MT Capital Research Report: bitSmiley, the pioneer of Bitcoin’s native stablecoin protocol

Introduction:

This article introduces bitSmiley, whose stablecoin combined with a decentralized lending business model is also known as the “MakerDAO + Compound” of the Bitcoin ecosystem.

bitSmiley fills the gap in the stablecoin market of BTC ecosystem

Since the second half of last year, the popularity of NFTs has brought a large amount of funds and user traffic to the Bitcoin network, driving the development of the Bitcoin ecosystem. The demand for NFT transactions has spawned a large number of Bitcoin wallets and NFT trading market infrastructure. The limitations of Bitcoin network transaction throughput and high Gas costs have also led developers to focus on the Bitcoin scalability track. NFTs, which have accumulated a large amount of funds, need to find new use cases and investment scenarios, and the rest of the ecosystem is also eager to capture the dividends of the rise of NFTs. Therefore, there is a constant stream of cross-chain projects.

Today, although the overall Bitcoin ecosystem is still in its very early stages, a batch of high-quality infrastructure has emerged to fill the market gap. For example:

• Wallets: Unisat, Alby, OKX Wallet, Wizz Wallet….
• Trading markets: Unisat, OKX BRC20 Market, idclub, Dotswap swap, Alex lab….
• L2 / Scalability：B^2 Network、Merlin Chain、BounceBit、BEVM、Bison Labs、SatoshiVM….
• Bridges：MultiBit、TeleportDAO、Ordinifinity、Ordbridge….
• DA：Nubit、B^2 Network、Babylon….

source：MT Capital

The popularity of the Bitcoin ecosystem is reminiscent of Ethereum’s DeFi Summer. However, compared to that, the current Bitcoin ecosystem is still severely lacking in DEX, Lending, and Stablecoin projects. Especially in the realm of DeFi, Bitcoin’s native stablecoin market still has a lot of gaps. With the gradual launch of BTC L2, the L2 ecosystem needs stablecoins to leverage BTC DeFi leverage and unleash the liquidity of the Bitcoin mainnet funds. As the frenzy of altcoins gradually fades and the market becomes more rational, the funds remaining on the Bitcoin network also need to find new avenues for growth and utilization, and stablecoins are undoubtedly the best choice. Therefore, we have also set our sights on bitSmiley, the first BTC-based over-collateralized stablecoin project in the bitRC-20 format, within the Bitcoin ecosystem. bitSmiley is expected to fill the gap in the BTC ecosystem’s stablecoin market and become a core component of the new wave of BTC ecosystem.

BTC’s “MakerDAO + Compound”

bitSmiley consists of two core components: bitUSD, the stablecoin minted based on over-collateralized BTC, and the decentralized lending platform bitLending, which is built on top of bitUSD. The business model of combining stablecoin and decentralized lending is also referred to as the “MakerDAO + Compound” of the Bitcoin ecosystem.

bitUSD

bitUSD is the core of the bitSmiley ecosystem. Due to the limited functionality of Brc-20, in order to meet the business requirements of a stablecoin, the bitSmiley team has further optimized the Brc-20 protocol and introduced an enhanced version called bitRC-20. bitRC-20 is backward compatible with Brc-20 and adds new operations like Mint and Burn to fulfill the needs of stablecoin minting and burning.

The overall minting logic of bitUSD is similar to MakerDAO. First, users need to over-collateralize BTC on the Bitcoin mainnet. Then, the oracle will transmit the information to L. The bitSmileyDAO deployed on L2 will receive and validate the oracle information, and then pass the Mint bitUSD information to the validators on the Bitcoin mainnet, thereby achieving the minting of bitUSD on the Bitcoin mainnet.

The logic of redemption is similar to the logic of minting. After the user retrieves the collateral, the corresponding bitUSD will also be destroyed.

If there is a situation where the loan-to-value （LTV）ratio is below the threshold, bitSmiley will also initiate a liquidation process by auctioning off the collateral assets. Similar to MakerDAO’s liquidation mechanism, bitSmiley’s liquidation will also use the Dutch auction format, starting with a high bid and gradually decreasing. bitSmiley will also use 90% of the stable fee income and auction income as a liquidation buffer to ensure the overall system’s security. In addition, when the liquidation buffer is not enough to offset the debt, bitSmiley will use the platform’s future revenue as collateral for debt auctions, ensuring the minimal occurrence of bad debts and better resilience against the damage caused by extreme market fluctuations to the platform.

The implementation approach of MakerDAO’s decentralized overcollateralized stablecoin has been validated by the market. bitSmiley cleverly referenced MakerDAO’s implementation approach and made more refined innovations in token standards and liquidation mechanisms, thereby better meeting the stablecoin market demand within the Bitcoin ecosystem.

bitLending

In addition to the demand for stablecoins, bitSmiley has also noticed the need for liquidity borrowing among Bitcoin users. Therefore, bitSmiley is able to provide Bitcoin-native decentralized lending services.

The implementation of bitLending is similar to other peer-to-peer lending protocols in the ecosystem. Lenders can publish loan offers on bitLending, including the type of bitRC-20 tokens they are willing to provide, the amount of tokens, the loan period, and the loan interest rate. Borrowers can choose to accept the desired offer. Once the match is made, bitLending will generate a multi-signature address for fund transfer. Borrowers and lenders need to transfer their assets to the multi-signature address and obtain network consensus confirmation. Once confirmed, the borrower can withdraw the loan.

Due to the long block time limitation of the Bitcoin network, bitLending cannot perform liquidation based on oracles like other lending protocols. If the price of the collateral assets of the borrower drops significantly, the borrower may refuse to repay the loan, resulting in substantial losses for the lender. To address this issue, bitLending introduces loan insurance. Both the borrower and the lender need to transfer an insurance fee to the multi-signature address before transferring the loan funds and collateral. The guarantor can receive the insurance fee in the multi-signature address and choose to guarantee the losses for the borrower. Once the borrower defaults, the funds in the multi-signature address will be used to compensate the lender, thereby safeguarding the interests of the lender.

As the protocol matures, bitSmiley also plans to further optimize the lending mechanism of bitLending, enabling bitLending to support order splitting and merging, thereby further improving capital efficiency. In addition, bitSmiley also plans to introduce CDS credit default swap products for bitLending, bringing more complex financial plays into the Bitcoin ecosystem.

To sum up,bitSmiley not only brings stablecoins and lending plays into the DeFi ecosystem, but also optimizes stablecoins and lending protocols in a more refined manner based on the uniqueness of the Bitcoin network. With the implementation of BTC L2 and the gradual maturity of bitSmiley’s business, the integrated play of stablecoins and lending by bitSmiley is expected to become the liquidity hub of the Bitcoin network, further aggregating liquidity and improving the efficiency of fund utilization, injecting vitality into the Bitcoin network. bitSmiley’s first-mover advantage may make bitUSD the hard currency for value exchange in the Bitcoin network, and through the continuous expansion of its network advantage, form its own ecological barrier, thereby achieving a reduction in dimensionality attack on other products.

Recent developments

In addition to bitSmiley’s high-quality founding team and excellent product capabilities, bitSmiley’s strength in market promotion, creating momentum, and event operation should not be overlooked. Recently, bitSmiley has been increasing its promotional efforts and has been actively promoting funding institutions and partners on Twitter. It has also been actively participating in organizing AMAs and Twitter Spaces. Discussions about bitSmiley in the community and the number of users paying attention to bitSmiley have gradually increased. In order to further enhance community stickiness, reward early supporters, and attract more new users, bitSmiley has also launched a series of NFT activities.

First, bitSmiley has released a limited edition of 100 OG NFTs: bitDisc-Gold, specifically distributed to Bitcoin OGs and industry leaders. Users who own bitDisc-Gold will be invited to the private Bitcoin OG Club and will have priority access to the full range of bitSmiley products and future benefits.

Secondly, bitSmiley has also launched a limited edition of 10,000 bitDisc-Black NFTs to give back to regular users, early supporters, and contributors. Users who own bitDisc-Black NFTs will also have priority access to experiencing bitSmiley products and will receive a series of benefits, including potential airdrops and more.

Currently, bitSmiley has taken snapshots of 1999 early community followers, and the remaining whitelist will be distributed through subsequent activities. KOLs on Twitter have also started activities to retweet and draw from the whitelist. In addition, bitSmiley has launched a new round of Discord active user whitelist lottery. Users can join bitSmiley’s Discord community, actively leave messages, and strive for whitelist qualifications.

Summary

After in-depth research and analysis, MT Capital is very optimistic about the development potential of bitSmiley and participated in the recent round of financing. bitSmiley has keen insights into the blank market of stablecoins and lending products in the Bitcoin ecosystem. They have successfully achieved the perfect fit between products and the market by launching innovative native Bitcoin over-collateralized stablecoins and decentralized peer-to-peer lending products (Product Market Fit). In addition, bitSmiley’s stablecoins not only provide a new value anchoring standard and medium of value exchange for the Bitcoin network, but its lending products also open up new application scenarios and value domains for these stablecoins. We believe that with its first-mover advantage in the market, bitSmiley will quickly build a strong ecological barrier and become a leading DeFi product in the Bitcoin ecosystem with its unique combination of stablecoins and lending products.

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