Introduction
Motivation
As cryptocurrency becomes more mainstream, scaling the major cryptocurrencies (e.g., Bitcoin and Ethereum) has become one of the most critical tasks. The emergence of Layer 2 technologies has opened up new opportunities for the ecosystem's development. In this context, actively exploring new application paradigms has become our primary motivation. Since most financial services are built through base interest rate markets to create new derivative interest rate markets, this was one of the key foundations for the development of DeFi on Ethereum and other smart contract platforms. Unlike Ethereum's native inflationary base interest rate, Bitcoin lacks a foundational interest rate. Therefore, Bitanchor's vision is to build a base interest rate market on Bitcoin's Layer 2, providing a basis and new possibilities for the development of liquidity pledge derivatives.
Industry Pain of Bitcoin Layer2
The completion of the TapRoot upgrade is a milestone for the explosive growth of the Bitcoin ecosystem. With the popularity of Ordinal, there has been a surge in transaction demand, and the market's pursuit has made the Bitcoin network very congested, pushing operating costs to new heights. The significant increase in transaction fees has led people to consider migrating ecosystem construction to Layer 2; hence, Bitcoin Layer 2 related public chains have attracted a large amount of asset staking.
However, we can't help but ask some questions:
Do we need to build new application ecosystems on the Bitcoin second layer network?
Will the assets currently migrated to Layer 2 have use cases in the future?
How will these Bitcoin Layer 2 ecosystems be more competitive compared to Ethereum and other smart contract platforms?
These questions highlight three fundamental pain points at this stage:
Insufficient application innovation for Bitcoin.
Lack of use cases for assets on Bitcoin Layer2.
Lack of expected returns brought by the benchmark market.
Our Solution
Bitanchor will introduce tiered leveraged funds on Bitcoin Layer 2 to create a derivative interest rate market (initially), allowing users to obtain the new stablecoin USDB by giving up their current Bitcoin positions, and then investing USDB in other markets to earn USDB-based returns. Next, users can deposit their Bitcoin positions into the tiered market, combining funds with USDB deposit users, creating an xBTC position with leveraged returns. xBTC can amplify the profits of users betting on the long-term appreciation of BTC price.
For users who give up BTC positions to hold USDB, it means:
USDB is a stablecoin asset generated by 100% collateralization of BTC, which will be exchanged for USDB at the current price, and USDB can also redeem the corresponding value of BTC;
USDB can be allowed to invest in the secondary market to earn returns, the first step is to be lent to still bullish BTC users to establish tiered leverage positions;
USDB in the protocol will hardly be affected by Bitcoin price fluctuations nor bear losses from tiered leverage users;
Outside of the Bitanchor protocol, USDB can also be used in other DeFi Legos, such as vAMM, machine gun pools, Yield Farms to earn income or dividends.
For users using BTC positions to establish tiered leverage positions, it means:
You can hold xBTC based on tokenized BTC to establish a tiered leverage long position xBTC;
The more USDB in the protocol, the higher the leverage ratio you can use;
After the protocol rebalances, your xBTC can redeem more or less BTC according to market fluctuations;
Outside of the Bitanchor protocol, xBTC can be Wrapped, thus applied in other DeFi Legos, like interest rate swap markets (similar to Pendle), LSDFi, machine gun pools, and other derivative interest rate markets or trading markets.
Since the tiered leverage uses a rebalance model, the above assets will not generate active liquidation in most cases, thus preventing all parties from bearing the risk of liquidation incentives involving liquidators.
Why Bitanchor？
In the Solution section, we mentioned that our first product is a derivative interest rate market, why not determine the benchmark interest rate market from the start?
Taking POS's chain inflation as an example, we explain the effectiveness of these benchmark interest rate markets:
Based on coin-based inflation, its benchmark interest rate's profitability fails under its actual value decrease.
Under the actual ineffectiveness of benchmark interest rates, its derivative interest rate market's profitability may fail or generate systemic risks.
Bitanchor's interest rate is not a native rate; its rate fluctuates due to the users' long-short ratio. However, since the stable asset USDB interest rate is set at a constant value by the protocol, it creates a benchmark interest rate market.
Simply put, deciding whether USDB is a benchmark interest rate market's key factor is the protocol's TVL, thereby generating an effectively applicable range of benchmark interest rates.
Under this design:
For users who do not look optimistically at the future rise of BTC, they can convert BTC positions into stablecoins with robust returns.
For users optimistic about BTC's future market, they can magnify long-position profits by holding xBTC.
Different from Traditional CDP
Compared to MakerDAO's CDP model, Bitanchor does not involve liquidation and directly provides tiered leverage markets for fixed income. Compared to the former Anchor, Bitanchor does not need additional subsidies for stablecoins to attract users.
Different from Other Restaking
Unlike Ethena, Bitanchor is a fully decentralized closed market, not involving the risk of forced liquidation that may occur on delegated exchanges, contract risks, management risks, negative fee risks, etc. Compared to BounceBit, Bitanchor does not involve actual asset custody.
Possibilities
The infinite possibilities of Bitanchor based on DeFi Legos include:
As the scale of the Bitcoin Layer 2 ecosystem expands, other protocols can build DeFi Legos based on Bitanchor's benchmark interest rates;
Assets like USDB and wxBTC (Wrapped xBTC) can be applied in secondary market liquidity, such as trading, lending, etc.;
As the use of the ecosystem expands, USDB may become one of the mainstream cryptocurrency assets as a new semi-algorithmic stablecoin;
More possibilities await your Giga Brain to envision…
Risk Management
Bitanchor divides risk management into four segments:
Contract Risk: The possibility of smart contracts being exploited by hackers, so strict code auditing and permission management become one of the important indicators for building risk management;
Liquidity Risk: USDB, xBTC, and other protocol-generated assets might lead to some mechanism failure due to liquidity impact. Besides the Rebalance strategy, improvements in liquidation mechanisms and Tokenomic compensation mechanisms are also crucial;
Profitability Risk: Including the balance between gold standard and coin standard profitability, and the effectiveness of profits, we must also consider the opportunity cost of using BTC Layer 2. Bitanchor tries to design a more robust and secure method to provide leading market strategies in the mid-to-long term market.
Decentralization Risk: As a decentralized protocol, we cannot fully perform credit checks on your counterparties. This eliminates privacy leakage to some extent, but for businesses that may be exposed to regulation, we need to perform necessary KYC to expand the quota authorization for users.
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