Cobo: How to unlock BTCFi's trillion-dollar market value?

On the evening of June 13, Cobo and DeepChao invited Cobo co-founder and CEO Shenyu, Merlin Chain Founder Jeff, Solv Protocol Co-founder Ryan Chow, B² Network Product Advocate Stan and Crypto independent researcher DaPangDun to launch a Space on X with the theme of "More than HODL, fully explore the possibility of BTCFi in the 10 billion dollar track", and entered into an in-depth discussion on this topic.

Cobo has sorted out the core views of the guests and shared them with Cobo users and readers.

In the past two years, the crypto industry has undergone earth-shaking changes, especially the Bitcoin ecosystem, which has shown new ecological characteristics. This is not only reflected in the emergence of the BTC Layer 2 network that carries TVL (today, Bitcoin can participate in on-chain DeFi activities, whether it is lending, stablecoins, or innovative models such as Solv Protocol and CeDeFi), BTC on-chain players who hope to obtain passive income, and a new group of active on-chain users, and gradually formed an ecosystem and infrastructure around these players.

With new demands come new track opportunities. The scale of Bitcoin assets is much larger than Ethereum and stablecoins, so the growth of Bitcoin's total value locked (TVL) and the participation of funds in specific products will bring amazing volume. Shenyu believes that the BTCFi track has great potential, has not been fully developed, and has a very considerable market size. In the short term, the total market value of BTCFi is expected to reach tens of billions of dollars, even exceeding the historical high of the Ethereum ecosystem; in the long term, the total market value of BTCFi is expected to exceed the trillion-dollar mark.

This issue of Cobo X Space brings together BTC players to discuss "More than HODL, fully unlocking the possibility of BTCFi worth tens of billions of dollars". The flourishing BTC ecosystem is showing new diversity characteristics, user group stratification and population portraits.

Merlin Chain Founder Jeff believes that the number of active users on the BTC chain is about hundreds of thousands to one million. Unlike Ethereum players, the BTCFi ecosystem has bred a new group of Bitcoin chain users. They don't care about Gas fees, but pay more attention to discovering potential assets, especially inscriptions, runes and Meme players. They are keen on Bitcoin culture and the concept of fair issuance, and crave equal profit opportunities. They are very active and loyal, tend to be high-risk and high-return, and are more familiar with the use of Bitcoin wallets. Instead, they find Ethereum wallets such as MetaMask more difficult to use. In terms of attracting large and high-net-worth users, the potential market size and unit price of the Bitcoin ecosystem may surpass Ethereum, and the total value locked may also be higher. The rise of this group of users may inject new vitality into the Bitcoin ecosystem.

In addition to new active on-chain users, another mainstream user group of BTCFi is institutions and large users. They hold a large amount of Bitcoin and hope to obtain stable returns in a passive way. However, the market has not yet provided a suitable way to increase value, and most Bitcoin assets are still lying in cold wallets and not being used.

How to tap into this part of the market demand,let institutions, large users and some individual users better utilize the underlying infrastructure of the Bitcoin ecosystem, and activate the tens of billions of dollars of BTC assets sleeping in cold wallets, will be the key issues that BTCFi needs to focus on in its development.

Large Bitcoin users and institutional users are naturally more sensitive to risks. In order to capture the needs of this part of BTC users, Cobo co-founder and CEO Shenyu believes that the following points need to be considered:

• In the long run, as user demand surges, the development of the Bitcoin script language and technical upgrades will gradually improve in the next 3-5 years, and ultimately achieve a fully decentralized and permissionless solution. But in the transitional stage before that, we will see a large number of multi-party co-management solutions based on multi-party computing (MPC) technology emerge.

• These transitional solutions can revitalize institutions, large users and some individual users, allowing them to better utilize the underlying infrastructure of the Bitcoin ecosystem. Through multi-party co-management, the security of the underlying assets is guaranteed, the risk of single point failure is reduced, and on this basis, users are provided with profit opportunities. This may be more in line with the needs of large users and institutions with lower risk appetite.

• The biggest weakness of the Bitcoin network is that it is impossible to build smart contracts on the main chain, which has led to the ownership of the underlying network assets becoming a key constraint on the development of the industry, bringing loopholes and moral risks.

Ryan, co-founder of Solv Protocol, said: The use of hybrid centralized custody and decentralized technology solutions such as Cobo MPC ensures transparent capital flows and clear ownership, solving the problem of funds entering the black box and users having no way of knowing where to go and control rights under the traditional opaque CeFi model. By separating asset management and custody, Cobo and other security custody institutions can integrate and collaborate with Solv, Merlin, B² Network and other innovative projects that focus on value-added and ecological expansion, providing users with transparent and secure Bitcoin asset management and income value-added solutions. This new model of asset custody and asset management division of labor is expected to solve the pain points of the traditional CeFi model and bring a safe and transparent way to increase income.

BTCFi is a broad track that can accommodate a large number of startups and innovative attempts. This round of cycle has absorbed new traffic from AI, BTCFi, encrypted payments and other fields, injecting new vitality. Unlike the Ethereum Foundation, which has formed a unified camp, the Bitcoin network has no absolute orthodoxy, and there are many cross-chain solutions, which have created huge market opportunities for integrating consensus and liquidity, and are beneficial to Asian entrepreneurs to a certain extent. The BTCFi track has a promising future.

Here are the key points:

How big is the BTCFi market? When can this market really prosper without relying on the existing subsidy or points mechanism?

Shenyu:First of all, I think 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, and currently only Bitcoin and Ethereum have been recognized. Due to its advantages as a hard currency, Bitcoin occupies a large share of the entire industry, but has long lacked efficient ways to use it like Ethereum.

There is a strong demand for Bitcoin asset management, but there are few reliable, safe and stable ways to increase value. Its biggest means of value-added is to lend Bitcoin as collateral to obtain other cryptocurrencies for investment operations. If the Bitcoin ecosystem develops rapidly, it can provide more ways to make money for this large class of assets. I personally expect that the total market value of BTCFi will reach tens of billions of dollars in the short term, and even exceed the historical high of the Ethereum ecosystem. In the long run, the total market value of BTCFi is expected to exceed one trillion US dollars and change with market fluctuations.

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 is only hundreds of millions of dollars. At present, the main users of BTCFi are institutions and large households, who hold a large amount of Bitcoin and hope to obtain stable returns through passive means, but the market has not yet provided a suitable way to increase value, and most Bitcoin assets are still lying in cold wallets.

In the long run, as user demand surges, the development of Bitcoin scripting language and technical upgrades will gradually improve in the next 3-5 years, and finally achieve a fully decentralized and permissionless solution.

However, as a peer-to-peer cash system, Bitcoin's underlying infrastructure iteration speed is relatively slow, and it will take several years to achieve full decentralization, allowing us to support permissionless solutions.

During this transitional stage, we will see a large number of multi-party co-management solutions based on MPC technology as transitional solutions to activate institutions, large households and some individual users, allowing them to better utilize the underlying infrastructure of the Bitcoin ecosystem. Through multi-party co-management, the security of the underlying assets is guaranteed, the risk of single point failure is reduced, and users are provided with benefits on this basis.

As entrepreneurs in the field of Bitcoin public chains, how big 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 more than 1 trillion US dollars, but the potential size of active Bitcoin assets on the chain may reach hundreds of billions of dollars. Merlin is mainly committed to helping Bitcoin users in the following two aspects:

• Participate in on-chain DeFi, such as lending, stablecoins, etc., so that Bitcoin can earn interest;

• Cross-chain Bitcoin to EVM-compatible chains and participate in other on-chain DeFi products.

The current industry challenge and the problem we are trying to solve is the wrap and unwrap capabilities on the retail side, that is, the bridging capability. Cobo has helped solve this problem, with $13 billion to $15 billion of Bitcoin in our wallets being bridged across chains in the past 45-60 days.

Another long-term challenge is to generate real returns for Bitcoin, rather than relying on project points or tokens for profit, which are highly cyclical. Solv is trying to obtain dollar-denominated returns for Bitcoin through quantitative investment and other means.

In addition to Bitcoin native currency, Merlin is all in BRC-20, Ordinals and other new Bitcoin assets, which have active users and greater return potential than annualized fixed income. Merlin provides liquidity for these assets, and users can participate in trading and market making. As long as the investment is in a bull market, the return rate will be very considerable, just like the surge in inscriptions and runes at the end of last year.

Attracting users on the first layer to release liquidity to the second layer, and conducting better transactions, lending and contract operations on the second layer is a long and challenging process. Merlin's DEX has generated more than $1 billion in trading volume in the past few months, with a daily trading volume of about $20 million to $30 million. This slow construction method is expected to bring higher returns and more users to the chain itself.

In general, the current industry is still very early, and the development strategies of different chains are different. For Merlin, it is more about how to safely bring new business to the Bitcoin ecosystem in the long term, rather than pursuing short-term trading volume growth.

Stan:The value of BTCFi lies in transforming Bitcoin from a passive asset to an active asset, which is mainly reflected in three aspects:

• Use Bitcoin security to provide security for a wider network, such as the Stacks project;

• Improve the liquidity and application scope of Bitcoin and related assets, including the second-layer network, and provide infrastructure for Bitcoin native DeFi;

• Provide cross-chain functions, introduce Bitcoin funds into other DeFi ecosystems, and improve capital liquidity.

Therefore, BTCFi's target customer groups mainly include three categories:

• Original Bitcoin players: such as miners, holders, etc., BTCFi can meet their needs to earn income.

• Users and project parties of other blockchains: such as EVM, Solana, etc., BTC's second-layer network can achieve a bridge with these ecosystems.

• Out-of-circle users: As the core user group of all blockchain ecosystem expansions, BTCFi can lower their threshold to enter the cryptocurrency field.

Only when the second-layer network at the bottom of the Bitcoin ecological chain has enough vitality, users and innovation, can BTCFi continue to develop.

Jeff, can you estimate the number of active DEX native traders on the second-layer network, including the user scale of rune and inscription players, and their average asset scale? How do you describe these user groups?

Jeff:In terms of user scale, the number of active users on the BTC chain is about hundreds of thousands to one million, which can be observed through the head assets and NFT data. Most of them are new chain users. They may have only been speculators before. They are more familiar with the use of Bitcoin wallets and think that MetaMask is very difficult to use.

These users have relatively high personal net worth. Due to the high transaction fee of Bitcoin, ordinary transactions require tens to hundreds of dollars, which naturally filters out the Mao Mao party who cannot afford the high transaction fee. Therefore, users on the Bitcoin chain do not care much about the high or low transaction fee, but are more concerned about how to discover potential assets. For example, in the early days of Merlin, hundreds of millions of dollars of BRC20 assets and Ordinals NFTs were quickly pledged, showing that these users are active and have strong financial strength.

Typical user profile: Like Bitcoin culture, believe in the concept of fair issuance, and have a strong demand for equal opportunities to benefit through airdrops. As a new type of Bitcoin chain user group, future development is worth looking forward to, and the potential of Bitcoin programmability needs to be further explored and utilized.

In general, this is a new type of chain active user group that likes Bitcoin culture and has strong financial strength. Their rise and development may inject new vitality into the Bitcoin ecosystem.

Ryan has extensive entrepreneurial experience in the Ethereum community. What is the difference between providing BTC financial services in the Bitcoin community and the Ethereum community? Solv has been making compliance attempts and attracting large compliant investors. Is there a chance to introduce 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. Compared with the Ethereum community, providing BTC financial services in the Bitcoin community faces the following major differences and challenges:

• The Bitcoin infrastructure is relatively backward, and the underlying level of decentralization is higher, which makes it much more difficult to build infrastructure and improve user experience than Ethereum;

• The high gas fee makes it more difficult to conduct retail business in the Bitcoin ecosystem.

But the Bitcoin ecosystem also has its unique advantages and characteristics:

• The Bitcoin ecosystem has a huge high-net-worth user market and total value locked (TVL) potential. First, the scale of Bitcoin assets is indeed much larger than Ethereum and stablecoins, so the growth of Bitcoin's total value locked (TVL) and the participation of funds in specific products will bring amazing volume. Secondly, the average personal holdings of Bitcoin majors (holding more than 1,000 Bitcoins) may be higher than the average level of Ethereum majors. This means that the average customer price and personal holdings of the Bitcoin ecosystem may be higher.

• The Bitcoin user base is relatively conservative, which is significantly different from the Ethereum ecosystem users, creating opportunities for opening up new areas.

In addition, there are two other important differences between the Bitcoin ecosystem and the Ethereum ecosystem:

    1) The Bitcoin ecosystem lacked innovation opportunities in the past, but this cycle has absorbed a large amount of new traffic from AI, BTCFi, crypto payments and other fields, injecting new vitality.

    2) Unlike the Ethereum Foundation, which formed a unified camp, the Bitcoin network does not have an absolute unified camp, and there are many cross-chain solutions, which have created huge market opportunities for integrating consensus and liquidity, and to a certain extent, give Asian entrepreneurs greater opportunities.

The high decentralization of Bitcoin makes it relatively easy for compliance institutions to participate.

Solv is doing BTCFi-related business on various public chains. For your BTCFi ecosystem, are you worried that partners or BTCFi project parties will become problematic institutions in centralized finance (CeFi) in this cycle in the future? 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 currently does not have such an environment, which makes it very difficult to implement smart contracts at this stage. In this case, the ownership of underlying network assets has become a key issue restricting the development of the entire industry.

Since the Bitcoin network cannot implement smart contracts on Layer 1, the issue of asset ownership has become a key constraint on the development of the industry, bringing loopholes and moral risks.

This has prompted the emergence of hybrid solutions such as Cobo and Antalpha that combine centralized custody and decentralized technologies to ensure that the location and flow of funds are transparent and traceable. Although some people question its centralized tendency, unlike traditional CeFi, this model ensures transparency of fund flows and ownership definition. The fundamental problem of CeFi is that after the funds enter the black box, users cannot know where they go and cannot control them, which leads to opaque profit margins. By separating asset management and custody, Cobo and other security custody institutions can integrate and collaborate with innovative projects such as Solv, Merlin, and B² Network that focus on value-added and ecological expansion to provide users with transparent and secure Bitcoin asset management and income value-added solutions. This new model of asset custody and asset management division of labor is expected to solve the pain points of the traditional CeFi model and bring a safe and transparent way to increase income.

Can you share some exciting new projects or new development trends that you have recently paid attention to?

DaPangDun:Regarding BTCFi, I analyze it from the following aspects:

Security is the key, including wallet security, asset ownership protection security, and prevention of systemic risks (such as volatility risks caused by DeFi nesting dolls).

BTCFi needs to have basic conditions: first, assets that can be pegged (including Bitcoin itself); second, diversified Fi forms (lending, staking, etc.); third, implementation paths (side chains, OP Code, etc.).

After the last round of DeFi Summer, the market's tolerance for security risks has decreased, guiding BTCFi to develop in a safer and more reliable direction.

Stablecoins play an important role in BTCFi, and users who are willing to participate in Fi prefer stablecoin targets.

The market will test which implementation path will win in the end through a hundred schools of thought.

Fi's ultimate goal is income, and each project will achieve income through different forms (staking, lending, etc.).

In general, BTCFi needs to focus on security, enrich asset forms, explore multiple implementation paths, and introduce stablecoins, etc., with the ultimate goal of creating income for users.

Does Merlin Chain plan to cooperate with Tether or Circle to introduce native stablecoins? What are the main difficulties faced?

Jeff: Currently, since the BTC Layer 2 solution (mainly sidechain) cannot provide absolute security guarantees, it is difficult to introduce compliant stablecoins. Although it can bridge USDT, USDC, etc., the user's trust in the security of the bridge solution is the key.

At the same time, BTC users do not have much actual demand for stablecoins, and most of them are traded in BTC. Therefore, in the short term, due to technical trust issues, it is difficult to fully trust the current Layer 2, and the introduction of stablecoins such as Tether and Circle is still a medium- and long-term goal. At present, we may focus on developing native projects based on BTC, including over-collateralized stablecoins, and moderately introduce USDT, USDC, etc., rather than introducing compliant stablecoins on a large scale.

What are the challenges and obstacles faced by the development of the BTCFi ecosystem? What obstacles will traditional asset management institutions or ETH asset management track projects face when joining in?

Shenyu:The biggest obstacle facing the BTCFi ecosystem is that the development speed of the BTCFi ecosystem lags far behind the innovation speed of industry applications, which stems from the slowness of the upgrade iteration of the underlying Bitcoin. The decentralized nature of Bitcoin determines that its upgrade requires broad community consensus, and the process is complex and lengthy, which is in stark contrast to the rapid iteration expected by entrepreneurs. Therefore, the BTCFi ecosystem will be more decentralized and diversified over a long period of time, and various innovative attempts will emerge in an endless stream.

Bitcoin lacks the official support and uniformity of Ethereum, which makes the BTCFi ecosystem more decentralized and diversified, and the project party faces greater challenges in balancing the balance sheet. However, this also brings some unique advantages to the BTCFi ecosystem. For example, Bitcoin's underlying mechanism of multi-signature and MPC can provide more detailed authority separation and asset monitoring capabilities for large and institutional users, with relatively lower risks, which is attractive to large and institutional users.

Ryan:From a regulatory perspective, Ethereum has outlined the "red line" and "green line" for the development of BTCFi, providing a reference for the latter. At present, infrastructure such as Bitcoin L2, side chains and lightning networks have not yet caused obvious regulatory issues.

In terms of asset custody, whether it is Bitcoin or Ethereum, certain compliance requirements need to be met because it involves the transfer of asset ownership.

In the field of asset interest, Bitcoin has more advantages. Since Bitcoin is clearly defined as a commodity, the relevant interest-bearing and management regulations are theoretically more relaxed. Whether Ethereum staking is 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 some exchanges have been warned by the SEC when providing related products, showing that there is uncertainty. In the Bitcoin interest-bearing track, some products have not fully considered regulatory compliance, but have not yet caused major regulatory issues, indicating that this field is still in a gray area. However, due to the asset attributes, Bitcoin interest-bearing products often need to operate in compliance. For example, some products on Solv require KYC to avoid regulatory risks. Through DeFi and decentralized exchanges, retail investors who have not undergone KYC can also participate in these products.

The last round of Bitcoin growth was driven by user education and expansion of the L2 layer. In the next stage, asset interest may become a new driving force for growth. In this process, compliance issues still need to be paid attention to.