BitSmiley is the MakerDAO+Compound of the Bitcoin ecosystem, providing a comprehensive solution for Bitcoin DeFi by addressing the most significant gaps in the current Bitcoin ecosystem — stability coins and lending infrastructure.

In addition to offering stable coins in bitRC20 format, over-collateralized by BTC, BitSmiley also facilitates peer-to-peer lending based on BRC20. Furthermore, it has established insurance and CDS derivatives built on the lending framework. BitSmiley has entered into partnerships with several BTC Layer2 projects, supplying them with stable coins and DeFi ecosystem products.

I. The Booming BTC Ecosystem and the Lack of Infrastructure

Recently, the Bitcoin inscription ecosystem, represented by projects like Ordi, has clearly entered a period of intense activity. On-chain gas fees are often driven to over 300 by some “unknown” inscription, with a single transaction costing tens of dollars, reaching congestion levels reminiscent of the ETH Defi Summer of that year.

However, unlike the Defi Summer of 2020, when the ETH Defi ecosystem was led by relatively mature Defi infrastructure, with MakerDAO dominating the stablecoin sector, and Compound/AAVE and Uniswap in lending and DEX, all established projects between 2018–2019. The current BTC ecosystem, aside from asset issuance, remains in a relatively undeveloped state. Apart from Unisat, which provides basic services such as wallets and markets for BRC20 users, traditional Defi pillars like DEX, lending, stablecoins, and advanced derivatives are largely absent. Various XXRC20 protocols are still exploring and building infrastructure for wallets and trading markets. Moreover, just as major Alt Layer1+Layer2 solutions handled the value overflow caused by high ETH gas fees during Defi Summer, the concept of BTC Layer2 has come into focus. In the BTC ecosystem, there is a need for faster, cheaper Layer2 solutions and a more comprehensive Defi infrastructure.

II. BitUSD — A BTC-backed Overcollateralized bitRC20 Stablecoin

BitUSD stablecoin stands as the central component of BitSmiley, initially launched on the first BTC Layer2 platform that collaborated with BitSmiley and gradually expanded to other BTC Layer2 solutions.

The overall overcollateralization mechanism of BitUSD is akin to MakerDAO, familiar to those versed in Defi. Here’s a brief explanation:

On the minting side, users collateralize BTC (can utilize wrapped BTC on partnered Layer2 platforms or use BitSmiley’s official bridge to bring BTC) into BitSmileyDAO, subsequently minting bitUSD.

Redeem, on the other hand, involves a reverse mechanism.

In terms of liquidation, the system also adopts the latest liquidation 2.0 mechanism similar to MakerDAO, employing a Dutch auction model. When the Loan-to-Value (LTV) falls below the designated threshold, the liquidation process is initiated.

Two points worth emphasizing are as follows:

Firstly, the last resort in liquidation — In the design of MakerDAO, when insolvency occurs due to factors like severe market fluctuations, Maker token holders become the ultimate guardians. MakerDAO issues additional MKR to cover bad debts, effectively diluting the interests of MKR holders. In contrast, BitSmiley conducts an English-style auction with future platform revenue as the debt. Profits from the platform, after deducting basic operational expenses, will prioritize repayment to debtors.

Secondly, the format of BitUSD will appear in a bitRC20 inscription form compatible with BRC20.

Due to the need to determine the total supply before deployment in the case of the BRC20 inscription, which doesn’t align with the dynamic adjustment of stablecoins, BitSmiley opts for a new inscription format called bitRC20. This format is both backward-compatible with BRC20 and supports access control and upgrades. With the introduction of version numbers and the Burn operation, the flexibility of the entire stablecoin inscription aligns with the system’s requirements.

III. Subsequent Defi Products — Lending, Insurance, CDS

In addition to the core stablecoin, BitSmiley has tailored Defi products suited to the technical characteristics of BTC. Building on its foundation of peer-to-peer lending supported by its stablecoin, BitSmiley introduces advanced derivatives like insurance and CDS, providing a new dimension to BTC Defi.

1. Native Peer-to-peer Lending Based on bitRC20 -

As it is widely known, implementing point-to-pool lending, similar to AAVE or Compound, is challenging on the BTC blockchain due to the lack of support for smart contracts.

However, leveraging multi-signature and existing BTC OPcodes, it is entirely possible to implement native peer-to-peer lending based on BTC. For instance, User A wishes to collateralize BTC to borrow bitRC20, and User B is willing to lend bitRC20 while setting interest rates and other conditions. The matching mechanism within BitSmiley facilitates the pairing, and the transaction is completed through atomic swap technology.

In the future, the team also plans to launch features such as loan splitting and order merging. This involves aggregating similar peer-to-peer orders, creating a simulated “group-to-group” lending model, significantly enhancing capital utilization and Total Value Locked (TVL), to match the capital efficiency seen in point-to-pool systems on the Ethereum network.

2. Insurance -

Native lending on BTC comes with a challenging issue: the liquidation mechanism.

In the ETH ecosystem, platforms like Compound or AAVE rely on oracles to support liquidations. However, in the BTC realm, where block times are 10 minutes compared to ETH’s 12 seconds, replicating the liquidation model is difficult. A liquidation process triggered in the first minute might become ineffective by the 10th minute. To address this, BitSmiley has devised an alternative solution — liquidation-free lending insurance. When the collateral BTC’s price falls, the borrower has the right to “forcefully” purchase insurance.

This introduces an insurance seller, Charlie (where Alice and Bob are the lending parties).

The pricing model for insurance utilizes common extremes theory and T-Copula, prevalent in the insurance industry. The team boasts extensive experience in this domain, with members possessing a solid foundation in capital pricing theory and financial mathematics. They have actively participated in projects applying pricing methodologies to traditional financial derivatives as well as DeFi derivatives. Additionally, the platform’s innovative “Black Box Purchase Mechanism” is set to enhance the efficiency and trading volume of insurance pricing.

3. CDS (Credit Default Swap) -

For those familiar with the 2008 financial crisis, CDS, or Credit Default Swaps, are likely not unfamiliar. The issue, however, does not lie with the CDS derivative tool itself but rather with the excessive sale of houses to individuals lacking the qualifications to purchase them.

CDS plays a crucial role in traditional financial derivatives, enabling investors to engage in more efficient risk management, credit assessment, arbitrage trading, and enhancing market liquidity and pricing efficiency. The reason advanced derivatives like CDS haven’t appeared in the ETH Defi ecosystem is due to the predominant point-to-pool model in the ETH lending ecosystem, while CDS is built on a peer-to-peer model. BitSmiley’s native BTC peer-to-peer lending system, on the other hand, is well-suited for the development of advanced derivatives like CDS.

CDS allows bundling of multiple loans with similar risks and characteristics into a CDS asset portfolio. Thus, CDS based on peer-to-peer loans ensures the safety of the collateral while maintaining speculative attributes inherent to derivatives.

In conclusion, BitSmiley not only fills a crucial gap in the current BTC ecosystem with its stablecoin in inscription form but also opens new paths in BTC Defi through lending, insurance, CDS derivatives, making it an indispensable key component in the BTC ecosystem.

About ABCDE

ABCDE is a VC focused on leading investment in top Crypto Builders. It was co-founded by Huobi Cofounder Du Jun and former Internet and Crypto entrepreneur BMAN，who both have been in the Crypto industry for more than 10 years. The co-founders of ABCDE have built multi-billion dollar companies in the Crypto industry from the ground up, including listed companies(1611.HK), exchanges(Huobi), SAAS companies(ChainUP.com), media(CoinTime.com), and developers platforms(BeWater.xyz).