Hotcoin Research | On the Eve of the Biggest Narrative in the Crypto Industry: Analysis and Outlook of the BTCFi Track Development

1. Introduction

DeFi, through smart contract technology, has built an open financial system that does not rely on traditional financial intermediaries, offering users services such as lending, trading, staking, and derivatives. Ethereum, as the main platform for DeFi, has led the development of this track with its wide-ranging smart contract functionality and active developer community.

Bitcoin, as the earliest and most valuable cryptocurrency, has long been viewed as a store of value, but its application in decentralized finance (DeFi) has been relatively lacking. This limitation is primarily due to the scalability of the Bitcoin network and the inherent restrictions of its scripting language, making it difficult to support complex DeFi applications. However, with the development of Bitcoin’s Layer 2 technology and cross-chain solutions, the BTCFi track is gradually gaining the ability to integrate with DeFi. Today, BTCFi is growing rapidly, encompassing Bitcoin lending, decentralized trading, staking, stablecoins, and other financial tools and protocols. Bitcoin’s strong network effects and decentralization advantages give BTCFi the potential to complement and further develop alongside Ethereum’s DeFi.

This research aims to provide a comprehensive analysis of the current state and future prospects of the BTCFi track. Through an in-depth exploration of the definition, development status, representative projects, comparison with Ethereum DeFi, and the opportunities and risks BTCFi faces, this paper will provide readers with a deep understanding of this field. We may be on the verge of an explosion in the Bitcoin ecosystem narrative, and BTCFi could become the next significant growth point in the crypto industry.

2. Overview of BTCFi

Compared with other crypto assets, Bitcoin, as the most liquid and influential asset globally, boasts the largest market value and user base and has high credibility, providing a strong foundation for its entry into the DeFi market. Through BTCFi, holders can use Bitcoin as collateral to participate in lending, trading, staking, and other financial activities, further unlocking Bitcoin’s liquidity.

2.1 Definition of BTCFi

BTCFi, or Bitcoin Financial Infrastructure, refers to decentralized financial applications and their related technologies and protocols based on the Bitcoin network. The core goal of this track is to bring Bitcoin, the world’s largest crypto asset by market value, into the decentralized financial ecosystem, transforming it from merely a digital gold and store of value into an asset that can participate in lending, trading, staking, and other financial activities.

BTCFi mainly covers the following areas:

• Decentralized Lending: Users can use Bitcoin as collateral to obtain loans without relying on traditional banking intermediaries. Such lending is usually executed automatically through smart contracts and backed by Bitcoin as the collateral asset.
• Staking and Restaking: By staking Bitcoin, users can earn network rewards or transaction fees. Additionally, the concept of restaking has emerged, allowing users to reinvest the rewards they earn from staking to achieve higher returns.
• Decentralized Stablecoins: BTCFi allows users to issue stablecoins pegged to fiat currencies by collateralizing Bitcoin, providing a more stable trading tool in the crypto market and reducing the impact of price volatility.
• Liquidity Provision and Trading: BTCFi projects allow users to provide liquidity on the Bitcoin network, facilitating cross-chain transactions and the establishment of liquidity pools for Bitcoin assets.

Compared with the rapidly growing DeFi ecosystem on Ethereum and other public chain platforms, the BTCFi track has started relatively late, mainly due to the original design of the Bitcoin network and the limitations of smart contract platforms. Bitcoin has focused more on security, decentralization, and scarcity, with its core functions being peer-to-peer payment systems and store of value. Ethereum, on the other hand, has greatly expanded blockchain’s application scenarios through smart contract technology, becoming the core platform for decentralized financial applications.

2.2 Special Characteristics of BTCFi

Since its inception, Bitcoin has been positioned as digital gold or a store of value, giving it the following unique financial characteristics:

• Security: Bitcoin achieves high network security through the Proof of Work (PoW) mechanism. Its globally distributed nodes and mining network ensure the immutability and censorship resistance of Bitcoin.
• Decentralization: Bitcoin is recognized as the most decentralized blockchain network, with control fully distributed, allowing users to conduct peer-to-peer transactions without intermediaries or trusted third parties.
• Scarcity: The total supply of Bitcoin is capped at 21 million, making it highly resistant to inflation, and it is viewed by many investors as a long-term store of value.

However, these characteristics also limit Bitcoin’s use in more complex financial scenarios. For example, DeFi applications require support for fast transactions, programmable smart contracts, and liquidity of various asset types, all of which Bitcoin, in its original design, did not provide. As DeFi rapidly developed on platforms like Ethereum, the emergence of BTCFi became particularly important, as it allows Bitcoin holders to use their assets in the DeFi world.

The key to BTCFi’s development is how to integrate Bitcoin into broader financial application scenarios without compromising its core values (security, decentralization, scarcity). To this end, BTCFi relies on innovative technologies such as Layer 2 scaling solutions, cross-chain bridging protocols, and decentralized financial protocols to help Bitcoin holders unlock their assets’ liquidity and enter the decentralized financial system.

3. Limitations and Technological Advances in BTCFi Track Development

Despite the significant development of the BTCFi track in recent years, its expansion and adoption face several challenges due to the original design and technical limitations of the Bitcoin network. This chapter will explore the limitations of the BTCFi track and the technological advancements made to overcome these challenges, opening up new possibilities for decentralized financial applications on the Bitcoin network.

3.1 Limitations of the BTCFi Track

Bitcoin’s decentralization and security make it the foundational asset of the crypto industry, but these characteristics also result in technological scalability and functional limitations, particularly when compared to blockchain platforms that support smart contracts, such as Ethereum.

3.1.1 Scalability Issues

The Bitcoin network prioritizes security and decentralization in its design, leading to relatively low transaction throughput. Bitcoin can process approximately seven transactions per second, whereas traditional financial payment networks like Visa can process thousands of transactions per second. This scalability issue limits Bitcoin’s use in everyday payment scenarios and the scale of decentralized financial applications.

Additionally, the Bitcoin network’s block time is 10 minutes, meaning there is a waiting period for transaction confirmation. This delays its use in instant transactions and high-frequency trading. In decentralized financial applications, users expect fast transaction confirmations and high liquidity, and Bitcoin’s limitations pose significant bottlenecks in building DeFi applications.

3.1.2 Lack of Smart Contract Support

Bitcoin’s core protocol design does not support complex smart contract functionality. Bitcoin uses a simple scripting language that cannot compare to Ethereum’s Turing-complete smart contracts. Smart contracts are the backbone of decentralized financial applications, allowing the creation of complex financial protocols like decentralized exchanges, lending protocols, and insurance contracts.

Due to Bitcoin’s lack of native smart contract support, many DeFi projects have turned to platforms like Ethereum that support smart contracts. Although Bitcoin dominates the global crypto asset market, this technical limitation has left its potential in decentralized finance largely untapped.

3.1.3 User Experience and Technical Barriers

Bitcoin’s technical complexity makes it difficult for ordinary users to directly participate in its Layer 2 solutions or cross-chain protocols. For example, while the Lightning Network significantly improves Bitcoin’s payment speed and scalability, users need substantial technical knowledge to run nodes and manage payment channels. In contrast, many applications in the Ethereum DeFi ecosystem offer simple, intuitive user interfaces, making it easy for ordinary users to participate, which increases BTCFi’s usability barriers.

Additionally, the complexity of cross-chain transactions presents another obstacle to BTCFi track development. Cross-chain bridge protocols often require users to convert assets between multiple blockchains, involving numerous steps and potential security risks.

3.2 Technological Advances Driving BTCFi Development

Despite these limitations, technological innovations on the Bitcoin network in recent years have driven the rapid development of the BTCFi track. The following advancements are gradually overcoming Bitcoin’s limitations in scalability and smart contract support.

3.2.1 Progress in Layer 2 Solutions

The application of Layer 2 technologies has significantly improved the scalability of the Bitcoin network, providing a technical foundation for the prosperity of the BTCFi track. The Lightning Network achieves instant payments through off-chain payment channels outside the Bitcoin main chain, greatly reducing transaction costs and increasing transaction speed. Through the Lightning Network, users can participate in decentralized financial applications such as payments, lending, and decentralized trading. Bitcoin sidechains, which shorten transaction confirmation times, support asset issuance, and enable cross-chain trading, are also bringing richer financial applications to Bitcoin.

3.2.2 Introduction of Smart Contract Platforms

The lack of smart contract functionality in Bitcoin has limited its expansion in the DeFi ecosystem, but in recent years, through technological innovation in sidechains and independent platforms, smart contracts are gradually being integrated into the Bitcoin ecosystem. Sidechains achieve interoperability with Bitcoin through two-way pegs with the Bitcoin main chain. For example, Stacks interacts with Bitcoin through its unique “Proof of Transfer” (PoX) consensus mechanism, allowing developers to run smart contracts on top of Bitcoin. The Clarity smart contract language on the Stacks platform is particularly designed for enhanced security and transparency, enabling Bitcoin holders to use Bitcoin for staking, lending, and other financial operations without leaving the Bitcoin network.

3.2.3 Breakthroughs in Cross-Chain Technology

Cross-chain technology is key to enabling Bitcoin’s flow in the decentralized financial ecosystem. Through cross-chain protocols, users can map Bitcoin to other blockchain platforms and participate in more diverse DeFi applications. Decentralized cross-chain bridges enable the transfer of Bitcoin assets across different blockchain platforms, supporting the flow of multiple assets, including Bitcoin, across chains and bringing greater liquidity and application scenarios to Bitcoin.

Although the BTCFi track faces limitations in scalability, smart contract support, and user experience, continuous technological progress is helping the track overcome these obstacles. Layer 2 solutions, smart contract platforms, and cross-chain protocols introduce more financial functionalities and applications for Bitcoin, gradually integrating it into the DeFi ecosystem.

4. Types of BTCFi Projects and Representative Examples

Projects in the BTCFi track span different types of decentralized financial (DeFi) applications, mainly including decentralized exchanges (DEX), lending protocols, staking and restaking protocols, stablecoins, and more. These projects expand Bitcoin’s potential in the financial sector by leveraging the decentralization and security of the Bitcoin network.

4.1 Staking/Restaking Projects

Staking is commonly used to provide security for blockchain networks, with stakers earning network rewards by locking their assets. As modular tracks develop, the concept of Bitcoin staking has emerged as a new dimension, especially through projects like Babylon, which provide security via Bitcoin staking.

• Babylon
  Babylon is a blockchain project founded by Professor David Tse of Stanford University, aiming to provide security for other Proof of Stake (PoS) chains by staking Bitcoin. Babylon uses complex UTXO script contracts to directly stake Bitcoin into PoS chains, enabling a mechanism without cross-chain or third-party custody. This method retains Bitcoin’s decentralized properties while offering security support for PoS chains. Multiple liquid staking protocols in its ecosystem, such as Bedrock, Solv, and Lorenzo, have also emerged, offering users diverse earning channels.

• Bouncebit
  Bouncebit is a BTC restaking chain that allows users to seamlessly convert BTC into wrapped versions on other chains (such as BTCB and WBTC) and participate in on-chain yields. Bouncebit combines centralized finance (CeFi) and decentralized finance (DeFi) to offer multiple earning opportunities, supporting liquid staking and node operation rewards in its on-chain ecosystem.
• Chakra
  Chakra is a modular settlement network that uses zero-knowledge proof technology for Bitcoin liquidity settlement. Users can stake Bitcoin through Chakra and participate in liquidity yield opportunities. The project is supported by the Starknet ecosystem and collaborates closely with Babylon’s staking ecosystem.

4.2 Decentralized Exchange Automated Market Makers (DEX AMMs)

Decentralized exchange AMMs offer users token trading without the need for centralized order books. The BTC ecosystem’s DEX AMM Swap enables cross-chain trading through technologies like PSBT (Partially Signed Bitcoin Transaction) and atomic swaps. According to RootData, there are currently 28 listed BTC ecosystem DEX projects.

• Bitflow
  Bitflow is a decentralized exchange built on Stacks, where users can earn BTC yields through liquidity pools and participate in cross-chain trading. Bitflow aims to build a BTCFi ecosystem, making it easier for Bitcoin to integrate into DeFi without custodial risks.
• Dotswap
  Dotswap is a native AMM DEX on the BTC mainnet, supporting the trading of multiple assets, including Runes and BRC-20. The project provides secure liquidity pools through MMM (Multilayered Multisig Matrix) technology and achieves cross-chain trading with the support of PSBT technology.

4.3 Lending Projects

Bitcoin lending platforms allow users to use Bitcoin as collateral to obtain loans or earn interest by lending Bitcoin, providing liquidity to Bitcoin holders and new earning opportunities for investors. These platforms typically set collateralization ratios and liquidation mechanisms to manage the risk of Bitcoin price fluctuations. Between 2018 and 2019, as the cryptocurrency market grew rapidly, lending platforms like BlockFi, Celsius Network, and Nexo emerged, while DeFi concepts drove the development of decentralized lending platforms. Currently, RootData lists 17 BTC ecosystem lending projects.

• Liquidium
  Liquidium is a peer-to-peer (P2P) Bitcoin lending platform that allows users to use Bitcoin-based assets, such as Ordinal Inscriptions, Runes, and BRC-20 tokens, as loan collateral. It uses PSBTs and Discreet Log Contracts (DLCs) on the Bitcoin Layer 1 network to provide secure, decentralized lending without custodial services, ensuring users retain control over their assets.
• Shell Finance
  Shell Finance is a trustless lending protocol built on the Bitcoin L1 network (BiFi = DeFi + NFTFi), using a peer-to-pool model to improve lending efficiency by 100 times. It allows users to borrow against Bitcoin-inscribed assets (including Ordinals, Runes, Atomicals, Stamps, and others), with loans issued in the form of synthetic Bitcoin assets ($BTCX).

4.4 Stablecoin Projects

Stablecoins are an important component of the BTCFi track, providing price stability by pegging to fiat currencies or other assets. Stablecoins allow Bitcoin ecosystem users to hedge against the volatility of cryptocurrencies and provide strong liquidity tools for decentralized trading, lending, and payments. Currently, RootData lists six stablecoin protocols in the BTC ecosystem.

• bitSmiley
  bitSmiley is the first native stablecoin project in the Bitcoin ecosystem, allowing users to mint stablecoins like bitUSD by over-collateralizing BTC. bitSmiley consists of the bitUSD stablecoin and the decentralized collateralized lending component bitLending. This business model, combining stablecoins and decentralized lending, is often referred to as Bitcoin’s equivalent of MakerDAO + Compound. The bitSmiley team has optimized the BRC-20 protocol and introduced the enhanced bitRC-20 protocol to accommodate the minting and burning of stablecoins.
• NUSD
  Also known as Nakamoto Dollar, NUSD is issued under the BRC20–5byte protocol. Similar to the issuance mechanism of Ethena, NUSD achieves price stability using a perpetual contract hedging mechanism. However, NUSD executes perpetual contract orders directly through DEXs to avoid the custodial risks of centralized exchanges. According to official reports, the issuance of NUSD will occur in two phases. The first phase will involve issuing NUSD pegged to USDe, at a 1:1 ratio with Ethena’s USDe. The second phase will introduce a triangular arbitrage hedging stage.
• Yala
  Yala has introduced an over-collateralized stablecoin called $YU. Whether using native Bitcoin or wrapped BTC on an Ethereum Virtual Machine (EVM) as collateral, users can easily mint $YU on any target chain and participate in DeFi protocols, including cross-chain yield farming, staking, and other DeFi activities. Unlike traditional stablecoin companies that concentrate profits, Yala redistributes the fees generated by the system to core $YU holders, ensuring users benefit directly from the ecosystem’s growth.
• Satoshi Protocol
  Users can mint the dollar stablecoin $SAT with a 110% collateralization rate by depositing BTC and BTC-based interest-bearing assets like LSTs. They can also earn returns by participating in trading, liquidity pools, and lending scenarios. The protocol has been officially deployed on the BEVM and Bitlayer mainnets and is connected to testnets such as BOB, Botanix, B², Anduro, and Omni Network.

4.5 Decentralized Custody

As concerns about the centralized management of wrapped Bitcoin (WBTC) grow, the demand for decentralized custody is increasing. Decentralized custody technology provides security for users through multi-signature and non-custodial methods.

• WBTC
  WBTC is the earliest and most widely used form of wrapped Bitcoin, introduced by BitGo to bridge Bitcoin assets to the Ethereum ecosystem and unlock Bitcoin’s liquidity in Ethereum’s DeFi scenarios. However, this ERC-20 token form of wrapped Bitcoin faces concerns about centralized management. In September, BitGo announced plans to transfer WBTC reserve asset multisignature permissions to a joint venture controlled by Justin Sun (BiT Global), raising concerns among major protocols, including Sky (MakerDAO) and Aave, which have reduced their WBTC exposure.
• tBTC
  tBTC is a custody protocol launched by Threshold that allows users to bridge Bitcoin to Ethereum. tBTC enables users to use Bitcoin as collateral in DeFi protocols through non-custodial methods, reducing the security risks associated with centralized custody. tBTC has been widely adopted on platforms like Curve Finance.
• FBTC
  FBTC is a new synthetic asset pegged 1:1 to BTC and supports cross-chain Bitcoin circulation. FBTC’s minting, burning, and cross-chain bridge operations are managed by the FBTC Security Council and security firms running the Threshold Signature Scheme (TSS) network.

5. Comparison Between the BTCFi Track and Ethereum DeFi

As decentralized finance (DeFi) rapidly develops, Ethereum has maintained a dominant position in this field. Its rich smart contract ecosystem and broad developer base have made Ethereum the core platform for DeFi. However, the rise of the BTCFi track has introduced new competition in the decentralized finance market. Although BTCFi started later, it is gradually attracting more investors and developers due to Bitcoin’s global consensus, security, and decentralization advantages. Below are the core differences between BTCFi and Ethereum DeFi.

5.1 Differences in Technical Ecosystem

Ethereum’s technical advantage lies in its powerful smart contract capabilities. Every Ethereum account can execute complex logic, enabling various DeFi applications such as decentralized lending, liquidity provision, and derivatives trading. This has led to the creation of highly innovative and diverse DeFi ecosystems on Ethereum. Standards like ERC-20 and ERC-721 make it easy for developers to create new financial tools and platforms.

In contrast, the native Bitcoin network does not support complex smart contracts. BTCFi primarily relies on Layer 2 scaling solutions and sidechains, such as RSK, Liquid, and the Lightning Network. Although these technologies add programmability to Bitcoin, they still fall short in terms of smart contract complexity and flexibility compared to Ethereum. However, BTCFi addresses some of these issues through cross-chain protocols, allowing Bitcoin to interact with other blockchain platforms and expanding Bitcoin’s application scenarios.

5.2 Degree of Decentralization and Security

Bitcoin is widely regarded as the most decentralized and secure blockchain network in the world. Its high hash rate provides extremely strong security and resistance to censorship. BTCFi leverages these core advantages of Bitcoin to offer users greater security when building financial applications, particularly in high-value transactions and long-term asset management.

Although Ethereum is highly decentralized, its network security is not as robust as Bitcoin’s. Ethereum’s consensus mechanism is still transitioning to Proof of Stake (PoS), while Bitcoin’s Proof of Work (PoW) has been battle-tested for over a decade. Despite Ethereum’s advantages in transaction speed and smart contract complexity, Bitcoin’s stability and decentralization make it more suitable for high-value, low-risk financial applications.

5.3 User Base and Market Demand

Ethereum’s DeFi ecosystem attracts a large number of users seeking high-risk, high-reward opportunities. Its rich application scenarios — including decentralized exchanges, lending platforms, and derivatives markets — cater to users who engage in high-frequency trading and speculation. The high returns offered by Ethereum DeFi, particularly in liquidity mining and high-interest loans, attract these types of users.

In contrast, the BTCFi user base is more conservative, composed mainly of long-term Bitcoin holders. These users prefer lower-risk asset appreciation through staking or lending, and BTCFi platforms often offer more stable returns and asset management tools. This contrasts sharply with Ethereum DeFi’s high-risk, high-reward strategy.

5.4 Cross-Chain and Interoperability

Ethereum’s DeFi ecosystem is extensive, having established cross-chain bridges with multiple blockchains, allowing assets to move and trade between different blockchain networks. Ethereum’s interoperability has attracted cooperation from projects like Polkadot and Cosmos, making Ethereum not only a leader in DeFi but also a driver of the cross-chain finance market.

However, BTCFi is breaking through Bitcoin’s isolation by integrating with cross-chain technology, particularly through collaborations with RSK and Liquid. BTCFi cross-chain bridges, especially those enabling interoperability with Ethereum, are expanding Bitcoin’s liquidity and usability in decentralized finance. This allows BTCFi to benefit from Bitcoin’s security while leveraging Ethereum’s flexibility and smart contract capabilities.

5.5 Revenue Models and Risk Management

Ethereum DeFi platforms typically attract liquidity providers and borrowers with high returns. For example, liquidity mining and high-interest lending products offer investors opportunities for rapid value appreciation over short periods. However, these high returns come with high risks, as market volatility and smart contract vulnerabilities often result in significant potential losses. The complexity and risk of Ethereum DeFi markets have deterred more conservative investors.

In contrast, BTCFi offers a more stable revenue model. Through staking and restaking, Bitcoin holders can earn relatively stable returns while facing lower risks. Additionally, Bitcoin’s value stability as the world’s largest cryptocurrency allows BTCFi users to better manage risks, particularly in long-term asset management. BTCFi platforms are typically designed with a stronger emphasis on asset security and transparency, attracting investors looking for more secure returns in crypto assets.

5.6 Richness of Application Ecosystem

Ethereum’s DeFi ecosystem is undoubtedly the most prosperous today. With Ethereum’s smart contracts, users can participate in decentralized exchanges (like Uniswap and SushiSwap), lending (like Aave and Compound), staking, derivatives trading, and more. Ethereum’s DeFi ecosystem is not only rich in applications but also highly interoperable, allowing users to seamlessly switch between multiple DeFi platforms and earn yields through liquidity mining and cross-platform staking.

In contrast, the BTCFi track is still in its early stages. While Bitcoin holds the advantage in market value and user recognition, its DeFi application ecosystem is far less developed compared to Ethereum. Although the number of applications is still relatively small, BTCFi is attracting more developers due to Bitcoin’s global influence and security. Over time, BTCFi’s ecosystem is expected to diversify and expand further.

6. Opportunities and Risks in BTCFi Track Development

As the BTCFi track rapidly rises, it presents great potential and abundant opportunities as an emerging field in decentralized finance. However, like any emerging market, BTCFi’s development also comes with corresponding risks. Understanding these opportunities and risks is crucial for future market participants, investors, and developers.

6.1 Opportunities in the BTCFi Track

a. Bitcoin’s Global Consensus and Acceptance

Bitcoin, as the world’s first cryptocurrency, has established widespread global consensus and recognition as a digital gold-like asset. Its decentralization, security, and resistance to censorship give the BTCFi track a vast potential user base. As the foundational asset of BTCFi, Bitcoin can attract a large number of investors and institutions, especially those seeking stable and secure ways to manage crypto assets. As a result, BTCFi can leverage Bitcoin’s mature foundation to quickly attract a significant amount of users and capital into the market.

b. Continued Growth of Decentralized Finance

The rapid growth of the decentralized finance market offers huge room for expansion. As users become increasingly dissatisfied with traditional financial intermediaries, DeFi is gradually becoming an alternative solution. BTCFi, through Bitcoin, the most widely recognized crypto asset, can further promote the adoption of decentralized finance. Compared to Ethereum and other DeFi platforms, BTCFi’s reliance on Bitcoin’s long-term market stability will attract more institutional investors to this track. Additionally, as the decentralized financial ecosystem expands, the types of BTCFi projects and application scenarios will diversify, driving further market growth.

c. Technological Advancements and Cross-Chain Applications

BTCFi currently faces technical bottlenecks, mainly regarding Bitcoin’s limited programmability and scalability. However, the development of cross-chain technology has opened new possibilities for Bitcoin’s interoperability with other blockchain ecosystems. Through solutions such as the Lightning Network, RSK, and Liquid, BTCFi projects can connect Bitcoin with other parts of decentralized finance, providing more financial services. These technological advances not only improve Bitcoin’s programmability but also broaden Bitcoin’s applications in decentralized finance.

d. Entry of Institutional Capital

As institutions deepen their participation in the crypto market, the BTCFi track is increasingly drawing the attention of institutional investors. Bitcoin’s stability and broad acceptance make it an ideal choice for institutional capital entering decentralized finance. Many large financial institutions are developing Bitcoin-based financial products, such as Bitcoin ETFs, collateralized loans, and stablecoins, further promoting BTCFi’s growth. The entry of institutional capital provides not only significant financial support but also enhances market maturity and liquidity.

6.2 Risks in the BTCFi Track

a. Technical Bottlenecks and Smart Contract Security

While the BTCFi track has implemented programmable functionality through Layer 2 networks and sidechains, it still faces technical bottlenecks compared to blockchains specifically designed for smart contracts, such as Ethereum. Bitcoin’s smart contract functionality is relatively basic, making it difficult to execute complex decentralized financial operations. Additionally, cross-chain technologies, though they provide scalability, introduce new security risks, particularly during cross-chain bridge processes, where technical vulnerabilities or hacks may occur. Smart contract security remains a significant concern in decentralized finance, and any exploit in the contract could result in massive losses.

b. Market Volatility and Regulatory Risks

Despite Bitcoin’s reduced market volatility in recent years, there is still a risk of significant price fluctuations. This volatility poses a potential risk, especially for BTCFi projects that rely on Bitcoin as collateral for lending and staking. Large fluctuations in Bitcoin’s price could lead to insufficient collateral value, triggering liquidation risks across the system. Additionally, regulatory risks remain a concern, as global regulations surrounding the cryptocurrency market are still evolving. Some countries are tightening their regulations on Bitcoin, which may negatively impact BTCFi market development.

c. User Costs and Adoption Barriers

Although the BTCFi track shows immense potential, its complexity and high technical barrier may hinder mass adoption. Layer 2 networks and cross-chain technologies in Bitcoin are relatively complex, making it difficult for average users to participate. The technical complexity of BTCFi could prevent widespread adoption, particularly among users accustomed to the ease of Ethereum and other user-friendly DeFi platforms. Lowering these barriers with simple and intuitive user interfaces will be a critical challenge for BTCFi in the future.

d. Competition with Ethereum DeFi

While BTCFi has inherent advantages due to Bitcoin’s strong position, it still lags behind Ethereum’s DeFi ecosystem in terms of application diversity and developer support. Ethereum’s DeFi projects are numerous and innovative, attracting many developers and users. BTCFi faces intense competition, particularly as it struggles with smart contract functionality and decentralized application development. Maintaining competitiveness against Ethereum’s DeFi dominance will be an important challenge for the BTCFi track.

7. Outlook and Conclusion

The BTCFi track, as an important expansion of the Bitcoin network, is gradually becoming a focus in the DeFi ecosystem. With Bitcoin’s strong network effects, ongoing technological progress, and the expanding decentralized financial ecosystem, BTCFi has the potential to become a significant force in the global DeFi landscape. Although the BTCFi track started relatively late on the Bitcoin network, its growth potential is immense, particularly in areas like Layer 2 scaling, cross-chain bridges, stablecoins, lending, and decentralized exchanges. BTCFi has the potential to complement other DeFi ecosystems, such as Ethereum, and achieve broader growth in the coming years.

In the long term, the BTCFi track could become a major pillar of the decentralized finance sector. Bitcoin, as the most stable and decentralized crypto asset globally, is inherently suited to serve as the foundational layer of the decentralized financial system. As technology continues to improve and the market matures further, BTCFi will gradually overcome its current technical limitations and expand into more financial application scenarios.

In the future, the BTCFi track will likely go beyond basic applications like lending and staking and may develop a range of innovative financial products, such as decentralized derivatives markets, Bitcoin-based financial contracts, decentralized insurance, and more. This will provide Bitcoin holders and cryptocurrency users with a broader range of financial service options, while also bringing greater transparency and efficiency to the crypto financial market. In the evolving decentralized financial world, BTCFi could become one of the most important narratives in the crypto industry, driving Bitcoin’s transformation from a store of value to a comprehensive financial infrastructure.

About Us

Hotcoin Research, as the core investment research department of Hotcoin, is dedicated to providing comprehensive and professional analysis of the crypto market. Our goal is to offer clear market insights and practical operational guidance for investors at all levels. Our professional content includes “Play to Earn Web3” tutorial series, in-depth analysis of crypto market trends, detailed analysis of potential projects, and real-time market observations. Whether you are a newcomer exploring the crypto world or a seasoned investor seeking deep insights, Hotcoin is your reliable partner for understanding and seizing market opportunities.

Risk Disclaimer

The crypto market is highly volatile, and investment involves risks. We strongly advise investors to fully understand these risks and operate within a strict risk management framework to ensure the safety of their funds.

Website：https://www.hotcoin.com/

X：x.com/HotcoinAcademy

Mail：labs@hotcoin.com

Medium：medium.com/@hotcoinglobalofficial