Regardless of whether it’s BTC LRT, CeDeFi, or DeFi, Cobo MPC solutions have opened up multiple high-yield and risk-controlled income opportunities for Bitcoin holders, maximizing the release of Bitcoin’s intrinsic value.
Background:
As the oldest first-generation cryptocurrency, Bitcoin is more concentrated in the market compared to Ethereum. Early Bitcoin holders have experienced countless cycles of bull and bear markets and the rise and fall of various investment tools, gaining an understanding of the high risks associated with cryptocurrency assets. As a result, these veteran Bitcoin holders tend to have a more conservative investment philosophy and a higher aversion to risk.
On the other hand, to ensure security and decentralization, the Bitcoin network has made compromises in scalability and programmability. These limitations restrict its potential for expansion and ability to attract developers. As a peer-to-peer electronic cash system, the Bitcoin blockchain cannot support the deployment of new financial applications like Ethereum, making it difficult to become an ideal financial infrastructure.
This has led to a limited variety of financial products available for investors in the Bitcoin ecosystem. Existing products are often too simple and active, lacking complex structural design and risk hedging strategies, making it difficult to meet the diverse needs of investors for returns and risks.
A widely circulated Bitcoin meme on the internet sharply pointed out this fact, stating, “Bitcoin, as an investment target, seems to have no other way besides long-term holding (‘hodl’).” This meme reflects the fact that while Bitcoin is a powerful store of value, there is still much room for expansion in terms of financial applications and use cases.
Income Demands Spawn a New BTC Staking Model:
The Bitcoin ecosystem urgently needs new sources of income, especially after the Bitcoin halving.
This is mainly due to two factors.
First, miners’ income has significantly decreased. After the fourth Bitcoin halving, block rewards decreased to 3.125 BTC. Based on the current price and electricity costs, the shutdown price for miners is around $55,000, much higher than last year’s $14,300. Data from The Block Pro shows that BTC miner revenue in May decreased by 46% compared to the previous month, reaching $963 million. If the Bitcoin price does not increase significantly, miner income will plummet, and if the price further declines, it may even be difficult to maintain a balance between income and expenses, forcing miners to shut down. Therefore, finding new revenue models for miners has become a driving force for maintaining the sustainable development of the Bitcoin ecosystem.
Additionally, early BTC holders have accumulated a large amount of idle assets and are in urgent need of investment channels for generating income. According to DefiLlama data, the market size of unilateral BTC yield exceeds $10 billion, with a significant portion of funds only able to obtain very low yields and requiring trust in centralized institutions to provide services. This reflects the market’s demand for secure risk-free returns on idle BTC assets.
In this context, we have seen explosive growth in Bitcoin Layer 2 (L2). Numerous Bitcoin scalability projects and BTC-based new projects have emerged like mushrooms after the rain.
DefiLlama data shows that the number of Bitcoin scalability projects has exceeded 60 in 2023, with a total TVL of Bitcoin, Bitcoin bridges, and scalability solutions exceeding $12 billion. This marks the transformation of Bitcoin from a single asset to a more vibrant ecosystem, giving birth to more application scenarios, innovative construction, and investment opportunities around Bitcoin.
BTC Staking is considered a highly potential and reasonable track. As a mature income model already validated in the Ethereum ecosystem through the EigenLayer module, once introduced into the Bitcoin ecosystem, BTC can be connected to a wider decentralized ecosystem, providing security support for other PoS chains or Layer 2 networks. With its higher security consensus advantage, BTC Staking can achieve higher security and decentralization levels compared to Ethereum staking. By reusing existing infrastructure and combining emerging innovative technologies such as EigenLayer and AVS, BTC Staking can explore new economic profit models and inject new sources of income into the entire ecosystem.
BTC Asset Management: Three Major Income Solutions for BTC
Currently, in the cryptocurrency market, stable and secure income mainly comes from Staking, CeDeFi rate arbitrage, and DeFi:
Staking refers to holding cryptocurrency and participating in its consensus mechanism to generate passive income. The most typical example is Ethereum’s POS staking, where users stake ETH and validate transactions to earn passive income. Staking income is relatively stable and requires minimal active operations, but the yield is relatively limited.
CeDeFi rate arbitrage refers to conducting arbitrage trading to earn returns by taking advantage of the interest rate difference between centralized finance (CeFi) and decentralized finance (DeFi). The CeDeFi arbitrage strategy combines the security of CeFi and the flexibility of DeFi, allowing users to take advantage of the deep liquidity in CeFi to execute profitable delta-neutral interest rate arbitrage, thereby achieving relatively controlled risks while obtaining substantial returns.
DeFi refers to income sources in the broader emerging decentralized finance ecosystem, such as PointsFi’s cumulative user dividends, liquidity mining, and yield aggregation. These innovative income models often originate from community participation, incentive mechanisms, etc., and have uncertainties but also the potential for excess returns.
Although the above solutions have been validated in Ethereum with very successful cases and are naturally suitable for permissionless blockchains, for the non-Turing complete Bitcoin, it is not easy to implement due to the limitations of the scripting language. The most effective solution currently is to upgrade the underlying architecture of the Bitcoin network, such as implementing OP Code and OP_CAT to support advanced functionalities and achieve truly decentralized on-chain settlements.
However, before that, are there any secure solutions that can introduce the three mainstream income models of the cryptocurrency industry into the Bitcoin ecosystem while ensuring asset security?
In fact, Multi-Party Computation (MPC) technology can be used to build diversified income solutions based on BTC, whether it’s BTC LRT fixed income, CeDeFi arbitrage income, or various mining income applied in a broader DeFi application scenario.
MPC is a technology that keeps data confidential among multiple participants, allowing multiple parties (each participant having its private data) to participate in calculations and verify results without revealing personal information to others. In practice, each participant holds an encrypted key, and these keys are collectively used to perform secure transactions or operations.
In an MPC setting, private keys are divided into several parts and distributed to participants. When authorization transactions are required, a specified number of these participants or nodes must provide their key fragments to sign the transaction. This process ensures that no single participant can control the transaction alone. The final digital signature is then verified using public keys, which can confirm the authenticity of the transaction without revealing individual key fragments.
MPC is particularly useful for cross-chain transactions because multiple approvals are required before taking any action. MPC provides powerful security advantages, including no single point of failure, flexible signature processes, and detailed control over who can access and sign transactions.
It is worth noting that in this use case, Cobo MPC is not a custodial service but a technical solution applied to Bitcoin asset management solutions, making it trustless.
Let’s take the three BTC asset management solutions as examples to explain how Cobo MPC is applied:
In the BTC LRT scenario, Bitcoin holders can deposit BTC assets into Babylon to receive native BTC income and token rewards from other AVS projects. Babylon is a decentralized trustless Bitcoin staking protocol that uses the staked BTC to secure PoS chains and Layer 2 networks through a shared secure public market, thereby extending the security of Bitcoin to other chains. In return, Bitcoin holders can earn income. Unlike centralized solutions, Cobo MPC provides Bitcoin holders with independent wallet addresses and manages Bitcoin using a 2/3 threshold signature mechanism, where two private key fragments are controlled by the client. Only when two private key fragments are passed, specific operations can be executed, protecting user assets from external and internal attacks, ensuring that even if one private key fragment is leaked, the assets remain secure, thus maximizing asset security.
In the CeDeFi model, Bitcoin holders do not need to directly custody their assets to exchanges but can use secure technologies like Cobo MPC to establish an isolated off-exchange custody and settlement network exclusive to the exchange. Users can lock Bitcoin in this isolated network, which will be mapped 1:1 to tokens on the exchange side. Users can then use these mapped tokens for CeDeFi operations, such as delta-neutral interest rate arbitrage trading between different markets, to earn interest rate spread income. The actual Bitcoin is securely stored in a cold wallet completely isolated from the exchange. Only necessary fund flows, such as settling trading profits and losses and paying fees, occur between the custody platform and the exchange account. Users can set the settlement period and calculate earnings by themselves. This model maximizes the security of Bitcoin assets while allowing holders to fully utilize CeDeFi to obtain substantial returns.
In the broader DeFi application scenario, Bitcoin holders can use Cobo MPC to deposit BTC and mint equivalent mBTC tokens on the Merlin protocol, then deposit these mBTC tokens into various liquidity pools provided by decentralized exchanges such as iZUMi for mining. Based on the preset rules of the Cobo Argus risk control system, personalized management of investment strategies and risk exposure for liquidity pools can be achieved, earning low-risk returns.
Whether it’s BTC LRT, CeDeFi, or DeFi, Cobo MPC solutions have opened up multiple high-yield and risk-controlled income opportunities for Bitcoin holders, maximizing the release of Bitcoin’s intrinsic value.
Looking ahead, in addition to cryptocurrency assets, Cobo can even include traditional assets such as ETFs in the asset management category. Since MPC technology can ensure users’ ownership and operational rights over assets, ETF holders can also utilize this technology in the future to store physical ETF assets in custodial wallets and manage ETF participation in liquidity mining, staking, and other operations, thereby achieving income growth.
