized custody and decentralized technology solutions such as Cobo MPC, the flow of funds can be made transparent and ownership can be clearly defined, solving the problem of funds entering black boxes and users being unaware of their destination and control rights in the traditional opaque CeFi model. By separating asset custody and asset management, Cobo and other security custody institutions can focus on providing transparent and secure Bitcoin asset management and value-added solutions in collaboration with innovative projects such as Solv, Merlin, and B2 Network. This new model, which divides asset custody and asset management, is expected to solve the pain points of the traditional CeFi model and bring about secure and transparent income growth paths.
The BTCFi track is broad and can accommodate a large number of startups and innovative attempts. This cycle has attracted new flows from AI, BTCFi, crypto payments, and other fields, injecting new vitality into the ecosystem. Unlike the unified camp formed by the Ethereum Foundation, the Bitcoin network does not have absolute orthodoxy, and there are various cross-chain solutions, creating huge market opportunities for integrating consensus and liquidity, which is beneficial to Asian entrepreneurs to a certain extent. The future of the BTCFi track is promising.
Here are the key takeaways:
How big is the BTCFi market? When will this market truly flourish without relying on existing subsidies or point systems?
Fish Zhang: First of all, I believe that the BTCFi market has a considerable market size. In the past two years, a large amount of traditional capital has flowed into the cryptocurrency market through ETFs, and currently, only Bitcoin and Ethereum have been recognized. Due to the advantage of Bitcoin as a hard currency, it occupies a large share in the industry, but has long lacked efficient utilization paths like Ethereum.
There is a strong demand for Bitcoin asset management, but there are few reliable, secure, and stable value-added methods. The main way to increase value is to use Bitcoin as collateral to borrow and invest in other cryptocurrencies. If the Bitcoin ecosystem develops rapidly, it can provide more money-making channels for this category of assets. I personally expect the total market value of BTCFi to reach billions of dollars in the short term, and even surpass the historical peak of the Ethereum ecosystem. In the long term, the total market value of BTCFi is expected to surpass the trillion-dollar mark and fluctuate with market conditions.
This is already a vast space that can accommodate a large number of startups and innovative attempts because the annual value of the early Bitcoin mining ecosystem was only hundreds of millions of dollars. Currently, the main users of BTCFi are institutions and large holders who hold a large amount of Bitcoin and hope to passively earn stable income, but the market does not yet provide suitable value-added channels, and most Bitcoin assets are still lying dormant in cold wallets.
In the long run, as user demand increases, the development and technological upgrades of Bitcoin’s scripting language will gradually improve over the next 3-5 years, ultimately achieving fully decentralized and permissionless solutions.
However, as a pioneer in the Bitcoin public chain field, what do you think the market size is? Which unique target customer groups do you prefer, institutional clients or other types of users?
Jeff: The market size of this track is enormous. Bitcoin currently has a market capitalization of over $1 trillion, but the potential scale of active Bitcoin assets on-chain could reach hundreds of billions of dollars. Merlin is mainly dedicated to helping Bitcoin users in two ways:
Participating in on-chain DeFi, such as lending, stablecoins, etc., to make Bitcoin generate interest.
Cross-chain Bitcoin to EVM-compatible chains to participate in other on-chain DeFi products.
The current challenge in the industry that we are trying to solve is the retail-side wrap and unwrap capabilities, that is, bridging capabilities. Cobo has helped solve this problem, with $13-15 billion worth of Bitcoin being bridged in the past 45-60 days in our wallet.
Another long-term challenge is to bring real income to Bitcoin, rather than relying on project points or token profits, which have strong cyclicality. Solv is trying to generate USD-denominated income for Bitcoin through quantitative investment and other methods.
In addition to Bitcoin itself, Merlin is all in on BRC-20, Ordinals, and other new Bitcoin assets. These assets are active and have greater profit potential than annual fixed income. Merlin provides liquidity for these assets, allowing users to participate in trading and market-making. As long as the investment is in a bull market, the return rate will be considerable, just like the surge in NFTs and tokens at the end of last year.
Attracting liquidity from the first layer to the second layer and conducting better trading, lending, and contract operations on the second layer is a long-term and challenging process. Currently, Merlin’s DEX has generated over $1 billion in trading volume in the past few months, with daily trading volume of about $20-30 million. This slow-build approach is expected to bring higher returns and more users to the chain itself.
Overall, the industry is still in its early stages, and different chains have different development strategies. For Merlin, we are more focused on how to bring new businesses to the Bitcoin ecosystem in the long term in a secure manner, rather than pursuing short-term trading volume growth.
Stan: The value of BTCFi lies in transforming Bitcoin from a passive asset to an active one, which is mainly reflected in three aspects:
Using the security of Bitcoin to provide security for a broader network, such as the Stacks project.
Improving the liquidity and application scope of Bitcoin and related assets, including Layer 2 networks, to enable native Bitcoin DeFi.Providing Infrastructure;
Providing cross-chain functionality, bringing Bitcoin funds into other DeFi ecosystems, and increasing capital liquidity.
Therefore, BTCFi’s target customer group mainly includes three types:
Existing Bitcoin players: such as miners, holders, etc., BTCFi can meet their needs for earning income.
Users and project parties of other blockchains: such as EVM, Solana, etc., the BTC Layer 2 network can bridge with these ecosystems.
Users outside the circle: as the core user group for the expansion of all blockchain ecosystems, BTCFi can reduce the threshold for them to enter the cryptocurrency field.
Only the Layer 2 network at the bottom of the Bitcoin ecosystem has enough vitality, users, and innovation, can BTCFi continue to develop.
Jeff, can you estimate the scale of active DEX native traders on the Layer 2 network, including the number of Rune and Glyph players, as well as their average asset size? How do you describe these user groups?
Jeff: In terms of the number of users, the active users on the BTC chain are roughly in the range of hundreds of thousands to millions, which can be observed through top assets and NFT data. Most of them are new users on the chain, who may have previously only been speculators, and are more familiar with Bitcoin wallet usage, but find MetaMask very difficult to use.
These users have relatively high net worth. Due to the high transaction fees of Bitcoin, ordinary transactions require tens to hundreds of dollars to be paid, naturally filtering out those who cannot afford high fees. Therefore, Bitcoin on-chain users do not care much about the high or low transaction fees, but are more concerned about discovering assets with potential. For example, in the early days of Merlin, hundreds of millions of dollars in BRC20 assets and Ordinals NFT were quickly pledged, showing that these users are active and financially strong.
Typical user profile: likes Bitcoin culture, believes in the concept of fair distribution, and has a strong demand for equal opportunities to benefit through airdrops, etc. As a new user group on the Bitcoin chain, the future development is worth looking forward to, and the potential programmability of Bitcoin needs to be further explored and utilized.
Overall, this is a new type of active user group on the chain with a strong economic strength that likes Bitcoin culture, and their rise and development may inject new vitality into the Bitcoin ecosystem.
Ryan has rich entrepreneurial experience in the Ethereum community. Can you explain the differences between providing BTC financial services in the Bitcoin community and the Ethereum community? Solv has always been trying to comply with regulations and attract large-scale compliant investors. Is there an opportunity to bring these investors into the Bitcoin ecosystem?
Ryan: The user groups, spiritual concepts, and infrastructure of the Bitcoin ecosystem are very different from those of the Ethereum ecosystem. Providing BTC financial services in the Bitcoin community faces the following main differences and challenges compared to the Ethereum community:
The Bitcoin infrastructure is relatively lagging, with a higher level of decentralization at the underlying level, making it much more difficult to build infrastructure and improve user experience than Ethereum;
High gas fees make it more difficult to conduct retail business in the Bitcoin ecosystem.
However, the Bitcoin ecosystem also has its unique advantages and characteristics:
The Bitcoin ecosystem has a huge market of high-net-worth users and potential total value locked (TVL). Firstly, the scale of Bitcoin assets is indeed much larger than that of Ethereum and stablecoins, so the growth of Bitcoin TVL and the participation of funds in specific products will bring amazing volume. Secondly, the average individual holdings of Bitcoin whales (holding more than 1000 bitcoins) may be higher than the average level of Ethereum whales. This means that the average unit price and individual holdings of the Bitcoin ecosystem may be higher.
The Bitcoin user group is relatively conservative, and it is different from the Ethereum ecosystem users, creating opportunities to explore new areas.
In addition, there are two other important differences between the Bitcoin ecosystem and the Ethereum ecosystem:
1) The Bitcoin ecosystem has lacked innovation opportunities in the past, but this cycle has absorbed a large amount of new traffic from AI, BTCFi, and encrypted payments, injecting new vitality.
2) Unlike the Ethereum Foundation forming a unified camp, the Bitcoin network does not have an absolute unified camp, and there are various cross-chain solutions, creating huge market opportunities for integrating consensus and liquidity, giving Asian entrepreneurs greater opportunities to a certain extent.
The higher decentralization of Bitcoin makes it relatively easier for compliant institutions to participate.
Solv is doing BTCFi-related businesses on various public chains. Are you concerned that your BTCFi ecosystem partners or projects will become centralized financial (CeFi) problem institutions in this cycle? How do you view this risk?
Ryan: The most obvious weakness of the Bitcoin network is that it cannot build smart contracts on Layer 1. The current Bitcoin mainnet does not have such an environment, making it very difficult to implement smart contracts at this stage. In this case, the issue of asset ownership at the underlying network becomes a key constraint on the development of the entire industry.
Due to the inability of the Bitcoin network to implement smart contracts on Layer 1, the issue of asset ownership becomes a key constraint on the development of the industry, bringing vulnerabilities and ethical risks.
This has led to the emergence of hybrid solutions such as Cobo and Antalpha, which combine centralized custody and decentralized technology to ensure that the position and flow of funds are transparent and traceable. Although some people question the centralization tendency, unlike traditional CeFi, this model ensures the transparency of fund flow and ownership definition. The fundamental problem with CeFi is that once the funds enter the black box, users cannot know where they are going and cannot control them, which brings about an opaque profit space. By separating asset management and custody, Cobo focuses on secure custody institutions and integrates and collaborates with innovative projects such as Solv, Merlin, and B2 Network that focus on value-added services and ecosystem expansion, providing users with transparent and secure Bitcoin asset management and yield enhancement solutions. This new model of asset custody and management is expected to address the pain points of the traditional CeFi model and bring a secure and transparent path for yield growth.
Can you share some exciting new projects or trends you have recently noticed?
DaPangDun: Regarding BTCFi, I analyze it from the following aspects:
Security is key, including wallet security, protection of asset ownership, and prevention of systemic risks (such as fluctuation risks caused by DeFi nesting).
BTCFi needs to have basic conditions: one is hookable assets (including Bitcoin itself); the second is diversified forms of Fi (lending, pledging, etc.); and the third is implementation paths (side chains, OP Codes, etc.).
After the last DeFi Summer, the market’s tolerance for security risks has decreased, guiding BTCFi towards a more secure and reliable direction.
Stablecoins play an important role in BTCFi, and users willing to participate in Fi tend to favor stablecoin targets.
The market will test which implementation path will ultimately succeed through competition among many.
The ultimate goal of Fi is income, and each project will achieve income through different forms (pledging, lending, etc.).
Overall, BTCFi needs to focus on security, enrich asset forms, explore various implementation paths, and introduce stablecoins, with the ultimate goal of creating income for users.
Does Merlin Chain have any plans to collaborate with Tether or Circle and introduce native stablecoins? What are the main challenges it faces?
Jeff: Currently, due to the lack of absolute security guarantee from the BTC Layer 2 solution (mainly side chains), introducing compliant stablecoins is difficult. Although USDT, USDC, etc. can be bridged, the trust level of users in the bridging solution’s security is crucial.
At the same time, the actual demand for stablecoins among BTC users is not too large, and they are more inclined to trade based on BTC. Therefore, due to the technical trust issue in the short term, it is difficult to fully trust the current Layer 2, and introducing stablecoins such as Tether and Circle remains a medium to long-term goal. Currently, the focus may be on developing native projects based on BTC, including over-collateralized stablecoins, while moderately introducing USDT, USDC, etc., rather than large-scale introduction of compliant stablecoins.
What challenges and resistance does the BTCFi ecosystem face in its development? What obstacles will traditional asset management institutions or ETH asset management track projects face when joining?
Shen Yu: The biggest obstacle that the BTCFi ecosystem faces is that the development speed of the BTCFi ecosystem lags far behind the pace of industry application innovation. This is due to the slow iteration of Bitcoin’s underlying upgrades. The decentralization of Bitcoin determines that its upgrades require widespread consensus in the community, making the process complex and lengthy, creating a sharp contrast with the rapid iteration expected by entrepreneurs. Therefore, the BTCFi ecosystem will be more diversified and diverse for a longer period of time, with various innovative attempts emerging.
Bitcoin lacks official support and unity like Ethereum, which makes the BTCFi ecosystem more fragmented and diversified, and project parties face greater challenges in balancing their balance sheets. However, this also brings some unique advantages to the BTCFi ecosystem. For example, the Bitcoin underlying uses mechanisms such as multi-signature and MPC, which can provide more detailed permission separation and asset monitoring capabilities for large account holders and institutional users, with relatively lower risks, making it more attractive to large account holders and institutional users.
Ryan: From a regulatory perspective, Ethereum has outlined “red lines” and “green lines” for the development of BTCFi, providing a reference for the latter. Currently, basic infrastructures such as Bitcoin L2, sidechains, and the Lightning Network have not caused significant regulatory issues.
In terms of asset custody, whether it is Bitcoin or Ethereum, they both need to meet certain compliance requirements because they involve the transfer of asset ownership.
In the field of asset yield, Bitcoin has more advantages. Since Bitcoin is clearly defined as a commodity, related yield and management regulations are theoretically more relaxed. Whether Ethereum staking constitutes a security is still under discussion, and there is a gray area. Currently, Ethereum staking does not require KYC and anti-money laundering measures, but when some exchanges offer related products, they are warned by the SEC, indicating the existence of uncertainty. In the Bitcoin yield track, some products have not fully considered regulatory compliance, but have not yet caused major regulatory issues, indicating that this area is still in a gray area. However, Bitcoin yield products often require compliance operation due to the nature of the asset. For example, some products on Solv require KYC to avoid regulatory risks. And through DeFi and decentralized exchanges, retail investors who have not undergone KYC can also participate in these products.
The last Bitcoin growth was driven by user education and expansion on the L2 layer, and in the next phase, asset yield may become a new growth driver. During this process, regulatory issues still need to be continuously monitored.