BitVM, a two-way pegging system, faced criticism for its large liquidity requirements. Galaxy, an investor in Citrea, conducted an economic analysis to determine the sustainability of BitVM. The pegging process involves operators taking custody of user funds and facilitating withdrawals through pre-signed transactions. Pegouts require users to burn funds on the second layer system and use Partially Signed Bitcoin Transactions to receive funds back on the mainchain, minus a fee. Galaxy's analysis considers variables such as transaction fees, liquidity, and the opportunity cost of capital. To be profitable, the aggregate of fees users pay to peg out must cover these costs. Galaxy compared interest rates on Aave and OTC markets, with the latter offering higher rates. For BitVM to attract capital, LPs must target a 10% Annual Percentage Yield (APY), resulting in a -0.38% cost for individual users in a peg out transaction. The report also emphasizes the impact of transaction fees during high-fee environments on operator profit margins. Ultimately, the success of a BitVM peg depends on generating a high enough liquidity yield to compete with OTC markets and attract institutional capital.



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