Three Discussions on BTCFi: Where Do BTC's Native Yields Come From?

Author: Kevin Source: X, @kevinliub

If the demand for BTC yield truly exists, then where does this "yield" actually come from? In particular, many people hope to obtain native BTC returns.

Before answering this question, please follow my line of thought and accept the following assumptions:

1. Bitcoin L2 can achieve native security. Currently, we are using the BitVM2 solution, and there may be other viable solutions in the future, but these solutions can all achieve the native security of Bitcoin at the L2 level.
2. Transactions of Bitcoin L2 can be verified on the mainnet. When challenges arise on L2 and are successful (i.e., malicious behavior is detected), withdrawals from L2 to the Bitcoin mainnet cannot be executed. This means that the security mechanism can effectively prevent wrongdoers from committing malicious acts.
3. 1 of N Assuming that the Sequencer nodes of Bitcoin L2 are sufficiently decentralized and abundant, and that there is always at least 1 honest node. This ensures that your BTC can safely exit L2 at any time.

(Knock on the blackboard, these are all the key points! )

Based on the above three assumptions, Bitcoin L2 will have security equivalent to the Bitcoin mainnet. This means that BTC on L2 is equivalent to BTC on the mainnet and can be safely and freely transferred in and out of L2.

Before proposing the native yield methods, let's take a look at the existing sources of BTC yields.

Currently, the native yield of BTC mainly comes from the funding rates of centralized exchanges. Essentially, this yield comes from putting your BTC into a centralized exchange and earning returns through the trading process. Of course, not everyone is willing to put their BTC into a centralized exchange.

When Bitcoin L2 with equivalent security to the Bitcoin mainnet is born, users can participate in the economic activities of Bitcoin L2 through self-custody, which is a natural progression:

1. Since the security of Bitcoin L2 relies on the Bitcoin mainnet, L2 should use BTC as the gas fee.
2. Bitcoin L2 has rich programmability, capable of supporting various BTCFi applications, allowing BTC to truly circulate.
3. Bitcoin L2 should adopt a decentralized sequencer and introduce competing and cooperating nodes to avoid single points of failure or the risk of "trust me, I won't do harm."

At this time, Bitcoin L2 has seemingly transformed into an external system that inherits the orange blood and genes of Bitcoin, absorbing BTC from the Bitcoin mainnet through a secure ZK Rollup bridge and using BTC as gas fees.

The specific model of native yield:

• Users holding BTC can stake their BTC to a decentralized Sequencer on L2 through self-custody, enhancing L2 security and increasing block probability weight. The control of BTC on Layer 2 remains with the users, and they can un-stake at any time.
• The decentralized Sequencer returns income to stakers through transaction fees, MEV, and other revenues, forming native BTC earnings.
• BTC holders who do not participate in staking can also earn returns through BTCFi products based on their risk preferences, such as liquidity mining, lending, and options.

Obtaining native BTC earnings is not actually complicated; the key lies in building an external system that allows BTC to circulate.

• The more economic activities in the system, the higher the earnings of BTC as gas.
• This kind of yield is based on real economic activities, rather than solely relying on inflationary tokens or speculative mining.

As long as we can create a decentralized, secure, and economically vibrant Bitcoin L2, the problem of native BTC yield will be easily resolved.