btc_yield_mechanism
Bitcoin Yield Mechanism Becoming Increasingly Complex and Specialized
From quantitative trading to DeFi liquidity mining, each strategy comes with risks and opportunities. This article is based on a piece by @ruiixyz, compiled, translated, and written by wublockchain.
(Previous Context: Usual’s surprise rate cut led to “USD0++ depeg” and a flash crash to $0.9. The Curve pool tilted severely, with the community calling it a scam.)
(Background: Can Bitcoin be used as collateral for loans? Financial Supervisory Commission: Hard for Taiwanese banks initially, as cryptocurrency value and stability remain unproven.)
According to earlier reports, Curve Finance founder Michael Egorov is preparing a new project called Yield Basis, aiming to help tokenized Bitcoin and Ethereum holders earn market-making revenue by reducing impermanent loss. The project has successfully raised $5 million at a $50 million valuation and is expected to use Curve’s CryptoSwap AMM to concentrate liquidity.
BTC yield sounds attractive, but it may be a house of cards built on layers of altcoin incentives, ready to collapse at any time.
- Is the yield paid in BTC or altcoins?
- What risks are involved?
- How much principal could be lost?
- Is this yield sustainable?
- Will yield dilute as TVL grows?
This article focuses on sustainable BTC-denominated yields in CeFi and DeFi:
Primary BTC Yield Sources
Despite various looping and compounding strategies, primary BTC yield sources can be categorized into five main types: quantitative trading, DEX liquidity provision (LP), lending, staking, and collateral.
1) Quantitative Trading Strategies: A “Zero-Sum Game”
Ensure your alpha strategy is net profitable. Arbitrage strategies include funding rate arbitrage, spot-futures basis trading, cross-exchange arbitrage, and lending arbitrage, sometimes incorporating event-driven trading. Quantitative trading requires deep liquidity—currently concentrated in TradFi and CeFi. Additionally, TradFi-to-DeFi arbitrage lacks cross-venue infrastructure.
BTC-denominated yield: Varies based on asset scale, risk preference, and execution. Market-neutral strategies may target a 4-8% BTC-denominated annual percentage rate (APR), with a stop-loss of around 1%. Elite quant teams even pursue 200-300%+ APR while managing risk through sophisticated controls, keeping stop-losses at 10-30%.
Risks: Highly subjective, involving model risk, judgment risk, and execution risk. Even neutral strategies can turn into directional bets. Requires real-time monitoring, robust infrastructure (e.g., low latency, custody, settlement protocols), loss insurance, and venue risk control.
2) DEX Liquidity Provision (LP): Limited by Supply and Demand
DEXs facilitate real trading volume beyond arbitrage. However, only about 3% of wrapped Bitcoin (WBTC) is in DEXs due to supply and demand constraints. Providing liquidity to volatile pairs like WBTC-USDC faces supply limitations from impermanent loss and demand challenges due to wrapping friction and limited DeFi utility.
BTC-denominated yield: Highly variable. Uniswap currently offers a 6.88% APR, sometimes reaching double digits.
Risks: Due to impermanent loss, simply holding BTC often outperforms providing liquidity. Many new LPs are misled by visible APR figures and overlook long-term capital losses. Standard DeFi risks also apply.
3) Lending: BTC Loans
BTC is primarily used as collateral to borrow USD or stablecoins for yield loops or leveraged trading, rather than for earning BTC-denominated APR.
BTC-denominated yield: CeFi and DeFi lending rates are generally low, around 0.02%-0.5% APR. Loan-to-value (LTV) ratios vary: TradFi offers 60-75% LTV with a benchmark rate of 2-3%; CeFi offers 33-50% LTV, with USDC rates around 7%; DeFi offers 33-67% LTV, with USDC rates around 5.2%.
Risks: Liquidation risk. Lower LTV reduces risk but at the cost of capital inefficiency. Hedging strategies can offer additional protection. CeFi and DeFi risks remain present.
4) Staking: Earning Altcoin Rewards
@babylonlabs_io contributes to the security of relevant PoS chains through staking.
Altcoin-denominated yield: Unknown APR.
Risks: The Babylon protocol should undergo multiple security audits and disclose expected staking yields upon system launch. If Babylon’s token issuance fails, its ecosystem’s sustainability will be at risk.
5) Collateral: Liquidity Mining
When you provide BTC to DeFi, BTC L2s, etc., as TVL to earn altcoins.
Altcoin-denominated yield: Varies, some range from 5-7%, but whales often secure better rates.
Risks: Different protocols have varying reliability and track records. Each protocol has different lock-up periods and capital requirements.
A New BTC Yield Venue: Introducing Yield Basis
As mentioned earlier, while altcoin-denominated yield is unsustainable, true BTC-denominated yield remains scarce and high-risk. Quant teams need sufficient liquidity, but DEXs currently do not meet this demand.
What is Yield Basis (@yieldbasis)? YB is an AMM designed to minimize impermanent loss while encouraging BTC liquidity provision, cross-venue arbitrage, and real trading.
Foundation for BTC yield: Based on six years of data simulations, YB can offer an average of 20% net APR, even higher in bull markets. It can also integrate with any LSTs seeking true BTC-denominated yield, and Pendle can leverage YB-generated yields.
Looking Ahead
BTC yield strategies will become increasingly complex, emphasizing risk management, BTC-denominated returns, and institutional-grade products. Winners will be those providing deep liquidity and fair returns without excessive risk while innovating within regulatory frameworks.
Small Mistakes Can Lead to Catastrophic Failures
“Nothing is unbreakable—just not yet a target.” BTC faces increasingly complex attacks involving multiple risk layers: CEX trust delegation, self-custody phishing, and potential vulnerabilities in smart contracts, liquidation mechanisms, and capital losses. Social engineering is a major threat, as relationships and interfaces can be exploited. Leading BTC LPs may even require chain halts and bridge freezes for security.
Scarcity of Elite Quant Teams
True BTC-denominated yield is highly attractive. While DEX LPs are in their early stages, quantitative trading remains dominant. Some teams package their strategies into BTC-yield products and raise external LP funds. However, high-frequency arbitrage has limited capacity, and top teams often retain these strategies internally, avoiding external capital—leading to “adverse selection.” Nonetheless, market-neutral and other low-risk strategies make sense as BTC-yield products.
It looks like you’ve uploaded an image, but I don’t see any specific request related to it. Let me know how I can assist you!