Compiled by: Luccy, BlockBeats
Editor’s note:
With the maturity of the Bitcoin market and the emergence of various income products, people have begun to think about how to maintain the local characteristics of Bitcoin. promote its financialization process. From Bitcoin’s native consensus, assets to income, this article discusses different categories of Bitcoin income products and highlights the importance of localized design in reducing trust dependence and counterparty risk.
While analyzing existing solutions, using the Brick Towers project as an example, Pascal Hügli shows how a near-perfect Bitcoin fit can be achieved by combining native Bitcoin consensus, assets, and returns. This article highlights the importance of balancing innovation and risk management in the process of financialization of digital currencies. Despite facing many challenges and unknown factors, Bitcoin, as an open and decentralized protocol, will continue to lead the development direction of financial technology with its localized design and basic features.
Bitcoin is undergoing a dramatic evolution, and there are multiple views on its nature. Some think of it as a currency for daily transactions, some think of it as modern gold used to store value, and still others think of it as a decentralized global platform that secures and verifies off-chain transactions. While these points all have merit, Bitcoin is increasingly viewed as a digital base currency.
Functioning similarly to physical gold, as a holding asset, an inflation hedge, and providing a monetary face value similar to the U.S. dollar, Bitcoin is reshaping the concept of a monetary base asset. Its transparent algorithm and fixed supply of 21 million units ensure a non-discretionary monetary policy. In contrast, traditional fiat currencies such as the U.S. dollar rely on a central authority to manage their supply, which raises questions about their predictability and effectiveness in an era of volatility, uncertainty, complexity, and ambiguity (VUCA).
This contrast is particularly striking in Nobel Prize winner Friedrich August von Hayek's critique of centralized monetary decision-making in his book The Prepense of Knowledge. Bitcoin’s transparent and predictable monetary policy contrasts with the opaque and potentially unpredictable nature of traditional fiat currency management.
For staunch Bitcoin supporters, the 21 million supply cap is sacrosanct. Changing this cap would fundamentally change the nature of Bitcoin, making it something completely different. As a result, the Bitcoin community is generally skeptical of leveraged Bitcoins. Many believe that any form of leverage is similar to fiat currency practices and undermines Bitcoin’s core principles.
This suspicion of leveraged Bitcoin is rooted in the distinction between commodity credit and circulation credit outlined by Ludwig von Mises. Commodity credit is based on real savings, while circulation credit has no such backing and is similar to an unsecured IOU. Bitcoin supporters believe that leveraging operations to create "paper Bitcoin" is economically risky and unstable.
Even some of the more nuanced views within the community are wary of leveraging Bitcoin, in line with the stance of Caitlin Long and others. Caitlin Long has been warning about the dangers of leveraging Bitcoin. The collapse of a number of leverage-based Bitcoin lending companies like Celsius and BlockFi in 2022 has further reinforced the concerns of Long and others about the risks of leveraged Bitcoin.
The crypto market experienced a major turmoil in 2022 similar to the collapse of Lehman Brothers, triggering a widespread credit crunch that affected crypto lending multiple players in the field. Contrary to assumptions, most crypto lending activity is not peer-to-peer and involves considerable counterparty risk, as customers lend funds directly to platforms, which then invest those funds into speculative strategies without adequate risk management.
During DeFi Summer 2020, the rise of major DeFi protocols provided promising avenues for revenue generation. However, many of these protocols lack sustainable business models and token economics. They rely heavily on inflation of the protocol tokens to maintain attractive yields, resulting in an unsustainable ecosystem divorced from basic economic principles.
The crypto credit crunch of 2022 exposed various issues with centralized yield instruments, highlighting concerns around transparency, trust, and liquidity, market, and counterparty risks. Furthermore, it highlights the shortcomings of centralized and off-chain risk management processes that, when applied to blockchain-based “banking services,” mimic those of traditional banks.
Despite the optimism brought by the bull market of 2020 and 2021, many institutions such as Voyager, Three Arrows Capital, Celsius, BlockFi, and FTX have collapsed due to a lack of these necessary processes. The inability to implement the necessary checks and balances with transparency and independence often results in over-regulation and ongoing failures and fraud, reflecting the historical challenges of the traditional banking system. However, lack of regulation is not the answer either.
So how should we respond? In light of this event in 2022, a growing number of Bitcoin supporters are asking the question: should we accept Bitcoin income products, or do they present excessive risks, similar to fiat currency systems? While these concerns are valid, it is unrealistic to expect Bitcoin income products to disappear entirely.
As the emerging Bitcoin ecosystem develops, this issue has become increasingly prominent. An increasing number of projects are building or claiming to develop financial infrastructure and applications directly on Bitcoin. Will this re-ignite the problems we've already seen in the broader crypto space?
Most likely. Because that's the nature of the game. Since Bitcoin is a permissionless protocol, anyone can build on it, including those who wish to build a Bitcoin-powered financial system. And the financial system inevitably requires credit and leverage.
It’s a historical fact: In any prosperous society, the need for credit and income naturally arises as a catalyst for economic growth. Without credit, it is difficult for underdeveloped economies to escape from survival. Only through access to credit can more complex and efficient economic structures be formed.
To realize the vision of a Bitcoin-based economy, proponents recognize the need to develop credit and revenue mechanisms on top of the Bitcoin protocol. While Bitcoin's role as a currency is often celebrated, the reality is that in order to function effectively as a currency, it needs a local economy to support it.
This highlights the importance of Bitcoin-based yield products in promoting the growth of the Bitcoin-centric economy. Such an ecosystem would leverage Bitcoin as its digital base currency while leveraging yield products to drive adoption and usage.
The financial system driven by Bitcoin will inevitably be built in layers. From a systemic perspective, this is not too different from the current financial system, where there are inherent layers within currency-like assets. In order to properly understand these inevitable trade-offs, we need a high-level framework to distinguish between different levels of Bitcoin implementation.
When offering Bitcoin returns, it is important to understand that these options can be structured along a triple trust spectrum. The main things to focus on are:
· Consensus
· Asset
· Income
Evaluate Bitcoin assets and assets based on the degree of Bitcoin locality Bitcoin income products, provide a valuable framework to evaluate their consistency with the Bitcoin ethos. Assets and products that score higher on this spectrum typically minimize trust, reducing reliance on intermediaries and relying instead on transparent and resilient code.
This shift reduces counterparty risk as dependence is shifted from off-chain intermediaries to code. Code transparency increases resiliency over the need for trusted intermediaries.
This is a development direction worth exploring, and creating native yield options for Bitcoin should be the gold standard and ultimate goal of the Bitcoin community.
According to the consensus consistency of the Bitcoin blockchain, Bitcoin income products can be divided into four categories.
No consensus: This category refers to centralized platforms whose infrastructure remains off-chain. Examples include centralized platforms such as Celsius or BlockFi, which have complete control over users’ assets, exposing users to counterparty risk and reliance on intermediaries. Although these platforms use Bitcoin, their revenue strategies are primarily executed off-chain through traditional financial mechanisms. While these platforms are a step towards Bitcoin adoption, they are still highly centralized, similar to traditional financial institutions, but often lack regulation.
Independent Consensus: In this category, the infrastructure is decentralized and is represented by public blockchains such as Ethereum, BNB Chain, Solana, and others. These blockchains have their own consensus mechanisms independent of Bitcoin and are not explicitly linked to Bitcoin’s consensus.
Inherited Consensus: In this category, the infrastructure is decentralized and represented by the distributed consensus of Bitcoin sidechains or Layer-2 solutions. While these sidechains have their own consensus mechanisms, they are designed to align more closely with the Bitcoin blockchain. Examples include federated sidechains like Rootstock, Liquid Network or Stacks.
Native Consensus: This category relies on Bitcoin’s own consensus mechanism as the basic security model. It does not use a separate blockchain or sidechain, but instead utilizes an off-chain state channel cryptographically linked to the Bitcoin blockchain. The Lightning Network is an important example of this approach, providing a high degree of trust minimization by relying entirely on Bitcoin's consensus.
The closer a Bitcoin income product is to the Bitcoin native consensus, the higher its fit with Bitcoin and the higher the degree of trust minimization it is generally considered to have. However, there are subtle differences in the degree of decentralization and security of the infrastructure between the two categories of independent consensus and inherited consensus.
Overall, consensus-free decentralization and trust minimization have the lowest levels, while local consensus is considered to provide the highest trust minimization level, although consensus security and decentralization considerations still require further analysis. .
来源: Brick Towers
When considering the assets used in Bitcoin income products, their fit with Bitcoin can be divided into three categories.
Non-BTC: This category includes solutions that use assets other than BTC, resulting in a lower fit with Bitcoin. One example is Stack’s overlay option, where Stack’s native token, STX, is used to generate yields in BTC.
Tokenized BTC: Here, the asset used is a tokenized version of BTC, improving its fit with Bitcoin compared to non-BTC assets. Tokenized BTC can be found on public blockchains such as Ethereum (WBTC, renBTC, tBTC), BNB Chain (wBTC), Solana (tBTC), and others. Additionally, tokenized BTC is hosted on Bitcoin sidechains with inherited consensus mechanisms, such as sBTC, XBTC, aBTC, L-BTC, and RBTC.
Native BTC: Assets in this category are on-chain Bitcoin (BTC) without any tokenized version involved, providing the highest level of Bitcoin compatibility. Various CEX solutions and Babylon’s Bitcoin staking protocol leverage BTC directly. Babylon aims to extend Bitcoin’s security by adapting a proof-of-stake mechanism for Bitcoin staking. Additionally, projects like Stroom Network leverage the Lightning Network to enable liquid staking, where users can earn Lightning Network revenue by depositing BTC and minting wrapped tokens like stBTC and bstBTC on EVM-based blockchains for wider use DeFi ecosystem.
来源: Brick Towers
When looking at the income aspect of Bitcoin income products, it involves the issue of compatibility with Bitcoin, resulting in similar assets. Classification: non-BTC, tokenized BTC and native BTC.
Non-BTC Yield: Babylon provides yield through assets native to its Proof-of-Stake (PoS) blockchain, which enhances the security of the blockchain through Babylon’s staking mechanism.
Tokenized BTC Earnings: Stroom Network offers income in the form of lnBTC tokens. Sovryn, running on Rootstock, facilitates Bitcoin lending and borrowing by using tokenized BTC (RBTC) as revenue. On Liquid Network, the Blockstream Mining Note (BMN) offers yields in BTC or L-BTC upon expiration, providing accredited investors with access to Bitcoin hashpower via the EU-compliant USDT security token.
Native BTC Earnings: Stacks offers a variety of options, including earnings paid in tokenized BTC in certain earnings applications, leveraging sBTC. However, with Stacks’ stacking options, earnings accrue in native BTC. Likewise, some CEXs offer centralized yield products that distribute native BTC to users as yield.
来源: Brick Towers
Considering the ideal Bitcoin-based income product, the Gold Standard product will combine the following three Features: Native Bitcoin Consensus, Native Bitcoin Assets, and Native Bitcoin Income. Such a product would mimic a near-perfect Bitcoin fit.
Currently, such a solution is only beginning to be built. One project under active development is Brick Towers. Their vision for an ideal Bitcoin-based yield product ranges from achieving a near-perfect Bitcoin fit by incorporating native Bitcoin consensus, assets, and yields. Brick Towers focuses on Bitcoin as a long-term savings solution and aims to provide customers with minimal trust dependence and a localized approach to leveraging Bitcoin.
The solution they plan revolves around generating native yields in Bitcoin, leveraging Brick Towers’ automated services for other nodes in the Lightning Network. By optimizing algorithms to address economics, capital is strategically allocated to meet the liquidity needs of other network participants, thereby optimizing capital efficiency while minimizing counterparty risk.
This approach not only promotes the growth of the Lightning Network, but also enhances the utility of Bitcoin as an asset while providing customers with a seamless and secure way to earn income from their Bitcoin holdings. Importantly, Brick Towers’ solution avoids the use of wrapper coins, further reducing counterparty risk and reinforcing their commitment to the Bitcoin native ecosystem.
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