The current state of Bitcoin in DeFi
Bitcoin, the largest cryptocurrency by market capitalization, has relatively limited participation in the decentralized finance (DeFi) ecosystem. As of 2023, Bitcoin's value locked (TVL) in DeFi accounts for less than 1% of its total market capitalization. This low engagement is mainly due to the following factors:
a) Technical limitations: The Bitcoin network lacks Turing-complete smart contract functionality, making it difficult to directly support complex DeFi applications.
b) Cross-chain barriers: Transferring Bitcoin assets to other DeFi-enabled blockchains, such as Ethereum, involves complex cross-chain operations and potential risks.
c) Opportunity cost: Traditional Bitcoin holders face a trade-off between holding and participating in DeFi, making it difficult to achieve both value storage and yield generation.
Challenges of cross-chain asset management
With the diversified development of the blockchain ecosystem, cross-chain asset management has become an increasingly prominent issue:
a) Security risks: Cross-chain bridging mechanisms are easy targets for hackers, with losses of more than $1 billion caused by cross-chain bridge hacking incidents in 2022.
b) Liquidity dispersion: Assets are dispersed across multiple chains, resulting in liquidity fragmentation and affecting market efficiency.
c) Complex user experience: Cross-chain operations usually require multiple steps, which increases the difficulty and cost of operation for users.
d) Regulatory uncertainty: Different blockchain networks may face different regulatory requirements, adding to the complexity of compliance.
Demand for yield bitcoins
The demand for yield-based Bitcoin products is growing rapidly, reflecting the strong appetite of investors seeking additional income while keeping Bitcoin exposed:
a) Yield maximization: According to statistics, more than 60% of Bitcoin is held for a long time, and these static assets represent a huge potential yield opportunity.
b) Inflation hedges: In the face of global inflationary pressures, investors seek out inflation hedges that can generate yield.
Institutional demand: Traditional financial institutions are beginning to explore Bitcoin derivatives and structured products to meet the diverse needs of their customers.
DeFi Ecosystem Expansion: As DeFi Total Value Locked (TVL) grows, the demand for high-quality collateral continues to rise, and the potential for Bitcoin as high-quality collateral is huge.
These market trends and challenges provide a clear space for issues and opportunities for the Phaethon project. Through innovative cross-chain technology and financial engineering, Phaethon aims to solve these core problems and unlock the full potential of Bitcoin in the DeFi ecosystem.