Is BTCFi dead? Analyzing the value reconstruction of its infrastructure era from three perspectives.

Written by: Haotian

I didn't expect the topic of "BTCFi is dead" to come so soon. Indeed, since @babylonlabs_io launched, the market has anticipated that Babylon would boost the BTCFi track with a range of ecosystems, but evidently, things have not gone as hoped. As for whether BTCFi is truly dead, I believe it is too early to make that judgment, and there is a misunderstanding of the evolutionary logic of the BTCFi track. In the following text, I will share a few observations:

1. Its linkage of Babylon's market performance post-launch to the prospects of the BTCFi sector is obviously skewed.

Because Babylon can lock users' BTC assets in the Bitcoin mainnet in the form of script contracts while being able to output "secure consensus services" on many BTC layer 2s, thus obtaining rich returns offered by other extended chains. From the supply side, Babylon's technological innovation services are indeed useful, but from the demand side, who will purchase such secure consensus services and who will provide continuous returns?

Clearly, from the perspective of B-end demand for "security consensus" from various new chains of different sizes, the prospects of BTCFi are obviously not as expected. However, from the perspective of C-end user demand, every BTC holder has a need to earn continuous interest on their held BTC. The goal of BTCFi's technical solution is to connect with trillions of dollars of traditional financial capital. The ultimate goal of this BTCFi narrative is how to integrate the unique decentralized consensus of Bitcoin with global financial liquidity.

Following this logic, in the post-ETF era, the narrative of BTCFi has just begun. How can there be talk of it being dead?

2. In fact, the technical solutions surrounding BTCFi have been maturing, from the initial EVM-Compatible to the UTXO Stack architecture, and then to the zkVM protocol framework, RGB client verification framework, and Optimistic Challenge Proof (OCP) architecture, etc. The technical solutions of BTC once presented a chaotic situation; however, while it may seem decentralized and chaotic on the surface, it is actually evolving and choosing directions in line with market trends.

The following text focuses on comparing the two technical paths of OP_CAT_ and BitVM2, and believes that BitVM2 has more potential because it does not require changes to the existing BTC script:

1. OP_CAT Path - Logically reasonable but requires changes to BTC OpCodes, which is difficult to gain acceptance from core developers.

2. BitVM2+OCP mechanism - Achieves off-chain computation and interaction through the OCP challenger mechanism. When a "challenge" occurs, the on-chain protocol will be executed on the Bitcoin mainnet, with Bitcoin layer 1 acting as an arbiter to ensure security.

Immature solutions will be eliminated or corrected under market pressure. For example, early Bitcoin cross-chain solutions commonly adopted centralized custody models, whereas the combination of BitVM2 and OCP now provides a trustless native secure cross-chain mechanism.

When technologies like BitVM2, which do not require changes to the BTC core code, mature, Bitcoin will usher in its own "OP moment," just as Ethereum gained recognition for the value of Optimistic Rollups, directly triggering a wave of market ecosystem explosion.

3. Let's allow the technical solutions to continue to evolve and compete for now, because there is another layer of logic: the biggest challenge facing BTCFi is not technical feasibility, but a sustainable Tokenomics economic model.

Currently, many solutions rely on token issuance and incentives, which are evidently unsustainable. A truly sustainable BTCFi economic model should be built on the network's utility value. When the second-layer network processes transactions and collects fees, and a portion of the revenue is returned to BTC stakers, a value cycle based on actual demand is formed.

This model does not rely on the procurement of external chains, but rather generates revenue through its own ecosystem, clearly outperforming in terms of the sustainability of the economic model.

That's it.

In summary, looking at it from a different perspective, the prospects for BTCFi will become clear. However, the sector is currently in the early stages of infrastructure construction, technological solutions are converging, the Tokenomics economic model is being refined, and the door to global financial liquidity access through ETFs has just started to open.