ABCDE: Why should we invest in BitSmiley?
Author: ABCDE Capital
BitSmiley is the MakerDAO + Compound of the Bitcoin ecosystem, providing a comprehensive solution for Bitcoin DeFi, filling the current gap in the Bitcoin ecosystem for "stablecoin" + "lending" infrastructure.
In addition to offering a BRC20-compatible bitRC20 format stablecoin backed by over-collateralized BTC, BitSmiley also provides peer-to-peer lending based on BRC20, as well as insurance and CDS derivatives built on lending. It has established partnerships with several BTC Layer2 projects to provide stablecoins and DeFi ecosystem products.
I. The Booming BTC Ecosystem and Missing Infrastructure
Recently, the Bitcoin inscription ecosystem, represented by Ordi, has clearly entered a booming period, with on-chain gas fees often driven up to over 300 by "some unknown" inscriptions, making a single transaction cost dozens of dollars, reaching the congestion levels seen during the ETH DeFi Summer.
However, unlike the DeFi Summer of 2020, when the ETH DeFi ecosystem was led by relatively mature DeFi infrastructure, such as MakerDAO in the stablecoin sector and Compound/AAVE in lending, which were established in 2018-2019, the current BTC ecosystem, aside from asset issuance, is still in a "wild" phase. Apart from Unisat providing wallet and market services for BRC20 users, traditional DeFi essentials like DEX, lending, and stablecoins are largely missing, not to mention advanced plays like derivatives. Furthermore, various XXRC20 protocols are still exploring and building basic infrastructure like wallets and trading markets. Additionally, similar to how various Alt Layer1 + Layer2 absorbed the value overflow caused by high gas fees during the ETH DeFi Summer, the concept of BTC Layer2 has entered people's vision. We need faster and cheaper Layer2 solutions along with a complete DeFi infrastructure in the BTC ecosystem.
II. BitUSD --- Over-Collateralized bitRC20 Format Stablecoin Based on BTC
The BitUSD stablecoin is the core component of BitSmiley, initially launched on the BTC Layer2 that BitSmiley first partnered with, and gradually expanding to other BTC Layer2s.
The overall over-collateralization mechanism of BitUSD is similar to that of MakerDAO, which should be familiar to those acquainted with DeFi. Here’s a brief description:
At the minting level, users collateralize BTC (which can be either wrapped BTC on the partnered Layer2 or BTC bridged in via BitSmiley's official bridge) to BitSmileyDAO, and then mint bitUSD.
Redemption is a reverse mechanism.
The liquidation aspect also adopts MakerDAO's latest liquidation 2.0 mechanism, using a Dutch auction model. When the LTV (Loan to Value) falls below a set threshold, the liquidation process is initiated.
Two key points to emphasize are as follows:
First, the last line of defense in liquidation --- In MakerDAO's design, when insolvency occurs due to market volatility or other reasons, MKR token holders become the last guardians. MakerDAO will issue more MKR to repay bad debts, effectively diluting the interests of MKR holders. In contrast, BitSmiley will auction future platform revenues as debt through an English auction, prioritizing the repayment of creditors from the platform's profits after deducting basic operating expenses.
Second, the format of BitUSD will appear in a BRC20-compatible bitRC20 inscription form.
Since BRC20 format inscriptions require a predetermined total supply before deployment, which does not align with the dynamic adjustment of stablecoins, BitSmiley has chosen to use a new inscription format - bitRC20, which is backward compatible with BRC20 and supports access control and upgrades. With version numbers and burn operations, the flexibility of the "stablecoin inscription" meets the system's needs.
III. Subsequent DeFi Products --- Lending, Insurance, CDS
In addition to the core stablecoin, BitSmiley has tailored DeFi products suitable for BTC's technical characteristics, based on peer-to-peer lending supported by its stablecoin, layered with insurance and CDS derivatives, giving BTC DeFi new gameplay.
- Peer-to-Peer Native Lending Based on bitRC20 -
As is well known, due to the lack of smart contract support, it is challenging to implement peer-to-pool lending similar to AAVE or Compound based on BTC.
(However, through multi-signature and existing BTC OPcodes, native peer-to-peer lending based on BTC can be fully realized. For example, if A wants to collateralize BTC to borrow bitRC20, and B is willing to lend bitRC20 and set interest rates and other conditions, the two can match through BitSmiley's matching mechanism, completing the transaction via atomic swap technology.)
In the future, the team also plans to launch loan splitting and order merging features to aggregate and match similar peer-to-peer orders, thereby "simulating" a peer-to-pool lending model, significantly improving capital utilization and TVL, catching up with the capital efficiency of ETH's peer-to-pool model.
- Insurance -
A tricky issue with native lending based on BTC is the liquidation mechanism.
On the ETH side, platforms like Compound or AAVE rely on oracle support for liquidation. However, due to BTC's 10-minute block time compared to ETH's 12 seconds, replicating ETH's liquidation model is challenging. A liquidation process triggered in the first minute may become ineffective by the tenth minute. To address this, BitSmiley has designed an alternative solution, which is a no-liquidation lending insurance. When the collateral BTC price drops, the lender has the right to "force" purchase insurance.
Here, we introduce an insurance seller Charlie (Alice and Bob are the lending parties).
The pricing model for insurance uses extreme value theory and T-Copula, which are common in the insurance industry. The team has extensive experience in this area, with members having solid foundations in capital pricing theory and financial mathematics, and having participated in traditional financial derivatives and DeFi derivatives pricing application projects. Additionally, the platform's unique "Black Box Purchase Mechanism" will enhance the pricing efficiency and transaction volume of insurance.
- CDS -
Those familiar with the 2008 financial crisis will undoubtedly recognize CDS (Credit Default Swap) as a sophisticated derivative. Of course, the issue was not with the CDS tool itself, but rather that too many houses were sold to buyers who had no qualifications to purchase them.
CDS plays an important role in traditional financial derivatives, as its characteristics help investors manage risks more efficiently, conduct credit assessments, engage in arbitrage trading, and increase market liquidity and pricing efficiency. However, the reason CDS has not appeared in the ETH DeFi ecosystem is that the ETH lending ecosystem has always been a peer-to-pool model, while CDS is based on a peer-to-peer model. BitSmiley's native BTC peer-to-peer lending is more suitable for the development of CDS derivatives.
CDS can bundle multiple loans with similar risks and characteristics into a CDS asset portfolio, ensuring the safety of the guarantor's funds while also possessing the speculative attributes of derivatives.
In summary, BitSmiley fills the current gap in the BTC ecosystem with "inscription format stablecoins" and opens new doors for BTC DeFi through lending, insurance, and CDS derivatives, undoubtedly becoming an indispensable key component of the BTC ecosystem.
