Exploration of the BTC Ecosystem and the Development of BTCFi

Bitcoin is undergoing an unprecedented transformation. The emergence of the Ordinals protocol and the BRC-20 standard has not only changed the way payments and value storage work but has also had a profound impact on the traditional financial system. The exploration of the Bitcoin ecosystem is becoming increasingly diverse, especially in the field of staking. Although BitVm is still a distant future, projects like Babylon and PStake are already leveraging Bitcoin's security features to enable POS chain operations without altering the core Bitcoin protocol.

Staking has initially formed as a breakthrough for the connection layer, with traditional staking bringing a borrowing of security. PStake has further developed liquid staking, allowing BTC to maintain liquidity while being staked, seemingly indicating that the era of BTCFi is about to arrive.

Overview of BTCFi

For a long time, Bitcoin has not been regarded as an active asset, with its trillions of dollars in market value mostly lying idle. The Bitcoin ecosystem places a much higher emphasis on "security" than other ecosystems, so any attempts to expand BTC are particularly cautious.

BTCFi, which is decentralized finance built on the Bitcoin public chain, aims to bring DeFi functionalities into the Bitcoin ecosystem, allowing Bitcoin to not only serve as a store of value but also to play a role in financial applications.

There is an essential difference in the user groups of BTC and ETH. Retail users are more concerned about equal profit opportunities, decentralized culture, and equal power, and they are less sensitive to Gas fees, tending to explore the potential of assets. In contrast, institutions and large holders that have long been involved in BTC infrastructure and robust finance tend to adopt long-term and conservative approaches to obtain returns, with primary considerations for safety and stability.

BTCFi can meet the needs of B-end users as well as ordinary users who do not pursue short-term high returns, transforming Bitcoin from a passive asset into an active asset.

Currently, the total locked value of BTCFi ( TVL ) accounts for only 0.09%, which is quite low. In contrast, DeFi accounts for as much as 14% in the Ethereum ecosystem, 6% in Solana, and 3% in TON.

Challenges Facing the BTC Expansion Plan

Community Game of BIP-300

BIP-300, also known as the Bitcoin Drivechain (, was launched in 2017 and introduced the concept of a sidechain called "Drivechain" built on the Bitcoin blockchain. It allows for trustless transfers of BTC between the mainnet and these Drivechains through a bi-directional peg )2WP(. There are essentially no technical challenges, as Drivechain is based on BIP proposals and is fundamentally equivalent to a soft fork modification of the BTC source code.

However, BIP-300 quickly fell into repeated discussions and could not be smoothly advanced. Opponents believe this may deviate from the definition of digital storage, increase the risk of fraud in the Bitcoin network, and may lead to stronger scrutiny from regulatory agencies. In addition, bidirectional peg could completely undermine the economic assumptions of Bitcoin. Some even believe this is aimed at profiting miners, as merged mining essentially allows miners to earn "free funds" through existing work.

The discussion ultimately fell into a legitimacy dispute over BTC Classic, making it difficult to move forward. Looking back at this process, the core community seems to defend the idea that Bitcoin needs a complementary system, rather than competing with it by creating new alternatives.

Therefore, many subsequent innovative ideas no longer rely on directly modifying BTC itself, but continue to innovate at the application level.

) limitations of native programming capabilities

Although the directions of exploration are different, the challenges faced are generally the same:

1. Lack of native smart contract functionality: Bitcoin itself does not support complex smart contracts and can only execute basic time locks or multi-signature locks through BTCscript.

2. Limited Interoperability: The interoperability between Bitcoin and other blockchains is limited, with most solutions relying on centralized institutions.

These restrictions lead to fragmented liquidity. Currently, users perceive that Bitcoin is primarily used for store of value on-chain, while off-chain liquidity is concentrated in centralized exchanges or wrapped tokens like WBTC on ETH, which also limits users' ability to trade efficiently and provide liquidity in the decentralized finance ecosystem.

Although the original design of Bitcoin is relatively simple, two important updates in recent years have brought new possibilities for BTC.

SegWit### Segregated Witness(

Activated in August 2017, SegWit separates the signature )Witness Data( from the transaction data, making the transaction data smaller, thereby reducing transaction fees and increasing the capacity of the Bitcoin network. SegWit raised the Bitcoin capacity limit from 1MB to 4MB.

Taproot Upgrade

Similar to SegWit, Taproot is also a soft fork upgrade aimed at promoting Bitcoin to achieve smart contract deployment and expand use case scenarios. After the upgrade, Taproot allows multiple parties to sign a single transaction using a Merkle tree, supporting features such as conditional payments and multi-party consensus through the introduction of a new script type "Tapscript."

The development cycle for these solutions based on BTC native technology is relatively long. For example, RGB has been in development for over 4 years, Lightning has been developed for many years, and Babylon took several years to develop the "timestamp protocol". Perhaps profit is the best driving force in the market; if there are secure solutions that can allow most participants to profit, it can attract more people to join.

Even the Taproot upgrade, which almost reached community consensus the fastest, was proposed in 2018 and went live in 2020, taking over 2 years to be implemented.

Nevertheless, the ecological infrastructure is still not perfect, and recent hotspots still revolve around exploring possibilities such as BitVM, BitVM2, RGB++.

) Limitations of other modes

Inscription and Stacking Protocol

Although the popularity of BRC-20 has brought traffic and attention to the Bitcoin ecosystem, subsequent standards like ARC-20, Trac, SRC-20, ORC-20, Taproot Assets, and Runes attempt to address the issues present in BRC-20 from different angles. However, the core problem of these overlay protocols lies in the decentralization challenge of their indexing, which may lead to inconsistencies between indexers and the risk of an indexer being attacked and unable to recover.

The biggest problem with the Lightning Network is its limited scenarios; it can only facilitate transactions and cannot achieve more use cases.

Other various scaling protocols, RGB, DLC, and side chains such as Rootstock and Stacks are still in the early stages, relatively weak in terms of scaling effects and smart contract functionality, or their security largely relies on multi-signature wallet management.

Therefore, there are increasing voices in the community that believe we should not simply copy Ethereum's applications to the Bitcoin network.

In contrast, a more practical original chain liquidity staking solution has gradually emerged. It does not rely on external smart contracts or side chains, but directly implements the staking mechanism on the Bitcoin network, introducing liquidity to generate returns. This model cleverly leverages the strong security of the BTC network while achieving a relative balance in terms of speed and returns.

Recently, the research report from Binance Research mentioned four heavyweight BTCFi protocols: Babylon, Bouncebit, PSTAKE Finance, and Lorenzo.

pSTAKE Finance Applications on BTC

pSTAKE has been providing staking and yield services across various chains since 2021. On BTC, pSTAKE is built on top of Babylon. This system has not been rejected by the BTC core community. In contrast, inscriptions once faced the threat of soft fork removal, because this native chain liquid staking solution does not inherently transfer BTC to other chains. It is based on Babylon's Remote Staking mechanism, staking on the Bitcoin chain while transmitting the security effects of BTC to other chains, thereby maximizing the value of BTC assets.

Through this bidirectional secure sharing protocol, it provides security verification for the POS chain while also offering returns to BTC holders participating in staking.

Babylon's traditional staking protocol

Babylon is a Bitcoin secure sharing protocol composed of three core modules: BTC staking contract, extractable one-time signature scheme (Extractable One-time Signatures, EOTS), and BTC timestamp protocol.

The staking contract is a set of BTC script contracts, mainly using two types of opcode:

• OP_CHECKSEQUENCEVERIFY: Implements relative time lock, transaction outputs can only be spent after the time expires.
• OP_CHECKTEMPLATEVERIFY: Sets conditions for the spent transaction output, such as creating mandatory spending to whom, rebinding inputs, etc.

After users participate, there are only two paths: normal staking ( for untethering upon expiration ) and illegal operations ( resulting in asset forfeiture ).

The confiscation mechanism utilizes the extractable one-time signature scheme EOTS. Users need to participate in the block generation activities of the PoS chain consensus protocol and complete the EOTS signing round on Babylon.

When the signer only signs a specific message once, the private key is secure. However, if the same private key is used to sign two different messages, the Babylon system will extract private key information through signature comparison, thus being able to destroy the user's assets pledged on BTC ###. At this time, the asset is still pledged in the BTC contract (. Upon maturity, the user needs to compare transaction speeds with Babylon. Since BTC produces a block only every 10 minutes, there is a high probability of being discovered, and all assets will be packaged and destroyed as miner fees.

The BTC timestamp protocol is a clever design used to circumvent the longest chain attack scenario of POS. It publishes the event timestamps of other blockchains onto Bitcoin, allowing these events to enjoy Bitcoin's timestamp. Due to the high security of BTC itself, the timestamps on it are also subject to rules; each new block must have a timestamp greater than the average timestamp of the previous six blocks.

The staking mechanisms of Babylon are modular and easy to reuse, which also creates opportunities for pSTAKE to collaborate in building together.

) pSTAKE Bitcoin Liquid Staking ( Bitcoin Liquid Staking ) Introduction

pSTAKE is a liquid staking protocol that is mechanism-wise similar to Babylon, and essentially operates within the PoS( proof of stake) ecosystem. Its biggest feature is that it allows users to stake their cryptocurrency assets while maintaining liquidity, similar to Lido's sETH.

The main difference between liquid staking and traditional staking lies in liquidity.

In traditional staking, users give up liquidity when they deposit tokens into a PoS protocol to enhance economic security. This means their tokens are locked and cannot be used elsewhere, which is also the case with Babylon currently, focusing more on security.

Liquid staking solves the liquidity dilemma in traditional staking by allowing stakers to retain asset liquidity and continue using it elsewhere.

In specific practice, when users deposit assets on BTC, the official will mint liquid staking tokens (LST) for users on the POS chain. Users can freely trade or use these LST on other DeFi platforms, and they can also redeem them back to the underlying assets at any time.

The main sources of income are as follows:

• Users first stake BTC to pSTAKE, then pSTAKE stakes the assets to Babylon, thereby earning returns and distributing dividends to users.
• When users stake BTC, pSTAKE will distribute a liquidity token pToken to users, which can be used like the liquidity token sETH generated by Lido.
• When users want to redeem BTC, they only need to perform a burn operation on the pToken in the pSTAKE application, at which point rewards will stop and BTC will be exchanged back from the liquidity exchange pool.

The BTC staked to pSTAKE is provided with associated services by Cobo and other MPC institutional custodians, which is similar to Merlin.

Ultimately, a dual-token system was formed, where pTOKENs represent unpledged assets that can be freely used in DeFi, while stkTOKENs represent pledged assets that can accumulate staking rewards.

![Interpreting the PStake Finance mechanism, examining the predicament and future of BTCFI]###https://img-cdn.gateio.im/webp-social/moments-a515341cf785308a6301c1cc7855cd62.webp(

) Summary

pSTAKE has many years of asset management experience and multiple contract security audit records. After collaborating with Babylon, it brings the following advantages:

• Further enhance liquidity: Collaborating with the Babylon platform, which focuses on improving asset utilization efficiency through advanced blockchain technology, can further optimize and expand liquidity.
• Increase income