Disclaimer: Non of the following is FA. DYOR.
2024 has brought much attention to BTC development, with many projects working hard to implement, bootstrap, and launch a Bitcoin layer 2. These L2 solutions aim to improve scalability while leveraging BTC network security. There is much discussion on the topic of BTC L2s, which I will not touch on, but for those interested, head over to Bitcoin Layers to read about the ongoing discourse.
Liquidity Mining and Points Programs 💦
All crypto projects need to liquidity mine, and the current meta is through points (loyalty) programs. As a simple Bitcoin hodler intrigued by innovations, I explored various L2 solutions and eventually speculated on the Build On Bitcoin (BOB) project and its rewards token. I'm encouraged by the BitVM and now BitVM2 research aligning economically with BTC miners via fee payment. Even if BOB itself doesn’t find a product-market fit, the open-source nature of these protocols will invite other innovators to build on top of BTC L2s.
BOB Launch Stages ⏫
- Season 1: Started with a simple TVL measuring system, tallying user participation by the amount of liquidity deposited into the network.
- Season 2: Introduced the BOB OP stack chain, launching dApps for DeFi such as DEXs and CDP (MM) protocols. Some dApps are not new and are deployed on other chains, which helps gauge the project's validity.
- Season 3: Introduced LSDs and restaking primitives to the BOB ecosystem.
- After initial project lauch: Their roadmap includes a novel merge mining technique, a BitVM implementation, and ZK proofs on BTC if the necessary OP codes are ever upgraded into Bitcoin Core.
BTC LSDs vs. PoS LSDs ⚔️
ETH LSDs (e.g., wstETH, rETH): Liquid Staking Derivatives come in two forms - yield barrying and non yield barrying. The yield barrying token’s price increases over time with respect to ETH. This yield comes from the staking rewards which are baked into the token itself as oppesed to LSTs like stETH which deposits staking reward into user’s walllet. The yield accrual is evident in the chart below of rETH/ETH.
BTC LSDs (e.g., solvBTC.BBN, PumpBTC): Pegged 1:1 with BTC, resembling wrapped tokens like WBTC and tBTC. The price should look like a flat line as seen below. So where does the yield come from? Several projects are implementing the Babylon BTC PoS proposal. The yield then comes from - 1. the Babylon protocol in the form of points and 2. the dApps deploying the LSDs again in the form of points. All these points - BOB Spice, Babylon points, and the LSD dApp points are speculated to convert to tokens. Almost all crypto projects do this to decentralize the protocol, helping to secure it.
The BTC LSD Projects on BOB 🙉
All of them currently reward points in one way or another, but not yield on the token itself. (Although some of them outline yield barrying in their whitepaper and roadmap.)
Strategies to Increase Spice Points ♟
- Money Markets: BOB's bridge UX allows users to deposit on-chain BTC into a BTC derivative on the BOB chain, permissionlessly. The great part of this bridge is users can deposit into a spot position or lending protocol directly from the bridge UI, known as intent-based UX. This eliminates the need to bridge into the BOB chain and then go to a dApp to deploy user capital manually. Instead, the user can position their asset to where they ‘intend’ right on the bridge UI. There’s a common looping technique involving borrowing an asset and depositing it back into the MM to increase points yield. Risks include price deviation and lending/borrowing APR. It would not make much sense if the sum of the two rates is negative because the user is essentially paying to borrow what they already have. The trick here is to borrow the same token, then loan that, and do it over again to minimize price divergence, AND monitor the APY spread for sometimes other users will borrow from your pool to leverage long/short that asset.
- CDP for Stablecoin: This strategy involves monitoring a single price change. BTC-backed stablecoin projects like thUSD and satUSD create an over-collateralized debt position. Users can use the stablecoin in further DeFi apps like LPs to farm spice. Their price stability mechanisms are similar in the sense that users deposit BTC and create an over-collateralized debt position for the stablecoin. The liquidity level is above 100%, meaning if the BTC price level goes below a price that is lower than the protocol liquidation level of the BTC price, the user gets liquidated automatically.
- DEX LP: Deploying a pair of tokens into a Liquidity Pool can earn fees from swap transactions on a DEX. Understanding impermanent loss (IL) is crucial. Here's a paper on the topic. Deploying an LP based on BTC derivatives, pegged 1:1 with BTC, minimizes IL. However, risks includes change in principle, protocol failure, and fundamental supply/demand shifts. Recently, UniBTC got unpegged when it was discovered that users could mint UniBTC with ETH. [sauce] (As of writing, it looks like they got it back under control.) I'm personally in the solvBTC/solvBTC.BBN pool, focusing on Spice farming and not factoring in much of the other points from the other projects.
Conclusion 🙂
BTC itself has volatile price movements. It's essential to monitor the APY spread and any protocol-related risks, when going out to farm when new protocals are mining for liquidity. Hopefully, this write-up helps, and stay safu out there!
Acknowledgment: Thank you @Kaylgung for the feedback
This is a reprint from my Mirror
