Penetrating the Bitcoin Lending Business: A New Paradigm Reconstruction of Trillion-Level Liquidity

Written by: JiaYi

I have mentioned multiple times before that Bitcoin, with a market cap of over a trillion dollars, is actually the largest and highest quality "funding pool" in the crypto world.

Last month, Avalon Labs, the largest on-chain lending protocol in the Bitcoin ecosystem, just completed a $10 million Series A funding round led by Framework Ventures, and my venture capital firm GeekCartel also participated. We hope to work with Avalon and more innovative projects in the Bitcoin ecosystem to transform BTC from a digital store of value into a more active financial tool.

In fact, for the Bitcoin ecosystem, starting from Babylon and Solv, BTC as a liquidity asset and niche asset is visibly evolving into richer on-chain structured yield scenarios, gradually giving rise to a unique and self-contained BTCFi ecosystem.

From a sustainability perspective, if we can activate the dormant BTC and build an efficient and secure liquidity network, we can completely open up the global imagination space for BTC as a trillion-dollar asset to serve as a DeFi niche asset.

Liberating Bitcoin Liquidity: Industry Practices

According to DeFiLlama data, as of January 9, 2025, the total locked value on the Ethereum chain exceeded $64 billion, a significant increase of nearly 180% compared to January 2023 ($23 billion). Meanwhile, the Bitcoin ecosystem, which began to gain momentum alongside the Ordinal wave, despite BTC's market cap and price growth far exceeding ETH, has always struggled to keep up with the expansion speed of the Ethereum ecosystem.

It is important to note that even releasing just 10% of BTC liquidity could create a market as large as $180 billion. If we can reach a TVL ratio similar to ETH (on-chain TVL/total market cap, currently about 16%), it would release approximately $300 billion in liquidity.

This is enough to drive explosive growth in the BTCFi ecosystem, and it even has the potential to surpass the broader EVM networks, becoming the largest super-chain financial ecosystem.

From this perspective, the greatest imaginative space for a Bitcoin liquidity platform like Avalon, which "allows anyone to benefit from BTC lending," lies here—it has already become the largest lending protocol in the entire BTC ecosystem, second only to DAI and lisUSD.

This has also created the record for the fastest TVL growth of any DeFi lending protocol in history. According to official data, Avalon Labs' TVL has surpassed $2 billion, and its Bitcoin stablecoin USDa exceeded $500 million in locked value just one week after its launch.

For current BTC holders, fully utilizing their dormant BTC assets is certainly a necessity, but they also do not want their BTC to bear too much principal loss risk. Ideally, they would like to convert fixed assets into liquid ones for easier operation.

Therefore, on-chain lending protocols based on Bitcoin are destined to welcome an opportunity window, which is also where Avalon's opportunity lies—the lending rate is fixed at 8%, with professional institutions managing the collateralized Bitcoin, while the stablecoins borrowed are supplied in unlimited quantities, providing BTC holders with greater liquidity to participate in other projects within the ecosystem.

The logic of this approach has also been validated by the market. It is worth mentioning that Avalon’s official strategy differs from other TVL projects in that they focus on the healthy construction of retail investors within the entire ecosystem, rather than just being a game for large holders. Anyone can participate and leverage as much as possible within a safe range to increase returns.

What is the Value of Bitcoin Stablecoins?

From the perspective of stablecoins, on-chain decentralized stablecoins are still dominated by debt-collateralized positions (CDP) stablecoins—MakerDAO's DAI is the largest, followed closely by liUSD, USDJ, and others.

Essentially, CDPs do not look like loans—borrowers mint a CDP, and the protocol's oracle calculates the dollar value at a 1:1 price. The CDP can be sold on the open market, allowing the borrower to "borrow" another asset while the lender receives the CDP.

In simple terms, this is an extension built on lending scenarios for stablecoin usage, effectively creating an additional liquidity trading pool for those dormant assets. Taking Avalon as an example, its ecosystem currently has four core business segments: yield-bearing stablecoin USDa based on Bitcoin collateral; a lending protocol based on USDa; a hybrid lending platform connecting DeFi and CeFi; and a decentralized lending protocol supporting BTC staking.

This is also why stablecoin protocols and lending protocols easily penetrate each other—such as Aave and MakerDAO, which are mutually advancing, with one launching a native stablecoin GHO and the other accelerating the construction of its own lending scenario coverage.

Therefore, on the same foundation, Avalon’s liquidity market can form a "lending" relationship with the underlying assets while building a stablecoin USDa market through liquidity design and providing users with fixed-income products.

In short, Avalon has truly achieved the goal of allowing anyone to benefit from BTC lending, transforming Bitcoin from idle assets into more liquid ones. This not only helps the Bitcoin ecosystem solve the long-standing stablecoin issue but also, by leveraging LayerZero technology, achieves cross-chain compatibility, allowing users to operate USDa seamlessly across multiple DeFi ecosystems without the need for third-party cross-chain bridges. This effectively brings the liquidity of the Bitcoin ecosystem to other chains.

It is important to note that most BTC is in a dormant state. Due to having sufficient safety margins compared to other altcoins, many OGs or Maxis lack the motivation or willingness to risk moving their assets across to ecosystems like Ethereum, resulting in a large portion of BTC remaining dormant and the scale of BTCFi stagnating.

In this context, USDa plays a relatively important role. On one hand, USDa fills the gap in the Bitcoin ecosystem's DeFi infrastructure (lending protocol), and on the other hand, Avalon’s USDa leverages the advantages of the CeDeFi lending platform, allowing users to use USDa to obtain USDT from CeFi liquidity providers, addressing the pegging issue.

It also provides a foundational framework for the Bitcoin network to efficiently utilize assets and activate dormant BTC, enabling more BTC holders to safely participate in on-chain liquidity activities and confidently place large amounts of dormant BTC into DeFi liquidity pools for exchange or yield generation.

Conclusion

It is foreseeable that as Bitcoin assets gradually awaken, BTCFi is very likely to become a new DeFi asset direction with a scale reaching hundreds of billions of dollars, becoming a key lever for building a prosperous on-chain ecosystem.

As an investor in Avalon, I believe that in just a few months, it has become the absolute leader in the BTCFi lending track, and I am firmly convinced that Avalon and BTCFi will perform even better in the future—building diverse financial product forms and DeFi scenarios centered around BTC, redefining BTC's role in the entire DeFi field.

As for whether the deep integration of BTC in the DeFi field can reach a critical turning point, it is worth looking forward to.