Feast on Multiple Dishes: Quick Guide to the Merlin Chain Liquidity Protocol

As the narrative around Bitcoin Layer 2 unfolds, the relatively “static” Bitcoin ecosystem is gradually becoming more active, highlighting the increasing importance of liquidity. To meet the urgent demand of numerous traders for Bitcoin yield and to facilitate efficient liquidity allocation, many liquidity staking protocols within the Bitcoin ecosystem have emerged. Headed by the Layer 2 Merlin Chain, along with emerging staking protocols like Solv Protocol, Avalon Finance, and StakeStone, the concept of yielding Bitcoin has been introduced. These protocols combine traditional liquidity staking concepts, offering investors in the Bitcoin ecosystem a completely new investment experience. This article will introduce the core mechanisms and staking strategies of Solv Protocol, StakeStone, and Avalon Finance, as well as how they collaborate within the Merlin ecosystem to “feast on multiple dishes.”

Solv Protocol

Project Overview

Solv Protocol is a proprietary full-chain basic income protocol within the Bitcoin ecosystem, comparable to Ethereum’s re-staking protocol Lido. By converting idle base assets into income-generating assets and facilitating cross-protocol, cross-ecosystem combinations, it creates a more efficient liquidity allocation method.

SovBTC, issued by Solv Protocol, is the first full-chain Bitcoin income asset, essentially an ERC-20 token with considerable liquidity. It allows users to stake idle assets in their wallets to generate secure basic income. Currently, SolvBTC is available on Arbitrum, BNB, and Merlin Chain.

Currently, Solv Protocol’s Total Value Locked (TVL) has exceeded $200 million, with over 55,000 users generating $7.03 million in income.

Team and Funding

Team background

The Solv team comprises seasoned professionals from various backgrounds, including experts from traditional financial institutions like Goldman Sachs and J.P. Morgan, product managers from Binance and OKX, as well as other influential figures in the cryptocurrency space. In addition to Solv Protocol itself, the team has also created the SFT (Semi-Fungible Token) token standard ERC-3525, attracting over 100 teams to build new products based on this standard.

Funding Details:

Investors in Solv Protocol include prominent institutions such as Binance Labs, NOMURA Group, Mirana, and Blockchain Capital. In the last funding round, they raised a total of $14 million.

Core Mechanism

Solv Protocol leverages four core modules: a distributed asset management structure, a DAO-driven coin selection mechanism, a non-custodial asset operation process, and a rigorously monitored risk management framework. Together, these modules provide strategy-based native income streams for mainstream assets such as BTC, ETH, and stablecoins.

1. Distributed Asset Management Structure: Solv’s structure supports the full asset lifecycle including creation, issuance, redemption, and risk control. The asset management framework consists of trading strategy Vaults, built-in Safe Guardian, Price Oracle, and liquidity strategy-driven tokens.

   • Trading Strategy Vaults: These Vaults store funds and LP assets and execute asset allocation. Designed to eliminate counterparty risk and ensure the efficient operation of liquidity pools, Solv defines permissible types of transactions in the contracts, excluding any potential misuse of funds.

   • Built-in Safe Guardian: Each Vault’s trading strategy is equipped with its own operational mechanism, allowing only designated multi-signature wallets. When users perform multi-signature operations, the checkTransaction function verifies compliance with specified rules.

   • Price Oracle: Serving as a bridge between Solv and other DeFi protocols, the Price Oracle retrieves and calculates asset net values and sets achievable prices for DeFi protocols, facilitating lending, trading, and other operations.

   • Liquidity Strategy-Driven Tokens (Vault LP tokens): These tokens convert staked assets into liquid, tradable assets, similar to the ERC-20 standard, ensuring maximum composability and utility within the DeFi ecosystem. Consequently, vault LP tokens like SolvUSD and SolvBTC can integrate and interact with other DeFi components such as money markets, DEXs, and LP-driven stablecoins.

2. DAO-Centric Coin Selection Mechanism: SolvBTC, SolvETH, and SolvUSD demand high-quality base portfolios for stable risk-return profiles. Therefore, Solv employs the decentralized autonomous community Solv DAO to execute the asset selection process. Currently, Solv DAO operates under the oversight of the Advisory Council and will transition to a user-funded SOLV governance model after the conclusion of Solv TGE.

3. Non-Custodial Asset Operation Process: Solv provides investors with on-chain asset autonomy and establishes trustless standards through smart contracts, reducing the risk of malfeasance. Smart contract upgrades require joint control with Solv’s partners through multi-signature addresses and TimeLock mechanisms.

4. Rigorously Monitored Risk Management Framework: Solv sets predefined stop-loss thresholds for each strategy. Additionally, Solv plans to introduce a 24-hour monitoring system to track portfolio deltas. Upon detecting deviations or anomalies, the system will automatically take action.

Code Audits: Solv’s code audits have been conducted by renowned security companies such as Quantstamp, Certik, Slowmist, Salus, and SecBit, with audit reports publicly available.

How to Feast More with SolvBTC

SolvBTC will serve as the liquidity strategy token (LST) on the Merlin Chain, allowing users to mint it at a 1:1 ratio by staking M-BTC, with no redemption available until June. After the lock-up period ends, it can be exchanged back to M-BTC at a 1:1 ratio. Since M-BTC can be redeemed for BTC at any time after the Merlin Seal staking ends, exchanging SolvBTC essentially allows for risk-free returns pegged to the underlying asset.

The earnings of SolvBTC come from multiple neutral trading strategy combinations, including Perp DEX market-making profits and neutral escape strategies from Funding Rates, aiming to stabilize returns while minimizing the impact of market price fluctuations.

As the Merlin ecosystem is still in its early stages of development, the BTC staked will be locked in the Vault to mitigate anchor risk until redemption is open in June. During the lock-up period, users can earn Solv tokens and also obtain multiple staking rewards through various DeFi combinations within the Merlin Eco. Here is a simple SolvBTC exchange process:

SolvBTC:M-BTC = 1:1

Step 0: Cross-chain Layer1 BTC to the Merlin Chain and then exchange it for M-BTC on MerlinSwap, with a slight discount.

Step 1: Deposit M-BTC into Solv to earn stable Merlin POS staking rewards.

Step 2: Additionally, Solv staking will also receive token airdrops, although specific rules and token airdrop ratios have not yet been provided by the Solv team.

LEGO Module for DeFi Protocols:

As SolvBTC is essentially an ERC-20 token, it can be combined with other DeFi protocols as a vital “Lego brick” module.

Step 3: The Solv token system is only related to staking and minting, meaning SolvBTC ownership does not affect staking rewards. Therefore, users can earn additional rewards by interacting with various DeFi protocols that are compatible with Solv.

According to the comprehensive overview released by Solv Protocol for the Merlin Chain applications, Solv has partnered with top DeFi products on the Merlin Chain, including MerlinSwap, bitSmiley, Surf Protocol, Mage Finance, and Avalon Finance, enabling users to benefit from multiple DeFi platforms simultaneously. Here’s a guide to the “one fish, multiple eats” strategy:

・MerlinSwap (DEX): MerlinSwap will list the SolvBTC-M-BTC trading pair, facilitating seamless trading for users. MerlinSwap, powered by the iZUMi Finance team in collaboration with MerlinChain, aims to provide a convenient DeFi interaction experience for the Bitcoin ecosystem, leveraging the stability of the Bitcoin ecosystem and interoperability with the Merlin EVM. As of the end of March, MerlinSwap TVL has surpassed $100 million, with a daily trading volume reaching $70 million, making it the largest DEX in the Merlin and Bitcoin ecosystems.

・bitSmiley (StableCoin): Stake SolvBTC to mint bitUSD (stablecoin). bitSmiley is a native Bitcoin stablecoin protocol that allows users to over-collateralize native BTC on the Bitcoin network to mint the stablecoin bitUSD. Additionally, bitSmiley offers lending and derivatives protocols, aiming to reshape the BTCFi ecosystem. bitSmiley was selected as a high-quality project in the Bitcoin hackathon hosted by ABCDE and OKX Ventures in November last year and received investments from ABCDE and OKX Ventures at the end of the year.

・Surf Protocol (Perp DEX): Open positions by staking SolvBTC. Surf Protocol is a perpetual contract DEX on Bitcoin Layer2, which was selected for the seventh season of the Binance Labs MVB accelerator program. The Surf Protocol testnet ended on March 26th, with a total of 30,000 wallet addresses participating and a total trading volume of $250 million. The mainnet will be launched soon.

・Mage Finance & Avalon Finance (Lending Protocol): Collateralize SolvBTC for lending. Mage Finance is the first Bitcoin lending infrastructure built on the Merlin Chain. Avalon is a DeFi platform on Bitcoin Layer2, which has been launched on the Merlin Chain.

・MerlinStarter & UniCross (LaunchPad): SolvBTC can be used as a participation certificate for future IDOs.

・Merlin Starter is the first launchpad platform in the Merlin Eco, aiming to incubate native projects and provide asset support for promising projects.

・UniCross is a cross-chain BTC inscription platform on Layer2 networks, allowing users to mint Layer1 BRC-20 tokens on Layer2 and pay with multi-chain assets such as BRC-20, BTC, and ETH. The stTokens obtained by users can be traded on the UniCross market or exchanged for ERC-20 tokens on Layer2.

・Map Protocol & Camelot Protocol (Layer3): Serve as bridging assets for Layer3.

・Map Protocol is a peer-to-peer Bitcoin Layer2 focusing on cross-chain interoperability, built on ZK and lightweight clients. Camelot Protocol is a Bitcoin Layer3 protocol designed for DePIN on the Merlin Chain, aiming to achieve decentralized AI training using blockchain technology. Camelot aims to build a scalable L3 DePIN platform on the Merlin Chain, allowing organizations and individuals worldwide to contribute computing resources to a shared pool.

Additionally, Solv launched its point system on April 5th, allowing users to earn points by minting SolvBTC. The more SolvBTC staked, the more points earned (single wallet operation recommended). Solv points can be used to redeem SOLV token airdrops. The points system will last for three months until the lock-up period ends in June.

StakeStone

Project Overview

StakeStone is a comprehensive liquidity infrastructure dedicated to providing native staking rewards and liquidity for Layer2 networks. It boasts high scalability, supporting various types of staking pools across multiple chains while also being compatible with Restaking. In addition, StakeStone has established a multi-chain liquidity market based on its native token LST $STONE, offering token holders a wider range of applications and revenue opportunities.

According to official information, StakeStone has engaged in deep collaborations with Layer2 networks such as Merlin Chain, BNB, Manta, and Scroll.

Funding Situation

In March of this year, Binance Labs and OKX Ventures announced investments in StakeStone, with specific amounts undisclosed, consistent with other fundraising efforts.

Core Mechanism

StakeStone’s core mechanism consists of four components: the StakeStone Vault, Minter, Strategy Pools, and OPAP (Optimizing Portfolio and Allocation Proposal).

・StakeStone Vault: This serves as a fund buffer pool responsible for managing deposits, withdrawals, and settlement functions. ETH pledged into the pool is stored in the contract until new settlements occur, after which it is deployed to the underlying strategy pools.

・Minter: The Minter is responsible for the minting and burning of STONE tokens. Its presence allows for the independent operation of STONE token circulation from the underlying assets, enabling adjustments to STONE token circulation to enhance token stability.

・Strategy Pools: StakeStone’s strategy pools adopt an OPAP-driven whitelist mechanism that is highly compatible with multiple assets. Asset risks are isolated within individual strategy channels to prevent high correlation risks.

・OPAP: This is the first decentralized solution designed to optimize liquidity yield rates, allowing for portfolio optimization and allocation of STONE’s underlying assets. It optimizes the allocation of income-generating assets and monitors returns. Any changes in StakeStone’s funds require a proposal presented through the OPAP mechanism, with STONE holders deciding whether to execute via on-chain voting.

StakeStone and BTC Ecosystem

STONE is the LSD token issued by StakeStone, designed to integrate mainstream staking pools, restaking pools, and LSD blue-chip DeFi strategy yields. Its value is directly correlated with the staking returns of underlying assets and can serve as liquidity across multiple blockchains.

On the other hand, mSTONEBTC is the first yield-bearing BTC derivative token based on the BTC Layer2 PoS mechanism. BTC can enter StakeStone’s liquidity distribution network through mSTONEBTC, further enhancing capital allocation efficiency within the BTC ecosystem. When StakeStone completes its integration with Merlin Chain, it is anticipated that a certain proportion of mBTC and STONE will be exchangeable.

BTC Ecosystem Acceleration Plan:

Although StakeStone currently relies on staking ETH to obtain STONE, on February 21st of this year, StakeStone announced the launch of the BTC Ecosystem Acceleration Plan, aiming to expand the staking scope to the BTC ecosystem. This plan allows users to deposit new ETH into Merlin Seal and B^2 Buzz to mint STONE and earn StakeStone points. The plan will continue until the staking period ends for Merlin Seal and B^2 Buzz.

Note: Participants in Merlin Seal before February 21st and eligible long-term community members may receive a reward of 0.5% of the total StakeStone supply as of that date.

Avalon Finance

Project Overview

Avalon Finance is a DeFi platform on the Bitcoin Layer2 network, offering users services such as deposits, loans, leveraged mining, and RWA (Real World Asset) loans. It has already launched on the Merlin Chain. Its key projects include overcollateralized lending, algorithmic stablecoins based on lending, and RWA loans, all of which focus on improving capital efficiency and optimizing the yield mechanism of lower liquidity assets through collateralized lending.

・Overcollateralized lending: A basic lending protocol with an isolated pool mechanism that supports various assets as collateral (both major assets and assets with lower liquidity).

・Algorithmic stablecoins based on lending: An overcollateralized algorithmic stablecoin that optimizes capital allocation efficiency through lending protocols.

・RWA loans: This pool supports both permissioned and permissionless RWA tokens.

Currently, Avalon’s Total Value Locked (TVL) has reached $51.31 million, with the total number of users surpassing 4,200.

Team and Funding

Avalon’s core team consists of seasoned professionals with 10 years of experience in the cryptocurrency industry. The founder previously served as a Hedge Fund Trader at ExodusPoint, a $15 billion fund, managing portfolios worth over $300 million.

On March 15th of this year, Avalon announced the completion of a $1.5 million seed round financing, with participation from institutions such as SNZ Capital, Summer Capital, and Matrixport Ventures.

Core Mechanism

Avalon Finance’s core mechanisms include the Isolation Collateral Pool designed for asset security and the AVAF locking mechanism tailored for growth.

Isolation Collateral Pool Mechanism:

Due to variations in the liquidity of different collateral assets, Avalon chooses to allocate them into separate collateral pools:

・ Main Pool: Used for collateralizing stable-priced assets that are resistant to manipulation. Currently, assets available for collateralization in the main pool on the Merlin Chain include BTC, M-BTC, M-USDT, M-USDC, and M-ORDI.

・Innovation Pool: Utilized for collateralizing assets with unstable prices that may be susceptible to potential manipulation. As these token assets mature, they can be migrated to the main pool after approval by the Avalon DAO. Currently, assets available for collateralization in the innovation pool on the Merlin Chain include M-BTC, VOYA, and HUHU.

・RWA Lending Pool: This pool supports both licensed and unlicensed RWA tokens, including money market funds, stock indices, and corporate bonds.

Currently, Avalon has initiated the first phase of staking without opening lending functions. Both the main pool and the innovation pool allow independent staking, and assets can be redeemed at any time subject to liquidity constraints. The second phase will introduce lending functions for the main pool, including assets like BTC, ETH, USDT, and USDC, with the team monitoring security dynamics 24/7. The third phase will involve the introduction of lending for the innovation pool, operating independently from the main pool, and initiating Avalon DAO voting during this phase. Additionally, the team aims to provide fractional innovation for NFTs, offering income channels for “small pictures” with low liquidity.

AVAF Locking Mechanism:

AVAF is the governance token of Avalon Finance, incentivizing protocol users and liquidity providers. The circulating supply of AVAF will depend on the total number of tokens used for staking pools and those allocated for marketing and relationship maintenance, with a maximum expected supply of 1 billion tokens. Tokens exceeding the limit will be subject to a 28-day time lock control, triggered only when new product launches require additional liquidity, and unlocking the time lock requires community governance voting.

Moreover, liquidity providers will receive esAVAF as proof of stake, which, apart from being non-transferable, shares the same utility as AVAF.

Code audit

Avalon security audit performed by Salus now public Audit Report and Contract address。

Avalon LEGO set

Currently, Avalon has collaborated with other top DeFi projects within the Merlin Eco, such as the mentioned partnership with Solv. In this collaboration, Avalon supports staking and lending for SolvBTC. Users can initially stake M-BTC in the Solv platform to exchange for Solv staking pool points. Then, they can exchange these points for SolvBTC at an equivalent ratio and stake them in Avalon to earn point rewards.

Staking Tutorial

Deposit Link: https://app.avalonfinance.xyz/dashboard/

Step 1: Connect your wallet (MetaMask is recommended). The default interface displays the main pool. To switch to the innovation pool, click on the dropdown button next to Merlin Market.

In both the main pool and the innovation pool, M-BTC can be staked, but the main pool offers higher rewards in terms of points. The primary use of M-BTC in the innovation pool is as collateral for obtaining other tokens after the development of lending in the third phase.

Step 2: Choose the currency you want to deposit, click on “Supply,” input the amount you want to deposit, adjust the gas to 0.05 gwei, and confirm.

After the deposit is completed, a deposit certificate token will automatically pop up, and the page will display the deposited currency and amount.

Step 3: Click on “Points” to view your current staking points. (After staking, the Avalon points system updates every 8 hours.)

Additionally, you can click on “Withdraw” next to “Supply” to redeem your deposit at any time when liquidity allows.

Reference: https://merlinchain.notion.site/2f4ec0f88d584cb5bab4030ad56c0b60?pvs=74

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