In blockchain networks, the core of each layer of applications is built to capture the liquidity value from the layer above it. Ethereum, as a public blockchain platform with smart contract capabilities, established the ERC-20 token standard since its inception in 2015:
Builders are not satisfied with simple asset trading. To capture the liquidity value of both the native token $ETH and the proliferation of ERC-20 tokens, a plethora of excellent DeFi projects, such as DEXs, stablecoins, and lending platforms, emerged.
Similarly, the ERC-721 market, with its significant capital accumulation, gave rise to numerous NFTFi projects focusing on lending and fractional ownership.
As for the Bitcoin network, originally designed as a peer-to-peer electronic cash system, its primary purpose is to facilitate the easy transfer of $BTC among users. Innovative applications like the Lightning Network are built on top of $BTC. However, this situation changed with the emergence of tokens on Bitcoin:
The popularity of Bitcoin-incribed assets provides a good opportunity to activate the liquidity value of the vast capital within the Bitcoin network. The emergence of token protocols and assets attracts many OTC funds and Bitcoin holders.
Similarly, the token market on Bitcoin is not limited to simple asset trading, necessitating a plethora of BeFi (Bitcoin Finance) projects to provide users with high-quality leverage and lending scenarios.
The bitcoin-inscribed asset market encompasses fungible token standards (such as BRC-20, ARC-20, SRC-20, etc.) and non-fungible token standards like Ordinals NFT, Bitmap, etc. Because these token standards derive their underlying logic from Ordinals, their trading paradigms and liquidity characteristics are very similar, and their user bases heavily overlap. Therefore, when discussing BeFi (Bitcoin Finance), the market scope includes the entire Bitcoin-inscribed asset market. This market has rapidly grown into a multi-billion-dollar market.
Due to the unique nature of the Bitcoin network, existing infrastructure and applications from other layer-one networks cannot be quickly migrated. Therefore, the BeFi infrastructure in the Bitcoin ecosystem (including DEXs, stablecoins, lending platforms, etc.) is severely lacking. The emergence of Shell Finance is expected to fill the gap in the token lending market on Bitcoin, becoming an essential piece in the puzzle of the new wave of the BTC ecosystem.
Protocols and applications should be designed to align with the user habits of upper-layer networks to capture the value of assets better.
Due to its design as a smart contract platform, Ethereum has a highly diverse user base. Differences between new and experienced users lead to the coexistence of both ETH-based and USDT-based user groups. Despite this, most NFT projects still use ETH as the base currency. Because of this community culture and user habits, NFTFi projects will continue to use ETH as the base currency, aiming to lower the barrier to user acquisition.
On the other hand, the Bitcoin network is a single-asset network, with a highly unified user base accustomed to a single asset valuation standard. The value is priced only in Bitcoin in the world created by Bitcoin. Due to this inherent habit of pricing assets in Bitcoin, even in the flourishing marketplace of tokens on Bitcoin, the valuation of tokens remains in BTC terms (satoshis terms). Therefore, the pricing logic of BeFi projects in the token market should respect this highly overlapping user habit. This is also the fundamental reason why Shell Finance chooses $BTCX, a synthetic asset anchored to the value of BTC, as the basis for valuation. Moreover, from an engineering standpoint, using BTC-based valuation allows the entire business process to be conducted according to the native token transfer method without introducing additional system complexity.
In the cryptocurrency lending market, the two most common matching methods are:
Peer-to-Peer (P2P): In P2P lending, bilateral participants in the market, borrowers and lenders, are directly paired. When the required parameters are met, the lending relationship can occur.
Peer-to-Pool (P2Pool): P2Pool lending allows users to borrow and lend assets without the need to trust a third party. The lending platform charges borrowers borrowing costs and offers interest incentives to lenders based on liquidity and market conditions.
Peer-to-peer lending protocols are relatively inefficient. Borrowers and lenders need time and effort to find suitable counterparties and offers. Also, the liquidity in the lending bilateral market is fragmented, making it difficult to match user demands precisely. In the Bitcoin network, due to the stateless nature of the UTXO model, there are no concepts of accounts and balances on-chain, making it impossible to implement programmable state data similar to Ethereum smart contracts. Peer-to-pool lending, easily achievable on Ethereum, cannot be directly applied to the Bitcoin network.
Shell Finance focused on solving the key problem of achieving efficient features similar to peer-to-peer on the UTXO model from the outset of its design. The core solution lies in introducing Vaults as the unit of each lending, allowing the protocol to act as a connector between the borrowing and lending markets, thereby constructing a unique lending structure called Peer-to-Protocol.
With this design, the protocol establishes independent lending relationships with each borrowing position in the borrowing market, thereby meeting diverse borrowing needs. Meanwhile, by actively maintaining the price balance between $BTC and $BTCX through the protocol and liquidity pools, the protocol absorbs liquidity from the lending market. Simulating the efficient characteristics of lending pools on the UTXO model greatly improves bilateral markets' matching and capital utilization efficiency.
The operating costs on the Bitcoin mainnet are often overestimated, which may stem from misconceptions arising from the high value of Bitcoin itself and the lack of on-chain applications. However, the reality is that due to the characteristics of the UTXO model, all computations and verifications occur off-chain, making transactions both the result and the proof. Therefore, the data carried by UTXOs is very limited, and the on-chain operating costs are not high.
Here, we illustrate this with a simple comparison: Assuming the current price of Bitcoin is approximately $65,000, and the network's Gas Price is 50 sats/vB. Taking an example operation in Shell Finance where collateralizing $ORDI to borrow $BTCX, the data size required to be sent to the chain is approximately 600 Bytes, according to the formula:
We estimate that this operation will cost approximately $20. Similarly, we can calculate the cost of redeeming $ORDI to repay the $BTCX loan, which is approximately $21.
As shown in the table, for operations involving ARC-20 and Ordinals NFT as collateral, the on-chain data size is smaller (about 400 Bytes per transaction), resulting in lower gas costs, with each operation costing only $12 to $14:
In contrast, looking at lending protocols on Ethereum, taking AAVE as an example (with Ethereum price at approximately $3,800 and Gas Price around 70 Gwei):
The cost of lending out $USDT 0xb4cb51a...ba94629 through AAVE is approximately 0.028 ETH, equivalent to $109.17.
While the cost of repaying the $DAI debt 0xb0833ae...54d84fc is about 0.016 ETH, equivalent to $63.85. It can be seen that even with such a high Bitcoin price, the typical user operation costs on Shell Finance are significantly lower than similar products on Ethereum, saving nearly 75-80% of gas expenses.
Shell Finance is a trustless peer-to-protocol lending protocol built on the Bitcoin network, which utilizes PSBT and DLC technologies to achieve trustless lending and liquidation processes. The protocol consists of two key modules: first, its synthetic asset $BTCX, which is pegged to the value of BTC; second, the lending protocol that supports various script assets (including Ordinals, Runes, Atomicals, Stamp, etc.) as collateral to borrow $BTCX. It provides the following core functionalities:
Trustless: Shell Finance leverages PSBT and DLC script contracts to enable secure trading of inscribed assets directly on Bitcoin Layer 1.
Peer to Protocol: Enhancing market matching and fund utilization efficiency in the lending market through Peer-to-Protocol strategies.
0% Interest Loans: Shell Finance charges a one-time fee of 1% for borrowing BTCX, instead of highly fluctuating interest rates.
Users can gain more liquidity through collateralized borrowing, converting lower-liquidity script assets into higher-liquidity Bitcoin synthetic assets, $BTCX, at a lower cost, thus achieving true financial leverage. Moreover, when users borrow $BTCX, whether they swap it back to $BTC for further trading or provide liquidity for BTCX/BTC trading pairs, they can generate additional profits.
We know that the Bitcoin network lacks a Turing-complete virtual execution environment like the EVM, making it unable to handle complex business logic through smart contracts. Currently, most projects in the market choose to move to more developer-friendly layer 2 solutions or other networks through cross-chain interoperability. However, the trust assumptions and security risks introduced by cross-chain solutions have become the Achilles' heel they cannot avoid.
Based on the principle of minimizing trust, Shell Finance utilizes PSBT technology to conveniently collect multi-party signatures when dealing with scenarios involving borrowers, liquidators, and the protocol, ensuring the security of user and protocol funds while achieving atomic asset swaps. Additionally, due to the inability to deploy smart contracts to manage users' collateral funds on the Bitcoin network, protocols such as lending, options, and futures that require liquidation based on Oracle prices unavoidably need the protocol to retain operational control over user assets, increasing unnecessary trust costs. Shell Finance addresses this issue by introducing Discreet Log Contracts (DLC), enabling a trustless liquidation mechanism.
Take a common Shell Finance scenario as an example: Suppose Alice collateralizes 100 $ORDI tokens to borrow 0.15 $BTC worth of $BTCX, calculated based on a minimum collateralization ratio of 150%. Only when the Oracle quotes for $ORDI fall below 225,000 SATS/ORDI, does the borrowing position transition to a pending liquidation state. In this scenario, we want liquidators to be able to liquidate the position without permission while ensuring that nobody can manipulate the user's collateral assets until the price reaches the liquidation threshold. DLC is introduced to address this requirement.
In the scenario described above, when Alice establishes the borrowing relationship, she requests a price oracle to generate a secret value pair and initialize the DLC. This DLC is used to stipulate an agreement between Alice and the protocol regarding the price of $ORDI:
If the price falls below 225,000 SATS/ORDI, the protocol can liquidate Alice's collateral according to the prearranged DLC contract.
If the price is greater than or equal to 225,000 SATS/ORDI, nothing happens, and asset ownership remains unchanged.
Once the DLC is established, Alice and the protocol must create a commitment transaction for the agreed-upon outcome. However, the signatures exchanged between the parties cannot be directly used to unlock the funds locked in the DLC. Instead, they must wait for the oracle to reveal a secret value. Therefore, in this case, we only need the oracle to commit to publishing the secret value when the price falls below 225,000 SATS/ORDI. Upon a successful auction by a liquidator, the protocol can utilize this secret value to complete Alice's signature and signature, making the transaction valid and broadcast to the network, triggering the liquidation effect.
DLC allows users and protocols to enter into agreements using the Bitcoin blockchain as a platform, with both parties locking funds in a multi-signature address to construct the DLC script. These funds can only be utilized and redistributed according to certain rules when the oracle publishes specific information at a specified time. In Shell Finance, the protocol utilizes DLC to implement a liquidation mechanism involving external price oracles without requiring users to trust any entity.