The Pendle of Bitcoin Ecosystem? Understanding Master Protocol in One Article

Author: NingNing, independent researcher Source: X, @0xNing0x

Master Protocol is an emerging interest rate swap market and points farm accelerator in the Bitcoin ecosystem. To some extent, we can regard it as the Pendle of the Bitcoin ecosystem, but we cannot regard it as a simple fork version of Pendle. To truly understand the value of Master Protocol, we need to observe it from the perspective of the BTC-FI value chain.

The narrative of Bitcoin programmability is infecting the West from the East. With Bitcoin Magazine and Top1 crypto venture capital Polychain debating and setting standards for Bitcoin L2, Bitcoin programmability has finally become a serious new crypto investment track in the West. Pentera, Coinbase Ventures, Polychain, Bankless and other top VC/investment DAOs have invested in incubating projects in this track. A number of so-called Western blue-blooded Bitcoin ecosystem projects such as Babylon, Botanix, BOB, and Mezo have successively announced that they have obtained high amounts of financing.

But we are still in the first stage of the new era of Bitcoin programmability, and there are still some major technical primitives and application scenarios that need to be solved. These problems include how to use BitVm to run fraud proof/validity proof, how to solve the problem of how Copy from Ethereum fits the market needs of Bitcoin ecosystem players, etc.

The core of the technical primitive problem is to find a solution that can simply and elegantly inherit Bitcoin L1 security. The problem of application scenarios is how to discover a blue ocean market where Bitcoin programmability solutions have comparative advantages over EVM compatibility + smart contract solutions.

Two major application scenarios of Bitcoin programmability

The technical primitive problem and the application scenario problem are not isolated, but interconnected.

Given that the programmability of Bitcoin scripts and OPCodes is limited by the constraints of community consensus, it is difficult to achieve Turing completeness in the short term. The development direction of Bitcoin programmability can only be Rollup and state channels (Lightning Network) in the off-chain expansion plan.

However, in the traditional market of general Rollup + smart contract Dapp, Ethereum has already gained a monopoly position and has built a broad moat in terms of developers, users, market awareness, etc.

Therefore, for Bitcoin programmability projects, their breakthrough direction lies in the emerging Dapp Rollup/AppChain paradigm, providing block space security/economic security for these Dapp Rollup/AppChain.

Currently, almost all well-known DeFi, NFT, Web3 social, Web3 games and other application layer projects, including Uniswap and AAVE, are using the Dapp Rollup/AppChain paradigm to redo it. The Bitcoin mainnet, which has a deposited value of $1 trillion, the highest degree of decentralization, and the strongest block space security, has a huge comparative advantage over Ethereum.

Moreover, Bitcoin Restaking gives BTC the ability to earn interest. Compared with the financial interest-earning (DeFi/CeFi lending) model, BTC's native interest-earning ability has stronger positive externalities and can provide a stronger security infrastructure for the prosperity of Dapp Rollup/AppChain.

Compared with Ethereum's Restaking protocols Eigenlayer, Karak, and Symbiotic, the Bitcoin Restaking protocol Babylon needs to additionally solve the self-custody and Staking-Slash problems of BTC on the Bitcoin mainnet. In fact, these two problems are also the core problems that Bitcoin programmable PoS chain expansion solutions such as Botanix and Mezo need to solve.

Both the Babylon cryptography solution and the decentralized multi-signature network (SpiderChain) solution of Botanix need to introduce the Staking-Slash mechanism and generate Wrap interest-bearing assets.

In order to share the Slash risk and obtain the instant liquidity of Wrap interest-bearing assets, the market demand for Liquidity Staking (LST) has arisen. In order for Dapp Rollup/AppChain to use Bitcoin's block security space/economic security, the infrastructure construction of the Restaking protocol is also imperative.

When the LST and Restaking protocols of the Bitcoin ecosystem have grown explosively, an interest rate swap market that can price the interest rate of Wrap interest-bearing assets in the Bitcoin ecosystem is crucial, and Master Protocol occupies this niche.

Master Protocol is currently in the testnet stage, and the Bitcoin interest-bearing assets it supports include Botanix's mpBTC and Bouncebit's stBBTC (in grayscale testing). In the future, it plans to support interest-bearing assets from Babylon and BitLayer. Users can apply for the testnet mpBTC through the faucet. Similar to the implementation mechanism of Pendle, there are three types of Master Protocol tokens, namely, interest-bearing asset standardized packaging token MSY, principal token MPT, and interest token MYT.

After packaging the interest-bearing assets into MSY standard tokens, users can obtain MPT tokens with an unlocking period and MYT tokens that can be sold immediately on AMM DEX, thereby obtaining the interest of interest-bearing assets in advance. Of course, users can also buy MYT tokens directly on AMM DEX to obtain basic floating yields and points, participate in the value discovery process of the native tokens of the interest-bearing asset protocol, and obtain higher potential returns.

Master Protocol Testnet Product Screenshot

At the market strategy level, Master Protocol stimulates community recommenders and interest rate swap market traders through equity Pass card NFT and transaction points rewards, respectively, to increase the adoption of the protocol in the Bitcoin ecosystem.

Finally, for the current Bitcoin ecosystem, the issuance market size of new assets such as Ordinals and Runes is limited (~$10B), and facing the strong network effect competition of the Ethereum ecosystem, there is not much room for imagination. The BTC interest-bearing market, with an upper limit of $1 trillion, is a vast blue ocean. In the BTC interest-bearing market, the Restaking protocol has stronger positive externalities and can provide a stronger security infrastructure for the prosperity of Dapp Rollup/AppChain. Master Protocol is responsible for pricing these Wrap interest-bearing assets of the Restaking protocol, which occupies a key ecological niche. However, there is not much time left for Master Protocol, and it needs to build its own moat before Pendle expands to the Bitcoin ecosystem. Therefore, the Master Protocol team is negotiating and cooperating with Babylon and Bouncebit, and plans to launch the mainnet version in June.