On the evening of June 13th, Cobo joined forces with Deep Tide to invite Cobo co-founder and CEO Shenyu, Merlin Chain founder Jeff, Solv Protocol co-founder Ryan Chow, B2 Network product advocate Stan, and independent crypto researcher DaPangDun to host a Space themed “Beyond HODL, A Comprehensive Exploration of the Potential of the Billion-Dollar BTCFi Track” at X, leading to an in-depth discussion on the topic.
Cobo has compiled the core views of the guests and is sharing them with Cobo’s users and readers. Over the past two years, the cryptocurrency industry has undergone tremendous changes, particularly in the Bitcoin ecosystem, showing new ecological characteristics. This is evident not only in the emergence of BTC Layer 2 networks that carry TVL (now, Bitcoin can participate in on-chain DeFi activities, whether it’s lending, stablecoins, or innovative models like Solv Protocol, CeDeFi, etc.), but also in the emergence of on-chain active user groups and the gradual formation of ecosystems and infrastructure around these players.
New demands have brought new opportunities. The scale of Bitcoin assets far exceeds that of Ethereum and stablecoins, so the growth of Bitcoin Total Value Locked (TVL) and the participation of funds in specific products will bring astonishing volumes. Shenyu 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 several billion 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 gathered various players in the BTC ecosystem to discuss “Beyond HODL, unlocking the potential of the billion-dollar BTCFi” together. The diverse Bitcoin ecosystem is presenting new characteristics, user segmentation, and user profiles.
Merlin Chain Founder Jeff believes that the number of active on-chain Bitcoin users is in the tens of thousands to millions. Unlike Ethereum players, the BTCFi ecosystem has given rise to a new type of on-chain Bitcoin user. They are not concerned about gas fees, are more focused on discovering potential assets, especially players interested in Bitcoin culture and the concept of fair distribution, and are eager for equal profit opportunities. Their activity and loyalty are high, they tend to prefer high-risk high-return, are more familiar with Bitcoin wallet usage, and find Ethereum wallets like MetaMask more difficult to use. In terms of attracting high-net-worth users and institutions, the potential market size and unit price may exceed that of Ethereum. The rise of these users may inject new vitality into the Bitcoin ecosystem.
In addition to the new type of active on-chain users, another mainstream user group of BTCFi is institutions and large holders. They hold a large amount of Bitcoin and hope to passively earn stable returns. However, the market currently does not provide suitable value-added pathways, and most Bitcoin assets are still lying idle in cold wallets. The focus for BTCFi development should be on how to tap into this market demand, enabling institutions, large holders, and some individual users to better utilize the underlying infrastructure of the Bitcoin ecosystem and unlock the dormant billion-dollar BTC assets in cold wallets.
Bitcoin whales and institutional users are naturally more sensitive to risks. To capture the demand of these BTC users, Shenyu, co-founder and CEO of Cobo, believes that the following points need to be considered:
In the long run, as user demand surges, the development and technical upgrades of Bitcoin’s script language will gradually improve over the next 3-5 years, ultimately achieving a fully decentralized and permissionless solution. However, before this, we will see a large number of multi-party co-management solutions based on Multi-Party Computation (MPC) technology as transitional solutions.
These transitional solutions can revitalize institutions, large holders, and some individual users, enabling them to better utilize the underlying infrastructure of the Bitcoin ecosystem. By ensuring the security of underlying assets through multi-party co-management, reducing the risk of single points of failure, and providing income opportunities for users, these solutions may be more suitable for the needs of large holders and institutions with lower risk preferences.
The biggest weakness of the Bitcoin network is the inability to build smart contracts on the main chain, making ownership of underlying network assets a key constraint factor for industry development, leading to vulnerabilities and moral risks.
Ryan, co-founder of Solv Protocol, stated that by adopting hybrid centralized custody and decentralized technology solutions such as Cobo’s MPC, it ensures transparent fund flow and clear ownership, solving the problem of funds entering a black box under traditional opaque CeFi models, where users have no knowledge or control over the destination of funds. By separating asset management and custody, Cobo and other secure custody institutions can collaborate with innovative projects such as Solv, Merlin, B2 Network, etc., to provide users with transparent and secure Bitcoin asset management and income enhancement solutions. This new mode, which divides asset custody and asset management, is expected to solve the pain points of traditional CeFi models and bring secure and transparent income growth pathways.
The BTCFi track is vast and can accommodate a large number of startup companies and innovative attempts. This round of cycles has attracted new traffic from AI, BTCFi, cryptocurrency payments, and other fields, injecting new vitality. Unlike the Ethereum Foundation, the Bitcoin network lacks absolute orthodoxy, with a variety of cross-chain solutions creating huge market opportunities for integrating consensus and liquidity, which is to some extent favorable for Asian entrepreneurs. The future of the BTCFi track is promising.
The key points are summarized as follows:
How big is the BTCFi market? When will this market truly thrive without relying on existing subsidies or point systems?
Shenyu: First of all, I believe that the market size of the Bitcoin finance (BTCFi) track is very considerable. In the past two years, a large amount of traditional capital has flowed into the cryptocurrency market in the form of ETFs, with only Bitcoin and Ethereum currently being recognized. Due to the advantage of Bitcoin as a hard currency, it holds a relatively large share in the entire industry, but has lacked efficient utilization pathways like Ethereum for a long time.
There is a strong demand for Bitcoin asset management, yet there are few reliable, safe, and stable ways to increase value. Its main means of value addition is by pledging Bitcoin as collateral to obtain other cryptocurrencies for investment operations. If the Bitcoin ecosystem develops rapidly, it can provide more channels for this type of asset. I personally expect the total market value of BTCFi in the short term to reach several billion 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 and fluctuate with market conditions.
This is already a vast space that can accommodate a large number of startup companies and innovative attempts, as the early mining ecosystem of Bitcoin was worth only a few hundred million dollars. Currently, the main users of BTCFi are institutions and large holders who hold a large amount of Bitcoin and hope to earn stable returns passively, but the market has not yet provided a suitable value-added pathway and most Bitcoin assets are still lying idle in cold wallets.
In the long term, as user demand surges, the development and technical upgrades of Bitcoin’s script language will gradually improve over the next 3-5 years, ultimately achieving a fully decentralized and permissionless solution.
However, as a public chain entrepreneur in the field of Bitcoin, what do you think the market size is? What are your unique target customer groups? Do you prefer institutional customers or other types of users?
Jeff: The market size of this track is very large. Bitcoin currently has a market value of over $10 trillion, but the potential scale of active on-chain Bitcoin assets could reach several hundred billion dollars. Merlin is mainly dedicated to helping Bitcoin users in two ways:
Participate in on-chain DeFi, such as lending, stablecoins, etc., so that Bitcoin can earn interest;
Cross-chain Bitcoin to EVM-compatible chains to participate in other on-chain DeFi products.
One of the industry challenges that we are trying to solve is the retail side’s wrap and unwrap capabilities, also known as bridge capabilities. Cobo has helped solve this problem, with $13-15 billion worth of Bitcoin in our wallet undergoing cross-chain bridging operations in the past 45-60 days.
Another long-term challenge is to generate real returns for Bitcoin, rather than relying on project points or token profits, which are highly cyclical. Solv is attempting to help Bitcoin generate USD-denominated returns through quantitative investment, among other methods.
In addition to Bitcoin itself, Merlin is all-in on BRC-20, Ordinals, and other new Bitcoin assets, which are active and have greater profit potential than 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 can be very attractive, as seen with the surge in the value of inscriptions and runes at the end of last year.
Attracting a layer of users to release liquidity to the second layer for better trading, lending, and contract operations is a long-term and challenging process. Currently, Merlin’s DEX has generated over $1 billion in trading volume over the past few months, with daily trading volume of about $20-30 million. This slow-building approach is expected to bring higher returns and more users to the chain itself.
Overall, the industry is still very early, and the development strategies of different chains are different. For Merlin, the focus is more on how to bring new business to the Bitcoin ecosystem in the long term, rather than pursuing short-term increases in trading volume.
Stan: The value of BTCFi lies in transforming Bitcoin from a passive asset to an active one, mainly in three aspects:
Using Bitcoin’s security to provide security for a wider network, such as the Stacks project;
Increasing the liquidity and application scope of Bitcoin and related assets, including second-layer networks, for native Bitcoin DeFi.
In conclusion, the BTCFi track shows great potential, with a vast market size and opportunities for innovation. The insights and perspectives shared by industry experts during the Cobo X Space event shed light on the future of BTCFi and its potential for growth and development.Providing infrastructure;
Providing cross-chain functionality, bringing Bitcoin funds into other DeFi ecosystems, and increasing capital liquidity.
Therefore, BTCFi’s target customers mainly include three categories:
Existing Bitcoin players: such as miners, holders, etc., BTCFi can meet their needs to earn income.
Users and project parties from other blockchains: such as EVM, Solana, etc., BTC’s Layer 2 network can bridge these ecosystems.
Off-chain users: as the core user group for the expansion of all blockchain ecosystems, BTCFi can lower 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 number of active DEX native traders on the Layer 2 network, including the scale of users such as rune and glyph players, and their average asset size? How would you describe these user groups?
Jeff: In terms of the number of users, the active users on the BTC chain are in the order of tens of thousands to millions, which can be observed through top assets and NFT data. Most of them are new on-chain users who may have only been speculators before and are more familiar with Bitcoin wallets, and find MetaMask very difficult to use.
These users have relatively high personal net worth. Since Bitcoin transaction fees are high, ordinary transactions require tens to hundreds of dollars in fees, which naturally filters out those who cannot afford high fees. Therefore, Bitcoin on-chain users do not pay much attention to the level of fees, but are more concerned with how to discover potential assets. For example, in the early days of Merlin, hundreds of millions of dollars in BRC20 assets and Ordinals NFTs were quickly pledged, demonstrating that these users are active and have strong financial strength.
Typical user profile: They like Bitcoin culture, believe in the idea of fair distribution, and have a strong demand for equal opportunities to benefit from airdrops and other means. As a new type of Bitcoin on-chain user group, the future development is promising, and the potential programmability of Bitcoin is yet to be further explored and utilized.
Overall, these are a new type of active users on the chain who like Bitcoin culture and have strong financial strength, and their rise and development may inject new vitality into the Bitcoin ecosystem.
Ryan has extensive entrepreneurial experience in the Ethereum community. What are the differences between providing BTC financial services in the Bitcoin community and the Ethereum community? Solv has been trying to comply and attract large 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 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 degree of decentralization at the underlying level, making it much more difficult to build infrastructure and improve user experience than Ethereum;
The 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 high-net-worth user market and potential total value locked (TVL). First, the scale of Bitcoin assets is indeed much larger than Ethereum and stablecoins, so the growth of Bitcoin TVL and the participation of funds in specific products will bring astonishing volume. Secondly, the average holding of Bitcoin whales (holding more than 1000 bitcoins) may be higher than the average level of Ethereum whales. This means that the average order value and personal holdings in the Bitcoin ecosystem may be higher.
Bitcoin user groups are relatively conservative, with significant differences from Ethereum ecosystem users, creating opportunities for exploring 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 attracted a large amount of new traffic from AI, BTCFi, and crypto 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, to a certain extent, giving Asian entrepreneurs greater opportunities.
The higher decentralization of Bitcoin makes it relatively easier for compliant institutions to participate.
Solv is doing BTCFi related business on all public chains. Are you worried that your partners or BTCFi projects will become centralized financial (CeFi) 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 Bitcoin mainnet does not currently have such an environment, making it extremely difficult to implement smart contracts at this stage. Under these circumstances, the issue of asset ownership on the underlying network has become a key constraint on the development of the entire industry.
The inability of the Bitcoin network to implement smart contracts on Layer 1 makes the issue of asset ownership a key constraint on the development of the industry, leading to vulnerabilities and moral risks.
This has led to the emergence of mixed solutions combining centralized custody and decentralized technology such as Cobo and Antalpha, which ensure that the location and flow of funds are transparent and traceable. Although some question the centralization tendencies, this model ensures the transparency of the flow of funds and ownership, unlike traditional CeFi. By separating asset management and custody, Cobo focuses on secure custody institutions, and Solv, Merlin, and B2 Network focus on innovative projects to provide users with transparent and secure Bitcoin asset management and revenue enhancement solutions. This new model of asset custody and management division is expected to address the pain points of traditional CeFi and bring secure and transparent revenue growth paths.
Can you share any exciting new projects or developments you have recently noticed?
DaPangDun: Regarding BTCFi, I analyze it from the following aspects:
Security is key, including wallet security, asset ownership protection, and the prevention of systemic risks (such as volatility risks caused by DeFi Ponzi schemes).
BTCFi needs to have the following basic conditions: first, linkable assets (including Bitcoin itself); second, diverse forms of Fi (lending, staking, etc.); third, implementation paths (side chains, OP codes, etc.).
After the last DeFi Summer, the market has become less tolerant of security risks, guiding BTCFi to develop in a more secure and reliable direction.
Stablecoins play an important role in BTCFi, and users who are willing to participate in Fi are more inclined to stablecoin benchmarks.
The market will test which implementation path can ultimately win out through competition among many.
The ultimate goal of Fi is revenue, and each project will achieve revenue through different forms (staking, 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 revenue for users.
Does Merlin Chain have any plans to collaborate with Tether or Circle to introduce native stablecoins? What are the main challenges they face?
Jeff: Currently, due to the inability of BTC Layer 2 solutions (mainly sidechains) to provide absolute security guarantees, there are difficulties in introducing compliant stablecoins. Although USDT, USDC, and other stablecoins can be bridged, user trust in the security of bridge solutions is key.
At the same time, the actual demand for stablecoins by BTC users is not very high, and they are more inclined to trade based on BTC. Therefore, due to technical trust issues in the short term, it is difficult to completely trust the current Layer 2 and introduce compliant stablecoins like Tether and Circle in the medium to long term. At present, the focus will be on developing native projects based on BTC, including over-collateralized stablecoins, while introducing USDT, USDC, etc. moderately, 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 projects face when they join?
ShenYu: The biggest obstacle facing the BTCFi ecosystem is that the development speed of the BTCFi ecosystem is far behind the pace of industry innovation, which is due to the slow iteration of Bitcoin’s underlying upgrades. The decentralized nature of Bitcoin determines that its upgrade requires widespread community consensus, making the process complex and lengthy, creating a sharp contrast with entrepreneurs’ expectations of rapid iteration. Therefore, the BTCFi ecosystem will be more diversified and diversified over a longer period, with various innovation attempts emerging one after another.
Bitcoin lacks official support and unity like Ethereum, which leads to greater challenges for project parties in balancing their balance sheets. However, this also brings some unique advantages to the BTCFi ecosystem. For example, the underlying Bitcoin uses mechanisms such as multi-signature and MPC to provide more detailed permission separation and asset monitoring capabilities for large account and institutional users, with relatively lower risk and attractiveness to large account and institutional users.
Ryan: From a regulatory perspective, Ethereum has drawn “red lines” and “green lines” for the development of BTCFi, providing a reference for the latter. Currently, Bitcoin L2, side chains, and the Lightning Network’s infrastructure have not caused obvious regulatory issues.
In terms of asset custody, whether it’s Bitcoin or Ethereum, there are certain compliance requirements to be met, as it involves the transfer of asset ownership.
In the asset revenue field, Bitcoin has more advantages. Since Bitcoin is clearly defined as a commodity, the relevant revenue and management regulations are theoretically more lenient. Whether Ethereum staking is considered a security is still under discussion, and there is a gray area. Currently, Ethereum staking does not require KYC or anti-money laundering measures, but some exchanges offering related products have been warned by the SEC, indicating its uncertainty. In the Bitcoin revenue track, some products have not fully considered regulatory compliance but have not yet caused significant regulatory issues, indicating that this area is still in a gray area. However, Bitcoin revenue products often require compliance operations due to the nature of the assets. For example, some products on Solv require KYC to avoid regulatory risks. Through DeFi and decentralized exchanges, retail users without KYC can also participate in these products.
The last cycle of Bitcoin growth was driven by user education and expansion at the L2 layer, and asset revenue may become a new growth driver in the next stage. In this process, compliance issues still need to be continuously monitored.
