Yala: The Liquidity Layer for Unlocking BTC Yield Across Ecosystems

Key Takeaways

• Unlike Ethereum and Solana, Bitcoin is utilized for only about 1% of its total supply due to issues such as low scalability and Turing incompleteness. To achieve true credit creation within the Bitcoin ecosystem, new solutions are needed.
  

• Yala acts as a liquidity layer for Bitcoin, transforming it from a passive asset into an active, yield-generating one. Users can safely deposit their Bitcoin in a native way, mint YBTC on their target chain, and then use that as collateral to mint the $YU stablecoin — giving them access to massive liquidity markets like DeFi and RWAs.
  

• Recently, the Trump administration has taken a pro-crypto stance, showing support for both Bitcoin and stablecoins. This market environment presents a perfect opportunity for Yala, whose goal is to unlock Bitcoin’s massive liquidity and connect it to sources of yield.

1. Background - Yala: The Liquidity Layer Connecting Massive Liquidity Sources

1.1 Low Bitcoin Utilization

As discussed in the previous Yala introduction article, one of the most crucial factors for a country's economic growth is credit creation. Credit creation occurs when assets and currency are widely utilized in the market based on credit, leading to the emergence of debt. Healthy credit creation serves as a driving force for economic growth.

Applying the concept of credit creation to the blockchain ecosystem, smart contract chains like Ethereum and Solana demonstrate a well-functioning credit creation process. These networks enable the implementation of various applications through smart contracts. Consequently, financial activities such as staking-based liquidity provision and restaking, collateral deposits in lending protocols, and leveraged trading facilitate credit creation, ultimately expanding the economic scale of these networks.

However, ironically, Bitcoin, which accounts for 60% of the total crypto market capitalization, remains underutilized due to network scalability issues and Turing incompleteness. The most well-known methods for leveraging Bitcoin in additional financial activities include converting Bitcoin into ERC-20 tokens via centralized custody providers like WBTC or cbBTC to participate in DeFi on Ethereum and other smart contract chains. Additionally, a recently popular alternative is staking Bitcoin in Babylon, a BTC staking protocol, to earn rewards from other PoS networks.

However, these methods each have their own limitations. In the case of WBTC or cbBTC, the process of bridging Bitcoin to other ecosystems involves centralized entities acting as intermediaries, which can lead to a single point of failure due to centralization. In fact, concerns over centralization risks were highlighted when Justin Sun, the founder of Tron, became involved with WBTC, causing worry within the crypto community. Additionally, WBTC being delisted from Coinbase serves as a notable example of such centralization risks.

Babylon has a significant advantage in that Bitcoin holders can stake their Bitcoin natively without the need for additional trust assumptions. However, its limitation lies in the fact that Bitcoin can only be utilized for the cryptoeconomic security of other PoS protocols. This restricts its use in various applications such as DeFi and RWA, preventing broader adoption.

It is challenging to precisely quantify what percentage of Bitcoin’s total supply is actively used in financial activities such as DeFi. However, by aggregating the number of Bitcoins engaged in the most commonly used wrapped Bitcoin protocols and Babylon staking, we get the following: WBTC (~130k BTC), cbBTC (~30k BTC), BTC.B (~5k BTC), and Babylon-staked BTC (~53k BTC), totaling approximately 218k BTC in active use. This accounts for just over 1% of Bitcoin's total supply—a very low figure.

One positive sign is that Babylon’s Bitcoin staking has a set limit imposed by the team, and each time this limit increases, Bitcoin fills up rapidly, indicating strong demand for Bitcoin staking. Nevertheless, even in an extreme scenario where the amount of Bitcoin staked in Babylon increases tenfold, this would still only represent around 2.5% of Bitcoin’s total supply. For the Bitcoin ecosystem to achieve true credit creation, a fundamental solution is required.

1.2 Yala: Unlocking BTC’s Yield

Yala, as a Bitcoin liquidity layer, leverages the $YU stablecoin as a medium to unlock Bitcoin’s vast potential by enabling its liquidity to be utilized in DeFi and RWA across various ecosystems. This allows Bitcoin holders to go beyond merely holding Bitcoin and instead generate additional yield. However, achieving this is not as simple as it seems, as it requires solving the following two key challenges:

1. How can Bitcoin be safely bridged to other ecosystems? - The Bitcoin network is inherently incompatible with other networks and does not support complex smart contracts, making it difficult to bridge Bitcoin securely to other networks.

2. How can Bitcoin’s liquidity be converted into liquidity suitable for DeFi and RWA? - The most widely used assets in DeFi and RWA protocols are stablecoins. Due to their significantly lower volatility compared to other cryptocurrencies, stablecoins are among the most preferred assets for DeFi users. In the RWA sector, government bonds and private credit, which provide stable yields, are highly popular, and investments in these assets are predominantly made using stablecoins.

To address the first challenge, Yala employs a randomly selected set of validators and Cubist to securely bridge Bitcoin to other ecosystems. To solve the second challenge, Yala enables the issuance of stablecoins backed by Bitcoin liquidity, making them usable across various ecosystems. The next section explores how Yala specifically revolutionizes Bitcoin liquidity in the crypto ecosystem.

1.3 How Yala Works

On Yala, users can deposit their native Bitcoin from the Bitcoin network and mint an equivalent value of YBTC on the Ethereum network (or any destination chains). Additionally, Yala allows users to utilize YBTC as collateral to mint the stablecoin $YU.

Unlike WBTC or cbBTC, which issue ERC-20 wrapped Bitcoin through centralized custody providers, Yala ensures Bitcoin deposits and withdrawals are verified by multiple validators using Cubist, a cryptographic key management service. Cubist users generate keys within secure hardware and sign transactions via an API, preventing anyone, including Cubist, from accessing the keys. This eliminates the need for users to store keys themselves, ensuring both security and speed.

Let’s take a closer look at the process where a Yala user deposits BTC on the Bitcoin network and issues YBTC on Ethereum (or any destination chains). First, the user transfers BTC to a multi-signature cold wallet on the Bitcoin network. Then, seven randomly selected notaries from Yala Bridge’s 11 decentralized validators verify the transaction and sign it using Cubist’s API. Finally, the signed transaction is sent to the destination chain, where the user receives ERC-20 YBTC.

In summary, Yala offers several advantages:

1. Users natively deposit Bitcoin on the Bitcoin network.

2. A group of randomly selected validators participates in the verification process.

3. Signing keys are securely managed through Cubist.

With these features, users can issue YBTC and use it as collateral to mint $YU stablecoins, unlocking a variety of use cases.

In other words, Yala functions as a liquidity layer, transforming Bitcoin—a traditionally passive asset—into an active asset by enabling its use in DeFi and RWA across various ecosystems. In this process, the $YU stablecoin serves as a bridge, connecting Bitcoin with DeFi and RWA applications.

1.4 Bitcoin for Everyone

The blockchain ecosystem consists of a diverse range of users, from DeFi beginners to degen traders and institutional whales. To cater to all these user types, Yala offers three different modes. This is intended to function as a liquidity layer, allowing all types of users to maintain their Bitcoin positions while also providing new yield-generation opportunities.

1.4.1 Lite Mode

Think of major asset managers like BlackRock or Vanguard, which collectively manage around $10 trillion in assets. How many of their clients are deeply involved in the specifics of investment strategies? Most users simply want to deposit their funds with a trusted institution and earn stable returns. Yala's Lite Mode is designed for these users.

In Lite Mode, users only need to deposit their Bitcoin via a Bitcoin network transaction. Their YBTC is automatically deposited into Yala’s Vault, where centralized entities utilize AI-driven risk and strategy management to generate returns for them. This mode requires no additional action from the user, making it a low-risk and highly convenient option.

1.4.2 Pro Mode

Pro Mode is best suited for regular DeFi users. Here’s how it works:

• Users deposit Bitcoin on the Bitcoin network and receive YBTC on the Ethereum network (or any destination chains).

• They can then use YBTC as collateral within Yala to mint $YU stablecoins, up to a specific collateral ratio.

• The minted $YU can be utilized in DeFi to generate additional yield.

1.4.3 Institution Mode

Users with large BTC holdings can opt for Institution Mode, which offers additional security and flexibility. Unlike Lite and Pro Modes, Institution Mode allows users to lock their Bitcoin in their own wallets using P2WSH (Pay-to-Witness-Script-Hash) transactions, eliminating third-party risk.

Yala then enables institutions to deploy their minted YBTC and $YU into Real-World Assets (RWAs) such as bonds and private credit, providing fixed yield opportunities for institutional investors.

2. Takeaway – Yala’s Diverse Use Cases

Yala acts like an interoperability bridge, enabling the dormant liquidity within the Bitcoin network to be utilized across various ecosystems. Issuing a stablecoin backed by Bitcoin's massive liquidity could have a profound impact on the crypto ecosystem. Specifically, how can Bitcoin holders leverage Yala to capture yield-generation opportunities across different ecosystems?

2.1 Real-World Assets

Bitcoin investors differ from other crypto traders in that they prioritize low volatility and stability, often avoiding additional investment activities with their BTC holdings. However, if they could collateralize their Bitcoin to mint stablecoins and invest in stable, income-generating assets like RWAs, it could be a game-changer.

RWAs (Real-World Assets) refer to tokenized versions of physical assets such as real estate, stocks, gold, and bonds, allowing users to trade and invest in traditionally inaccessible assets easily, quickly, and in fractional amounts.

The RWA market is significantly larger than the blockchain ecosystem, leading many protocols to integrate RWAs into DeFi. Unlike the highly volatile crypto market, the RWA market has grown steadily, reaching approximately $19 billion—even surpassing Lido’s stETH in market size.

The chart above highlights government bonds and private credit as particularly popular RWA categories. Their common trait is low price volatility due to fiat-based investment, making them reliable sources of passive income—a perfect fit for Bitcoin investors who seek stable returns.

Since Yala enables Bitcoin investors to collateralize BTC to mint $YU stablecoins, they can seamlessly access RWAs like government bonds and private credit, generating sustainable yields. Notably, most of the yield in Lite Mode and Institution Mode will also come from RWAs, making them a key revenue stream across all user types.

2.2 Bitcoin Staking

Beyond issuing $YU stablecoins, Yala also supports Babylon Bitcoin Staking, allowing users to earn additional yield. Users who seek extra returns beyond DeFi strategies can stake Bitcoin through Babylon for enhanced rewards.

Babylon is the first project to introduce native Bitcoin staking, allowing Bitcoin’s liquidity to enhance the crypto-economic security of PoS protocols. Through Babylon’s staking contracts, Bitcoin holders can lock BTC natively on the Bitcoin network and delegate it to validators, who then participate in PoS consensus mechanisms and earn altcoin rewards for Bitcoin stakers.

What’s remarkable is that complex staking actions like delegation and slashing are fully implemented through Bitcoin scripts, leveraging technologies such as EOTS (Elliptic Curve Optimized Threshold Signatures) and Adaptor Signatures. For a detailed technical breakdown, check out my previous article, "Unleashing BTC’s Potential: A Technical Deep Dive into Babylon".

In summary, Yala users can stake Bitcoin through Babylon, issue YBTC and $YU stablecoins, and participate in DeFi, unlocking massive yield opportunities.

2.3 Lending Protocols

Lending protocols are foundational to the DeFi ecosystem, allowing users to earn interest on collateralized crypto deposits or borrow assets against them. Given that stablecoins are the most widely used form of collateral in major lending protocols like Aave and Compound, $YU, as a Bitcoin-backed stablecoin, could see widespread adoption in lending markets.

3. Conclusion: Yala’s Role in Bitcoin’s Liquidity Evolution

3.1 Bitcoin as a Yield-Bearing Asset is The Next Frontier

Source: DefiLlama

Since the DeFi Summer of 2020, the DeFi market has continued to grow steadily. Currently, Bitcoin's price is higher than its 2022 peak, and compared to that time, a wider variety of more sophisticated DeFi protocols have emerged. However, ironically, the total DeFi TVL has not yet surpassed its previous all-time high. To break through this stagnation, the crypto ecosystem needs a new catalyst.

The catalyst for DeFi’s explosive growth is clear: Bitcoin and RWA. As mentioned in the introduction, the majority of Bitcoin’s liquidity remains dormant. Additionally, an interesting aspect of the RWA sector is that its TVL has continued to trend upward regardless of market conditions. If these two massive markets converge and create synergy, the DeFi ecosystem has the potential to grow to an unprecedented scale. Within this market landscape, Yala’s positioning is highly compelling.

3.2 Now is a Favorable Time for Yala

Source: Getty Images (Anna Moneymaker)

Stablecoins are one of the few sectors in crypto that have definitively proven PMF, with a staggering market size of ~$230B. This is slightly larger than Ethereum’s market cap, and given that the total DeFi TVL is only ~$90B, it highlights the massive demand for stablecoins.

Additionally, the pro-crypto stance of the Trump administration has also extended to stablecoins. At the Digital Asset Summit in New York, a U.S. government official stated that a stablecoin bill is nearly ready. The macroeconomic reasoning behind the Trump administration’s focus on stablecoins is preserving the U.S. dollar’s global reserve currency status.

[Tether (USDT issuer) holds $113B worth of U.S. Treasury bonds as of late 2024](https://tether.io/news/tether-hits-13-billion-profits-for-2024-and-all-time-highs-in-u-s-treasury-holdings-usdt-circulation-and-reserve-buffer-in-q4-2024-attestation/#:~:text=With U.S. Treasury holdings surpassing,in the digital assets space.), placing it 19th globally in sovereign bond holdings—between South Korea ($125B) and Mexico ($103B). Stablecoin issuers have already become major buyers of U.S. Treasury bonds, offering a potential solution to rising U.S. debt concerns.

Furthermore, the Trump administration faces inflation and interest rate pressures due to aggressive tariff policies, and stablecoin regulation could help mitigate these effects. If the bill passes, demand for stablecoins will surge, and stablecoin issuers will be required to hold U.S. Treasury bonds, increasing demand for Treasuries. This would push bond prices up, lower yields, and contribute to interest rate relief.

In summary, the size and significance of the stablecoin market will continue to grow during the Trump administration. Within this market opportunity, Yala aims to position itself as a Bitcoin liquidity layer—unlocking Bitcoin’s vast liquidity by using stablecoins as a medium with immense liquidity potential to access the deep liquidity of DeFi and RWA.

3.3 Yala Will Unlock BTC’s True Potential

Although Bitcoin has existed for nearly 18 years, it remains dormant from a financial perspective. Bitcoin's true potential will be realized in large-scale, stable revenue-generating markets such as RWA. Yala is expected to effectively serve as a liquidity hub that connects the massive liquidity of Bitcoin and the RWA market through the $YU stablecoin.

4. Resource

Related Articles, News, Tweets etc. :

• Yala: Unlocking the Vast Potential of Bitcoin-Backed Stablecoins (Four Pillars)

• Yala Docs / Blog