Regardless of whether it’s BTC LRT, CeDeFi, or DeFi, Cobo MPC solutions have opened up multiple high-yield and risk-controlled avenues for Bitcoin holders, maximizing the release of Bitcoin’s intrinsic value.
Background
As the oldest and most established cryptocurrency, Bitcoin is more centralized than the Ethereum market. Early Bitcoin holders have experienced numerous cycles of bull and bear markets and the rise and fall of various investment tools, gaining a deep understanding of the high risks associated with cryptocurrency assets. As a result, these veteran Bitcoin holders tend to be more conservative in their investment philosophy and have a higher aversion to risk.
On the other hand, in order to ensure security and decentralization, the Bitcoin network has made trade-offs in terms of scalability and programming capabilities. These limitations restrict its potential for expansion and its 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 designs and risk hedging strategies, which makes it difficult to meet investors’ diversified needs for returns and risks.
A meme about Bitcoin circulating on the internet sharply points out this fact: “Bitcoin seems to have no other purpose as an investment target besides long-term holding (‘hodl’).” This meme conveys the fact that while Bitcoin is a powerful store of value, it still has a lot of room for expansion in terms of financial management.
Interest Yield Demand Drives the BTC Staking New Model
The Bitcoin ecosystem urgently needs new sources of income, especially after the Bitcoin halving.
This is mainly due to two factors.
Firstly, miner income has significantly decreased. After the fourth Bitcoin halving, block rewards were reduced to 3.125 BTC. Based on the current coin price and electricity cost, the shutdown price for miners is approximately $55,000, far higher than last year’s $14,300. Data from The Block Pro shows that BTC miner income in May (due to the fourth halving) decreased by 46% compared to the previous month, reaching $963 million. If the Bitcoin price does not rise significantly, miner revenue will decline sharply, and if the price further drops, it may be difficult to maintain a balanced budget and miners may be forced to shut down. Therefore, finding new revenue models for miners has become a driving force for sustaining the sustainable development of the BTC ecosystem.
Additionally, early BTC holders have accumulated a large amount of idle assets and are in need of investment channels to generate income. According to DefiLlama data, the market size of one-sided BTC yield exceeds $10 billion, with a significant portion of funds only able to earn very low yields and requiring trust in centralized institutions for services. This reflects the market’s demand for safe and risk-free yield for idle BTC assets.
In this context, we have seen explosive growth in Bitcoin Layer 2 (L2). Numerous Bitcoin scalability projects and new BTC-based projects have emerged.
According to DefiLlama data, 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, nurturing more application scenarios, innovation, and investment opportunities around Bitcoin.
BTC Staking is considered a highly potential and reasonable track. As a mature revenue model that has been thoroughly validated in the Ethereum ecosystem through the EigenLayer module, once introduced into the Bitcoin ecosystem, BTC Staking will enable Bitcoin to connect with 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 BTC Yield Solutions
Currently in the crypto market, stable and secure income mainly comes from Staking, CeDeFi rate arbitrage, and DeFi:
Staking refers to holding cryptocurrencies and participating in their consensus mechanisms to earn passive income. The most typical example is Ethereum’s PoS staking, where users stake ETH and validate transactions to earn passive income. Staking provides stable income without requiring excessive active operations, but the yield is relatively limited.
CeDeFi rate arbitrage involves taking advantage of the interest rate differences between centralized finance (CeFi) and decentralized finance (DeFi) to conduct arbitrage trading and earn income. CeDeFi arbitrage strategies combine the security of CeFi and the flexibility of DeFi, allowing users to leverage CeFi’s deep liquidity to execute profitable delta-neutral interest rate arbitrage trades, while maintaining relatively controlled risks.
DeFi refers to income sources in the emerging decentralized finance ecosystem, such as PointsFi’s accumulated user dividends, liquidity mining, yield aggregation, and other innovative applications. These innovative revenue models often stem from community participation, incentive mechanisms, etc., and have uncertainties but also the potential for excess returns.
While the above solutions have been validated in Ethereum with successful cases and are naturally suitable for permissionless blockchains, they are not easy to implement for the non-Turing complete Bitcoin due to limitations in its scripting language. The most effective solution currently is to upgrade the underlying architecture of the Bitcoin network, such as implementing OP Codes and OP_CAT to support higher-level functionalities and achieve true 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 models 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 private among multiple participants, allowing multiple parties (each with its own private data) to participate in computations and verify results without revealing individual private information to others. In practice, each participant holds an encrypted key, and these keys are collectively used to execute secure transactions or operations.
In the MPC setup, private keys are divided into several parts and allocated to participants. When authorization is required for a transaction, a specified number of these participants or nodes must provide their held 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, confirming the authenticity of the transaction without revealing individual key fragments.
MPC is particularly useful for cross-chain transactions, as multiple approvals are required before any action is taken. MPC offers strong 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.
We can use the three BTC asset management solutions as examples to illustrate how Cobo MPC is applied:
In the BTC LRT scenario, Bitcoin holders can deposit their BTC assets into Babylon to earn native BTC income and token rewards from other AVS. Babylon is a decentralized trustless Bitcoin staking protocol that uses staked Bitcoin to secure PoS chains and layer 2 networks through shared security. In return, Bitcoin holders can earn income. Unlike centralized solutions, Cobo MPC provides independent wallet addresses for Bitcoin holders and manages Bitcoin through a 2/3 threshold signature mechanism, where two private key fragments are controlled by the client. Only when two private key fragments are used together can specific operations be executed, protecting user assets from external and internal attacks and ensuring asset security even if one private key fragment is compromised.
In the CeDeFi model, Bitcoin holders do not need to directly entrust their assets to exchanges. Instead, they can use secure technologies like Cobo MPC to establish a segregated off-exchange custody and settlement network. Users lock their Bitcoin in this segregated network, which is mapped 1:1 to tokens on the exchange side. Users can then use the mapped tokens for CeDeFi operations, such as delta-neutral interest rate arbitrage trading between different markets, to earn interest rate differential 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 their own settlement periods and calculate their income. This model maximizes the security of Bitcoin assets while allowing holders to fully utilize CeDeFi to generate substantial returns.
In the broader DeFi application scenario, Bitcoin holders can deposit BTC through Cobo MPC, mint equivalent mBTC tokens on the Merlin protocol, and then invest these mBTC tokens in various liquidity pools provided by decentralized exchanges like iZUMi for mining. Based on the preset rules of the Cobo Argus risk control system, users can personalize their investment strategies and risk exposure in liquidity pools to earn low-risk income.
Whether it’s BTC LRT, CeDeFi, or DeFi, Cobo MPC solutions have opened up multiple high-yield and risk-controlled avenues 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 its asset management scope. Since MPC technology ensures users’ ownership and operational rights over assets, ETF holders can also utilize this technology in the future to store physical ETF assets in custody wallets and have MPC technology manage operations such as participation in liquidity mining and staking, thereby achieving income growth.
