On The Brink with Castle Island - Luke Xie (SatLayer) on The Next Generation of Bitcoin Yield (EP.657)

Episode Date: August 18, 2025

Wyatt sits down with Luke Xie, cofounder of SatLayer for a conversation about Bitcoin yield. In this episode:  What makes financial markets for BTC unique How BTC DeFi will evolve, in the backdrop of the broader macro environment DeFi vs CeFi financial systems for BTC

Today on the podcast, I sat down with Luke Shia, the founder of Satlayer. Sat layer is an economic layer for Bitcoin and Defy, which allows holders to earn yield. Users deposit their Bitcoin and SatLayer routes deposits to best-in-class defy yield offerings. Luke and I discussed Bitcoin's rise as a financialized versus idle asset and what lies ahead for Bitcoin. Without further ado, here's my conversation with Luke. Matt Walsh and Nick Carter are partners at Castle Island Ventures. All of these expressed by them where the guests on this podcast are solely their opinions and do not reflect the opinions of Castle Island Ventures.

Guest and hosts may maintain positions in the assets discussed in this podcast. You should not treat any opinion expressed by anyone on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only is an expression of their personal opinion. This podcast is for informational purposes only. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated.

The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is a slug. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called a Bitcoin. Bitcoin.

Luke, thanks for joining us today. We're going to talk about Bitcoin, which will be fun. I wanted to kick off to say that one meaningful trend is that you look at Defy in the crypto industry. the TVL of Bitcoin referring to the amount of BTC that's being used in Defy protocols outside of the Bitcoin main chain is markedly increasing. The last I checked, Defi Lama cites something along the lines of $6 billion. Babylon has led the pack in that. You guys and a host of other protocols or a smallish number of other protocols have followed,

but still a meaningful development on that front when it comes to bringing BTC into existing defy capital markets. It seems to me that this will continue to progress, but I love your perspective on how you see this continuing to move going forward. Absolutely. I think in many ways, analogy here is probably like Defi summer for broader OG slash East Face Defi. And I think in many ways we're still in the first inning, just because I think in many ways

for Bitcoin Defi, a lot of the teams came from the EVM and Alt layer one side of the ecosystem and took a lot of the learnings. I think just the latest and greatest in terms of innovation and to build that in various ways on and around Bitcoin. And it goes well off saying the strength of Bitcoin this cycle and the biggest factor, I think, driving this bull market. So in many ways, it plays out similarly to, if you zoom out to look at the chart for Defi Summer where I think it ultimately topped out around $300 billion, and that's on a much

smaller overall market cap. and that's mostly on Ethereum, which is just at this point of fraction of Bitcoin's value and overall market cap as well. Because I think in many ways, there's a lot of other tailwinds for this with the rise of micro strategy and these Bitcoin treasury companies. Now we're getting to the point of, at least in certain markets, near saturation of these treasury companies. And so they're going to have to start differentiating in other ways.

And we certainly see on-chain yield as a big differentiator. Because at the end of the day, the reason people invest in these companies is to accumulate more Bitcoin. So part of it is how good are you in terms of trade execution on accumulating the Bitcoin that way from the capital you're able to raise in public equity markets. But I think the other portion is, okay, now you have all these Bitcoin that you've accumulated. How do you generate additional yield and growth from that? And part of it is also, especially on the Western institution side, we see a lot of weight and C of wanting to, for the protocol to be, operating for like at least six months, if not longer, with no major issues. And then folks will

start scaling into this at size. Because I think certainly, as you mentioned, it's around six or seven billion just depending on like Bitcoin price in terms of Bitcoin that is active in Bitcoin Defi. And a lot of that is staked into Babylon, restaked into Sat layer. But if you just look at the growth of the rat Bitcoin assets, the BTC, BTC, FBTC and WBDC, those are sitting a around 30-ish billion. And I forget the exact number, but I think a year ago, it was one-third to half of this. So I think overall, Bitcoin on-chain and being active and productive has definitely grown, I think, exponentially. And I think there's a long way to go from here. And to your point, those numbers be talked about, whether it's $6 billion, $2 billion,

across different Bitcoin variants, that's a drop in the bucket when you think about whether it's $300 billion in increasing in defy capital or the total market cap of Bitcoin. I'm curious for your view, do you think the innovation here is to have a lot of the same sorts of use cases you've had since early defy, which is on-chain lending markets, trading with Bitcoin as a more center asset? Or do you think it's more novel primitives for Bitcoin and Defy? I think it's a mix of both. we're certainly taking this approach along with some of our closest partners,

Saul Bon Lombard, of, I think, building the infrastructure and the braille, so to speak, for Bitcoin to participate in existing, whether it's EFDFI, sui, and what's say you, in terms of BVM and all here one DFI, because I think this was a hot take when I first started talking about it, maybe it might have been like six months ago or so. But I feel like now it's almost becoming more consensus, is that EFDFi was really tested for Bitcoin Defi. And I just see a future where Bitcoin becomes the biggest asset in BVM Defi in all layer one. How do you look at the relationship between Bitcoin and Ethan Defi?

Are they advantaging each other or at odds? How do you look at it? I think it probably depends on time horizon. Certainly this cycle. A lot of folks probably regret keeping their eth and then deploying that into Defy whereas if you had Bitcoin, Defi, you would just be very comfortable and very happy. where I think ironically, EF holders, one of the few asset holders that came out ahead for the FTC bankruptcy because they'd locked in 22 prices when EF was actually a 4K and higher versus for Bitcoin because they lock in 2020 prices. You're like way down.

But I think certainly at the same time, want to give credit where credit is due in terms of EF and EFDFI builders that really laid the foundation for all of this. But at the end of the day, at least certainly right now, there's only one asset within all of crypto that nation states are community. that institutions are, it's almost become somewhat consensus among institutions to accumulate, which is Bitcoin, not East, not Salana, certainly not the long tail of crypto. Yep, makes sense. And then I think the other piece to add is, I do think there's going to be some innovation in terms of how Bitcoin is used in these DFI slash financial use cases. And that's in part because from what we've seen and the conversations we've had with our

users, Bitcoin holders are a bit different than Ether Solana holders in that they're okay with much lower yield as long as there's much less principal risk. And so that's one of the reason that I think one of the big use cases that we've been spent a lot of resources and time developing with some of the price partners in the space like Exus Mutual and a few others I will announce soon is insurance that's backed by Bitcoin and also for Bitcoin LPs. So we can get into details later, but the idea here is really almost like structuring a product so that you have principal protected Bitcoin yield. And this again comes from our conversations with some of the largest Bitcoin holders and miners in the space, where generally they are okay with low single digit yield,

as long as there is principal protection. It's very interesting to me. I like the point on yield because if you look at the U.S. dollar and you try and peg something of a risk-free rate, you're probably in the 4 to 5% range. And every crypto asset, your yield expectation of a base yield would higher, I think would be probably something in the 7% plus range. For Bitcoin, to my understanding, it seems lower. Most people who own Bitcoin are looking for Bitcoin yield. I'd say their risk-free rate is lower than that at 4 or 5% potentially, which I think speaks to how unique the asset is and the potential affiliation with something like gold. Totally, because I think relative to most other crypto assets and then I think arguably even the dollar Bitcoin is lower risk and a better

store of value. Without, again, going into this rabbit hole, but I think we are seeing continuing inflation of the dollar and this continued kicking down the road of the U.S. debt issue, which is, I think, also made a lot of other central banks around the world and other countries start rethinking how much U.S. debt they hold and their alignments and reliance on the dollar. And I think a lot of our team view that Bitcoin is on the path to becoming a global reserve asset. Now, we're not saying it's going to be the global reserve asset, but we are saying it is going to be a global reserve asset just given, as I mentioned, the US debt issues and just overall global macro and geopolitics are going.

So overall, what we're trying to do with SAT layer is really to help usher in that future, and then also to effectively be the economic layer to unlock initially a more financial-focused use cases for Bitcoin, and both plugging into existing defy and then on the yield and liquidity side, as well as on the security side with some of the use cases to work with partners like Plum and Layer Zero. We had the same thought. I was going to say that was a good segue to talk about Sat Layer. To put a bit more of a fine point on it, maybe, you guys are aggregating Bitcoin capital and you're finding yield opportunities for it in the market. I'd love for you to speak to how you do that and where you see yield being generated by Bitcoin

because early on, I think there's a lot of demand for people, for example, to borrow US dollars against their Bitcoin. But I'd love to hear your views on, will there be appetite to borrow Bitcoin? What will be the yield generation sources for Bitcoin? I think for us, we certainly sit at a bit of a unique position in the entire ecosystem, where from a user flow-wise, we are downstream from whether it's your rap Bitcoin or your Bitcoin liquid stake token, and then we are intentionally not a chain. So we're able to actually deploy our contracts on a lot of the strongest L1s, essentially L2s as well in the ecosystem like sui, like baritane, like B&B. So in terms like where we sit, we basically enable users to almost

create this at least three, four stack of yield. So you get your yield from your Bitcoin LST, for example, that stakes similar to Lido does it. These Bitcoin LSTs like Solver Lombard will stake your Bitcoin into Babylon for you, but giving you a liquid stake token that then you can then deposit into Sat layer. And then right now, there's a lot of L1s that are incentivizing Bitcoin on their chain to also drive, I think, their defy ecosystem like SWI, like Barrer chain, and a lot of the up-and-coming ones as well. So that's your third set of yield. And then we have our own SAT squared rewards program. That's the four set of yield. And then we intentionally also meant the receipt token. So for the more Defi-Natives or DefiDiDi-Eas,

Gens, you can then take it onto lending, borrowing, or Dexelte if you want. But that's totally optional for the user, since there sometimes is risk associated with that. And then I think in addition, for us, it's really on the user's side and very much the beginning, where a lot of the big use cases that were focused on, some which have touched on earlier, are insurance backed by Bitcoin, as well as stablecoins backed are secured by Bitcoin. So Cap Labs is one of our partners who's integrating with us, as well as I can learn symbiotic in a very restaking native way, where in their architecture, the operators are actually the ones that are generating yield for the staple coin.

So it's a lot of the market makers in the space as well as trap by players like the IMC trading of the world. And then we're also working close to Plume on their nest credit, side of things. We're providing liquidity float, as well as on the core RWA business, wherefore their RWA transfer layer called Skylink, that, we will be providing Bitcoin security for that, just given effectively, the overly simplistic version of think about it is it like an RWA-focused bridge that's built as a layer zero DVN, and that's where we'll provide Bitcoin-based security, just given that in general for bridging, that is the most important thing is how secure your bridge is.

Especially for Bitcoin. For RWEs as well, because I think it's a lot of times there's assets tied to token representations of real world assets, that also, again, like security is very important versus like a gaming asset, for example, where maybe more cost is much more important in speed. And then I think the final use case is really around almost liquidity float, repo or prime brokerage that's on-chain and backed by Bitcoin. So here, we actually just announced this yesterday. We're working with Aether in terms of on the AI infrastructure side to help some of these

AI infrastructure providers access a lot more in deeper liquidity. That's Bitcoin backed. as right now we're seeing the boom in AI infrastructure. I love that LSTs or for anyone listening, crypto tokens that naturally give you the yield of the underlying chain as if you stake your Ethereum. I love that that's a canonical part of crypto now. And I think that you guys said an interesting point

because essentially you're saying, okay, now we need to rebuild market access in the way that capital flows for these LST tokens, especially in the case of Bitcoin, where it's completely novel. And I remember when Etherify did a similar thing in the Ethereum context. And in my opinion, it makes for better markets if the default asset becomes the one where you're automatically getting that risk-free rate as opposed to just the standard

Bitcoin or Ether. Yeah, I think Etherfi is a great example where they're almost becoming a bit of a Neo-Bank and then just giving users easy access to yield. In their case, primarily focused around EF, but also being able to, with their credit product, like spend it. Because I think in many ways, people by human nature are greedy. And when you have such a great asset like Bitcoin, of course, you would want to love to have yield on Bitcoin get more of it. So that's where I think it's also the benchmark rate for Bitcoin is going up.

Historically, especially before I think the emergence of Bitcoin D5 was really around sub 1% and half a percent range with these Delta neutral strategies. But I think as anyone in crypto knows, especially one folks that I've played with options, Delta neutral, it's kind of in some ways like picking up pennies in front of a steamer. roller, it's great until you're unable to roll your option, then you're stuck getting exercise, and now you're down 10% on principal instead of a couple percent on yield. Whereas, to be fair, on chain yield, it's not zero risk either, but I think there's contract risk or front-end attacks, et cetera. But I think in general, a lot of the teams definitely have security top of mind, including ours, and have gotten multiple audits from a lot of the leading firms, plus just internal good practices and internal audits to just minimize that risk.

But that is another reason why we put a lot of resources on developing these insurance slash copper products that's backed by Bitcoin for Bitcoin. It's just giving users, I think, another layer of assurance and security on their Bitcoin assets. I wanted to ask your perspective, we have dollars in Defi, which makes for a perfect comp in that there's a borrow rate on ABE and there's a borrow rate with JPMorgan. And you can compare the two and you can go decide to do business. either one. With Bitcoin today, obviously, yield and markets around Bitcoin and traditional

finance are very nascent, it's very much a treasury asset right now, to your point, and we have evolving ways of earning yield on your Bitcoin in Defi. Eventually, my hope would be that Bitcoin is just used more often in finance. And with that, you'll be able to lend and borrow Bitcoin more effectively because people will accept it when it comes to. wanting to pay for things. It'll just be a holding asset you can spend with it more effectively. Does that become competitive with DFI yield, in your opinion, for Bitcoin? And is that a nexus of competition if traditional firms start to not just hold Bitcoin,

but start to do financial operations and enter financial markets with the asset? I don't think so, because I think in many ways what we're seeing maybe stable coins is probably the best example. And the most top of line for folks is that now you're seeing whether it's Web 2, Fent, or even the traditional banks, embracing stablecoin or launching their own stable coins. Because overall, the way I think about it is just fundamentally, crypto, whether it's stable coins or Bitcoin or ether, whatever, is just a better form from like a product perspective of money.

It's a better form of money. I get what you mean. Especially stable coins is straight up a better form of money in like almost every dimension. Versus paper fiat money. You don't have the printing costs, and then there's a maintenance cost to having paper currency, which is not insignificant for a lot of major countries in the big tens or hundreds of millions a year. You have the fraud of, I can just print money that looks almost as good as the actual thing, and a lot of places can't tell.

And then you have V1 digital money of the memos, PayPal, as we chat and Ali pays. But those are centralized. And certainly for a good number of folks in crypto that have been suspended or debanked from some of these platforms, there's centralization challenges and risk, and if you get blocked, it's horrible because there sometimes is no recourse or it takes like months to unlock your account. And then meanwhile, you have funds stuck there. Whereas I think for stable coins, by nature, you can't really have counterfeit fraud because you can see very clearly that this is the UCC or the USTT. This is the contract. There's billions or even trillions of assets in this contract. And so this is obviously the real one and not

fake one. And then you can't counterfeit and print more of it. You also don't have the centralization risk of, oh, yeah, I got blocked by VEMO or PayPal. And then it's also, by nature, all the transactions are on chain. And then you can't have the, oh, I sent an international wire, but then somewhere along the way, I got stuck and nobody knows where it is. You can see exactly where it is. You know right away if it's sent out or not. So I think by nature, it's just a better product.

And I think for Tratby, they've come to understand it now. And especially just given how long a lot of these things have been around it is battle tested. And so now they're ready to launch their own version of it or collaborate and enter at scale. And so I think on the Bitcoin set of things, I would expect you would see something similar. But I think there's a bit more of an edge on the more crypto-native side because there is no Tradfi direct analogy for a Bitcoin. And people aren't going to build gold defy. So I think on the Bitcoin side, the innovation comes more from the Bitcoin native and crypto-native side, and then it's the traditional players just onboarding.

The thing I think is beautiful about Bitcoin, to your point, is it's one asset, whereas with cash, we have physical cash, we have digital money in a bank, we have stable coins, and we call them the same thing, and functionally they are in our economy. But those are three different iterations of an asset that you're calling a dollar. Whereas with Bitcoin, you really only have the Bitcoin on the ledger that is traceable, you know exactly where it is. There is no Bitcoin form of cash. Things like that have been tried, but it's not the default asset.

And I think with that in mind, it validates what's happening in Defi if people in traditional finance are using that same asset. Whereas with some of the cash or stable coins, you still have hard cash and you have digital money and you've stable coins. It's a slightly different iteration, which creates friction. And my hope is that that's a lot of cash or something. That will be a strengthening factor for Bitcoin across all markets eventually. 100%.

And also, Bitcoin is just such a unique asset where it's fixed supply. Countries can't print it at will. And I think it's become globally recognized. So not only are you having the really small from a relative size perspective, countries like Bhutan or like El Salvador adopting Bitcoin, but you're seeing some of the Middle East players like Mavadala accumulate Bitcoin and then be very public about the fact that they accumulated Bitcoin. And U.S., of course, adopting a strategic Bitcoin reserve, but I think it's been fascinating

on the U.S. side to see, as of now, I think at least three states that have front-raned the U.S. government in passing laws to adopt and set up their own strategic Bitcoin reserve, as well as I think many countries in the world that are more discreetly accumulating Bitcoin. Minimum as a hedge, because I think the narrative is very much shifted on central banks of, well, what if the U.S. actually accumulates Bitcoin inside? Then it's too late for us. So we should probably get a little bit just in case. And then I think even in traditional finance circles of Ray Dalio,

where it's like Fentac Frank put it really well on Twitter. He trades the journey of Ray Dalio. First, he was like Bitcoin is garbage as a scam. And then Bridgewater starts buying some Bitcoin and play around with it. And now he's recommending everyone allocate 15% of their portfolio to Bitcoin. So in many ways going through the typical journey we've all had in crypto. I was listening to a podcast he was on recently with, Chris Williamson who does modern wisdom and he was talking about his view on global power politics

and five powers. And I was like, how does this guy not believe in Bitcoin or how could he if not? And he must be on one side of the fence because it definitely fits into his overall narrative one way or another. Yeah, 100%. I did want to ask you, as we look at Bitcoin broadly, I think a lot of Bitcoin holders come at it from an original angle of either something of a libertarian streak and maybe extend that to even a former libertarianism that's in a lot of people. Or alternatively, crypto investing curious and they wouldn't buy other crypto assets, they wouldn't buy other stocks, but they'll buy a little bit of Bitcoin. I imagine there might be a lower risk tolerance of folks like that when it comes to even working with an application that wants to go

and earn them yield on their Bitcoin because of maybe the initial skepticism of financial markets and institutions generally, or maybe a preference for simplistic investing. The point I mentioned, it's someone who might not invest in other crypto assets or stocks. Do you find that to be something that is a friction when it comes to encouraging people to earn yield on their Bitcoin? Is that evolving? How do you look at it? I think it's evolved a lot.

And I think in many ways in Asia, folks look at it a bit differently. Part of it is when the Asian institutions and the Asian world in OG, in many ways are a lot more pragmatic and less idealistic about Bitcoin, crypto, really anything. Because in some ways, the big difference maybe between Asia and the West is religion in many countries is not really necessarily the majority. And people take a lot more of the practical view to things. And so certainly what we've seen even a year ago is that the biggest miners, institutions, OGs, in Asia have been actively deploying a portion of their Bitcoin holdings into Bitcoin DFI. And in many ways, they're really just almost embracing portfolios theory. And for them, it's their on-chain defy allocation that they're deploying into Bitcoin D-Fi. Whereas in some ways,

ironically, what we've seen a lot of Western institutions is they'll just take a wait and see approach and not even play around an experiment, wait six months and 12 months, and then start sizing it. Having said that, I think it has been over a year since we started on this. and then even longer for projects like Babylon that we work very closely with. So I think now you are seeing some of the Western institutions coming in. And it also, in many ways, I think a lot of the Asian institutions really paved the weight and showed them, hey, I've been deploying my Bitcoin on chain for a year plus 18 months and really haven't had issues.

I like the behavioral point from my experience, at least. I sold family backing Iran because that's from my dad grew up. And that's an extreme, but the economic stability there is relatively low. So there's not what I would call an economic centering, which we have in the U.S. You don't really have a proxy. So therefore, people are more exploratory and open to new ideas. Whereas in the U.S., you're always saying, oh, I have treasury bills, I have the U.S. dollar, have my local bank.

And there's a comfort in that that discourages going elsewhere. And I don't know if that's an impact on the Eastern culture, Asian culture, like you said as well. But I imagine, especially outside of China, probably is to some degree, just because the U.S. is the very obvious we feel incredibly centered. in our economic system because it's the predominant one. Yeah, I think it's very much the case. And it's a mix of, I think, distrust in government in centralized institutions or less

mature financial products. China is a great example where credit cards are not a big thing in China. Credit card is the standard in the U.S. If you don't have credit, like what are you even doing and you got credit score. Whereas in China, in many ways, it was almost like one of the leapfrocks is they just skip credit cards. It went straight to WeChat and Al-Epe. And now you can get some credit.

products from WeChat and Alipay. Mentally, it's much more of a less, I think, debt-focused culture, where folks are just used to like saving up and then paying primarily cash for a home. You're paying cash for a car, not really financing. And that's not being the extreme. As you mentioned, like Iran or like Turkey is a great example where Turkey is a massive Bitcoin market and crypto market because of their own currency stability. It seems to like El Salvador.

And then you have, for example, in Korea and Japan, where, if you're a lot of, where it's especially oftentimes the outgoing president or the outgoing ruling party officials just get thrown in jail right afterwards. There is no trust in centralized institutions. And I think that's why these markets are some of the biggest in crypto, is that for them it's like, well, either use the existing infrastructure, which is really just not transparent in some ways stacked against me, or I use these crypto products where it's at least everything on chain, traceable if I do want to.

It is shocking. The U.S. is behind when it comes to instant payments compared to things like PICs and M-Pesa that you have in countries around the world that you would argue we should be at least on parity with from an instant payments perspective. 100%. And like Fed now, who knows what it'll finally lunch? Yeah, agreed. Very interesting stuff. I'd love to hear maybe in closing. What should people be excited about in the near term when it comes to how Bitcoin financial markets will evolve? What will we see? On the near term, one of the most interesting areas, as is the case of stablecoins,

I think the convergence of crypto-native products and offerings, and then almost like Tradfile fintech offerings. I think, again, you're seeing this probably initially outside of the U.S. You have some of the biggest players in Latin America, as well as Europe, and then I think certainly Asia as well, launching some of these products. And at the same time, I think you have innovative players in the U.S. Meanwhile, which is doing life insurance, it's actually backed by Bitcoin. So very much, I think, on the same wavelength, that's our thesis here.

And I think it'll be super interesting, especially with, I think, the much more friendly regulations and also regulatory clarity that you now have in the U.S. That's, I think, now going to pave the road for the rest of the world. Because I think in many ways, a lot of regulators around the world still look to the U.S. SEC and CFTC when setting their own regulations. So I think it's going to be really interesting to see the Cambrian explosion of innovation that I think we've all been building the foundation for and waiting for the floodgates to open. I think the other super interesting piece is on the stable coin front. I'm particularly interested in the response of the other global currencies now that the U.S. is pushing

USD-based stable coins and really bracing stable coins. Because I think for the other major currencies, if you do nothing, then U.S. dominance grows and it eats your currencies lunch. So you're seeing this certainly like in Korea, which we've been following closely, Korean regulators have also embraced stable coins and a lot of the major Korean conglomerates are launching stable coin initiatives. Because I think in some ways, it's almost a topic of national security for them in terms of like insurance the future of the Korean law. Because stable coins by nature, they are fractional. So it's almost like for any currency that's effectively pegged the US. If there's global adoption of stable points, why do you see in Georgia,

you still need your currency in? do the math and just use a USB-based stable coin instead. Yeah, I couldn't agree more. We'll have to circle back in a year or two and see how things have landed. Yeah, I think it'll be fun to look at what played out and what did it. Thanks again, Luke. Really enjoyed it. Awesome. Thanks for having me. It was a lot of fun.

Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visit castle island. Visit castle island.vc. To listen to all of our podcast episodes, please go to On the Brink. brink dashpodcast.com or just click on the tab in our website. Thanks for listening.