By Chandler, Foresight News
In recent years, the scalability of Bitcoin has always been a core issue in the blockchain field. As Bitcoin is gradually widely recognized as a kind of digital gold, the inherent limitations of Bitcoin have prompted market participants to continuously seek technical paths to improve its liquidity and scalability. From side chains, lightning networks to Layer 2 expansion solutions, various attempts have emerged one after another. However, these solutions are still in their respective exploration stages and have not yet achieved large-scale application and consensus.
At the same time, staking and interest-earning as an innovative way of capital utilization is gradually changing the financial logic of the Bitcoin ecosystem. Especially in the field of staking and re-staking, users can obtain additional income by staking Bitcoin, which not only enhances the liquidity of assets, but also improves the application potential of Bitcoin in DeFi. Especially after the launch of the Babylon mainnet, the market's attention to re-staking has reached a new peak, and the on-chain fee war it has triggered has further highlighted the popularity of this track.
On August 22, Babylon launched the first phase of the Bitcoin staking mainnet. According to mempool.space data, Bitcoin network transaction fees once soared to more than 1,000 satoshis/byte, while in recent years, Bitcoin network transaction fees have been below 5 satoshis/byte for a long time. According to information provided by Babylon officials, the staking limit of 1,000 BTC in the first phase was completed in just 6 Bitcoin blocks. Data from the Babylon staking platform shows that the confirmed staking TVL is 1,000.04549438 BTC, and the final number of staking participants is about 12,720.
After the launch of the Babylon mainnet, it not only attracted a large amount of liquidity, but also prompted market participants to re-examine the capital efficiency of Bitcoin. Through the re-pledge protocol, investors can optimize their capital return rate without sacrificing asset security, thereby improving the liquidity of the entire market. This model has shown great appeal in the current market environment, especially in the context of increasingly high on-chain transaction costs, more and more users are turning to efficient re-pledge protocols.
ArkStream Capital once said in "9 Major Tracks for Web3 to Explode in 2024" that fundamentalism + market hot spots will explode with energy beyond the imagination of technology geeks, and the value released by BTC liquidity is a gold mine that has not been fully mined. After the narrative of the inscription, there is a wave of BTC's L2 and BTC applications. As Bitcoin's liquidity is expected to be released by more than 10%, BTCFi will carry a market of more than 100 billion US dollars.
This article will review the latest developments and development prospects of the Bitcoin re-staking track, analyze the financial logic behind it, and explore possible future evolution directions and market opportunities.
Bitcoin Liquidity Staking
As a proof-of-work (PoW) network, Bitcoin relies on miners to contribute computing power to maintain network consensus. However, with the rapid development of DeFi, the application scenarios of Bitcoin are also expanding. Liquid staking is an emerging mechanism designed to enhance the capital efficiency and liquidity of Bitcoin. This mechanism allows users to lock Bitcoin in a staking contract to participate in consensus and obtain returns while still maintaining the liquidity of assets.
A key advantage of liquid staking is its wide applicability in DeFi. As Bitcoin is viewed as an asset with high economic security, more and more financial applications and blockchain projects are beginning to rely on the economic security of Bitcoin to enhance their own security and credibility. Liquid tokens generated by staking Bitcoin can be used in various financial applications such as decentralized money markets, stablecoins, insurance, etc., thereby bringing higher capital efficiency to these applications.
The current implementation schemes of Bitcoin liquidity staking can be divided into three main types, each with different characteristics and advantages and disadvantages.
The first solution is the on-chain self-custody model. This model uses Bitcoin scripts to create pledge contracts and introduces complex cryptographic techniques such as one-time signatures (EOTS) and timestamp protocols to ensure the security and finality of pledged assets. The core of this method is to keep Bitcoin on its native chain while extending its security to other chains through remote pledge technology. This solution is very secure in theory and maintains the decentralized nature of Bitcoin assets, but its implementation complexity is relatively high, especially when dealing with cross-chain synchronization and responsiveness issues. This type of project is Babylon.
The second solution relies on centralized custodians. In this model, Bitcoin is transferred to a regulated custodian account, and then the Bitcoin assets are mapped to other blockchains through a series of off-chain and on-chain operations. The advantage of this method is that it is easy to implement and fast to advance, and because a trusted custodian is used, the security of user assets is guaranteed to a certain extent. However, this model has a low degree of decentralization, and users need to rely on centralized custodians, which may cause concerns about trust and security. The representative of this type of solution is BounceBit.
The third option is a custody model based on multi-party computing (MPC) and cross-chain bridges. This model stores Bitcoin in a multi-signature wallet, relies on a decentralized oracle network and cross-chain bridge technology to migrate Bitcoin assets to other chains and tokenize them. MPC provides a certain degree of decentralization and security, while cross-chain bridges ensure the circulation of assets between different chains. However, the security of the cross-chain bridge itself is still a potential risk point, especially when dealing with large amounts of assets. In addition, due to the upgradeability of on-chain contracts and the existence of centralized roles, the complete security of user assets still needs to be further verified.
These three solutions have their own advantages and disadvantages in the process of realizing Bitcoin liquidity pledge. The on-chain self-custody model provides the highest decentralization and security, but is complex to implement; the centralized custody model has advantages in ease of operation and advancement speed, but the degree of decentralization is low; while the MPC and cross-chain bridge models have achieved a certain balance between security and decentralization, but the inherent risks of cross-chain bridges still need to be addressed.
Babylon
Babylon is an innovative project that uses Bitcoin's native staking mechanism to provide proof-of-stake (PoS) security for other blockchains. Through cryptographic technology, Babylon implements cross-chain staking of Bitcoin, enabling Bitcoin holders to obtain on-chain benefits through staking, while providing economic security support for other PoS chains.
Babylon's staking process relies on cryptography rather than a third-party bridge or custodian. BTC pledgers achieve staking by sending a transaction with two UTXO outputs, one of which is locked by a time-lock script, and the pledger can unlock the BTC with a private key after the lock-up period ends; the other UTXO is transferred to a temporary Bitcoin address that meets the "Extractable One-Time Signature (EOTS)" standard. When the pledger runs a node on the PoS chain and verifies the only valid block, it will be signed with the EOTS private key. If the pledger operates honestly, he will receive the validator reward of the PoS chain; otherwise, his private key may be reversed and the pledged BTC will be fined. The project's staking mechanism does not use the traditional cross-chain bridge model, but is implemented through "remote staking", which reduces the reliance on cross-chain bridges and reduces additional security assumptions. However, the security of the pledge still depends on the security of the Babylon protocol itself, which is essentially no different from the traditional cross-chain bridge model.
Babylon Architecture
Babylon's protocol architecture is divided into three layers: Bitcoin network layer, control layer and data layer. The Bitcoin network layer provides timestamp services for the PoS consumer chain; the control layer is composed of the Babylon blockchain network, connecting the Bitcoin network and the Cosmos Hub, running the market at the same time, matching Bitcoin pledge rights and interests with the PoS chain; the data layer is various PoS consumer chains, which obtain Bitcoin's economic security support through the Babylon protocol.
The architecture design of the Babylon protocol is similar to that of Eigenlayer, both of which serve as intermediaries connecting the underlying network and the upper network, but Babylon is unique in that it is based on Bitcoin and can provide enhanced security for other blockchains. The protocol implements pledge contracts through the Bitcoin covenant emulator, supporting functions such as pledge, redemption, and slashing. Its slashing mechanism punishes malicious signers through EOTS and finality gadgets to ensure the security of the network. In addition, Babylon's Bitcoin timestamp protocol can provide fast redemption services and enhance the liquidity of BTC, giving it some advantages over other pledge protocols.
Chakra
Chakra is a Bitcoin re-pledge protocol based on ZK. It cross-chains Bitcoin and Ethereum mainnet BTC and ETH to the Chakra chain, forming the asset settlement center of BTC L2, and deploys ChakraBTC and ChakraETH to other BTC L2 through lightweight client cross-chain technology. Chakra provides re-pledge services for PoS chains based on SCS (Settlement Consumption Service).
Chakra uses the STARK zero-knowledge proof system to verify the security of the staking process. This mechanism allows users to verify staking events off-chain to ensure privacy and security. At the same time, Chakra's self-custody staking model is implemented through time-locked scripts and multi-signature vaults. Users can stake without transferring their Bitcoin assets out of their wallets, avoiding the security risks of third-party custody.
In May 2024, Chakra announced the completion of a new round of financing, with participation from StarkWare, ABCDE, Bixin Ventures, Cogitent Ventures, Trustless Labs, Web3.com Ventures and angel investors. The specific amount of financing has not been disclosed. As a modular settlement network, Chakra can support staking on the Bitcoin mainnet and can be seamlessly integrated with other protocols. Currently, Chakra has been integrated with Babylon. Users can stake BTC to Chakra and seamlessly transition to the Babylon mainnet to receive Babylon's staking rewards and Chakra's Prana rewards. The ZK-STARK staking proof generated by Chakra also enables users to obtain liquid assets on Chakra Chain, Starknet, and various other blockchains.
Lombard
Lombard is a re-staking protocol in the Babylon ecosystem, which aims to promote the application of Bitcoin in the DeFi ecosystem and unleash its huge economic potential through the LBTC token, a cross-chain liquidity token backed 1:1 by Bitcoin.
LBTC achieves the liquidity and yield generation of Bitcoin in the DeFi ecosystem through a series of steps. Users first deposit native Bitcoin through Lombard. The deposited Bitcoin is then staked to Babylon's secure staking infrastructure, and Lombard is responsible for managing all fees associated with staking. Once Bitcoin is successfully staked, users can mint an equivalent amount of LBTC tokens on the Ethereum network. This token maintains a 1:1 ratio with the amount of BTC staked by the user and is sent to the Ethereum address pre-selected by the user. Although these Bitcoins have been staked on Babylon, users can continue to receive staking income by holding and using LBTC tokens.
In July 2024, Lombard completed a $16 million seed round of financing, led by Polychain Capital, with participation from Foresight Ventures, Babylon, dao5, Franklin Templeton, HTX Ventures, Mirana Ventures, Mantle EcoFund, Nomad Capital, OKX Ventures and Robot Ventures.
Lorenzo
Lorenzo is a liquid staking protocol built on Babylon, providing L2-as-a-service rapid deployment services, aiming to reduce the risk of penalties for pledgers and release the liquidity of pledged BTC assets. Users can stake Bitcoin to Babylon through Lorenzo, and tokenize the staked Bitcoin into highly liquid stBTC. At the same time, Lorenzo also provides users with more innovative liquidity solutions by dividing the Liquidity Restaking Token (LRT) into Liquidity Principal Token (LPT) and Yield Accumulation Token (YAT).
Lorenzo also introduced an EVM compatibility layer built on Cosmos Ethermint into its architecture, enabling it to support cross-chain operations of Bitcoin on multiple blockchain networks. While enhancing Lorenzo's flexibility in cross-chain applications, it also relays Bitcoin mainnet information to the Lorenzo application chain through the Bitcoin repeater, realizing the issuance and settlement of Bitcoin liquidity re-pledge tokens.
In addition, Lorenzo's principal-interest separation mechanism and re-staking plan further optimize the distribution of staking income. After choosing the staking plan, users can obtain stBTC equivalent to the staked Bitcoin, while also accumulating and trading income through YAT. This design aims to avoid liquidity fragmentation and provide users with more income management and reinvestment options.
On August 31, Lorenzo announced that the first phase of the mainnet was officially launched, further expanding to BNB Chain. The upgrade includes opening BTCB staking and improving the Yield Accruing Tokens (YATs) section. Users will be able to receive YAT on BNB Chain. At the same time, the pre-staking Babylon event Cap 2 has also been launched, accepting native BTC and BTCB staking. In addition to Babylon rewards and Lorenzo points, Lorenzo will also allocate 0.1% of the token supply as an incentive for this planned airdrop.
Solv Protocol
Solv Protocol is a full-chain income and liquidity distribution layer. Through a decentralized asset management framework, it tokenizes staking income, re-staking income, trading strategy income, etc. in various networks to provide liquidity for different ecosystems. Through deep binding cooperation with projects such as MerlinChain, Babylon, BNBChain and GMX, the protocol has accumulated more than $1 billion in assets in a short period of time.
Solv Protocol has reached a cooperation with the crypto custody company Copper. Solv will integrate Copper's ClearLoop network. Solv institutional clients can store their assets in the Copper infrastructure and entrust these assets to the Solv platform for management and trading.
In the first round of Babylon staking, Solv subscribed 250 BTC shares, becoming the project with the largest number of shares in Babylon LST. In addition, during the pre-staking stage, SolvBTC.BBN has been integrated with more than 10 public chains and DeFi projects.
BounceBit
BounceBit is a Bitcoin re-staking infrastructure that aims to solve the problem of low liquidity and limited application scenarios of Bitcoin on the native chain. By introducing a dual-token PoS structure, BounceBit uses the wrapped token BTCB instead of native BTC to create a new liquidity ecosystem. BTCB is converted to BBTC and converted into a liquidity re-staking token LRT stBBTC through a pledge shared security mechanism.
BounceBit's architecture consists of three main parts: BounceBit Protocol, BounceBit Chain, and Share Security Client (SSC). BounceBit Protocol is its CeFi part, where users can deposit BTC into the protocol and receive Liquid Custody Token (LCT) in a 1:1 manner, such as BounceBTC (BBTC). The deposited assets are kept in a custodial account of a multi-party computation (MPC), and through cooperation with Binance, participate in low-risk trading strategies such as funding rate arbitrage, and return the profits to users after they are generated.
In May 2024, BounceBit officially announced the launch of the mainnet. The BounceBit chain operates as an independent Layer1 network, with BB acting as a gas fee token. The mainnet has launched a series of new features, including node staking and delegation, Premium Yield generation, liquidity custody, cross-chain to BounceBit and BounceClub. In September, BounceBit reached a cooperation with the intention execution network dappOS. The dappOS intention asset will use stBBTC issued by BounceBit as one of the underlying revenue sources, while maintaining the flexibility of the use of native assets.
Bedrock
Bedrock is a multi-asset liquidity re-staking project. It has launched the LRT token uniBTC in cooperation with Babylon. Users can stake WBTC on Ethereum and obtain uniBTC. In this process, Bedrock uses proxy staking and direct conversion to establish a connection with Babylon. The proxy mechanism is that when users stake wBTC on Ethereum, they also stake the corresponding amount of native BTC on Babylon; direct conversion is to directly convert WBTC into BTC and stake it on Babylon. Holding uniBTC can obtain BTC income and can be used for other DeFi protocols.
Uniport
Uniport is a Bitcoin re-staking chain that uses the UniPort zk-Rollup Chain built on the Cosmos SDK to achieve multi-chain interoperability of BTC ecosystem assets. Its cross-chain solution converts native BTC into UBTC and uses a centralized multi-signature cold wallet (multi-signature contracts will be used in the future) for management. UBTC will be deeply integrated with Babylon.
In terms of technical implementation, UniPort initially adopted a multi-signature alliance approach to manage cross-chain assets to ensure the security and decentralization of cross-chain transactions. In order to further improve the security of cross-chain transactions, UniPort introduced a series of mechanisms, including economic design and reserve management mechanisms, node pledge and rotation mechanisms, as well as security and anti-malicious behavior mechanisms. For cross-chain assets of smart contract chains, UniPort uses zero-knowledge proof and light client verification technology to ensure the efficiency and security of cross-chain operations. UniPort also optimized the existing ZK proof generation system and launched the UniVirgo proof system.
PumpBTC
PumpBTC is a Bitcoin liquid staking protocol on Babylon. PumpBTC works with licensed custodians Cobo and Coincover to ensure maximum protection of native Bitcoin assets. Staked Bitcoin is available across a variety of Ethereum Virtual Machine (EVM) compatible chains and L2 and L3 solutions. This multi-chain functionality allows users to use their Bitcoin as collateral or liquidity provider tokens, significantly expanding the utility of their BTC holdings across multiple blockchain ecosystems. Users can earn native yields directly from the Babylon protocol.
PumpBTC successfully entrusted 118.4288 BTC in the first phase of Babylon mainnet staking, accounting for 11.8%.
pSTAKE Finance
pSTAKE Finance is a cryptocurrency project focusing on liquidity staking services. It launched liquidity staking services in the Cosmos ecosystem in the early days. In July this year, pSTAKE Finance launched a Bitcoin liquidity staking solution on Babylon. The deposit limit of the protocol is 50 BTC to ensure the security of the protocol.
In addition, pSTAKE Finance plans to further enhance the user experience by launching version v2, which will launch the yBTC token on Ethereum. The token will provide an automatically compounded Bitcoin yield similar to the popular cToken model and will be integrated into major DeFi ecosystems such as various blockchains, Ethereum L2, Bitcoin L2, etc.
StakeStone
StakeStone is a full-chain liquidity infrastructure that deposits native BTC into Babylon for pledge and issues full-chain liquidity interest-bearing BTC STONEBTC.
In August this year, StakeStone announced a strategic partnership with Berachain, and STONE tokens were fully deployed on the Berachain bArtio testnet. Users will be able to use StakeStone's liquid assets STONE, ssBTC, and STONEBTC to participate in the Berachain ecosystem and earn revenue.
Stroom Network
Stroom Network is a Bitcoin Liquid Staking Protocol in the Lightning Network. By applying the mechanism of liquid staking, Stroom Network provides users with a decentralized way to leverage their Bitcoin capital in the Lightning Network (LN) and DeFi.
In August 2023, Stroom Network announced the completion of a $3.5 million financing, led by Berlin crypto investment company Greenfield, with participation from Ankr's venture capital arm Mission Street, Lemniscap, No Limit Holdings, Cogitent Ventures, etc. The new funds will be used for team expansion and the launch of Bitcoin "liquidity staking" on the Lightning Network, including the release of the corresponding Ethereum-based packaged token lnBTC.
summary
In the financial logic of Bitcoin staking returns, the value of liquidity release occupies a core position. As the world's highest-valued crypto asset, Bitcoin has traditionally been used as a value storage tool, and its liquidity is usually locked in cold wallets or other conservative storage methods. Although this static holding model can ensure the security of assets, it fails to fully tap the potential of Bitcoin in the capital market. Liquidity release is the key to breaking this limitation.
The core idea of staking income is to achieve a dual value creation by combining the security of Bitcoin with other proof-of-stake networks. On the one hand, this model allows Bitcoin holders to participate in the security of other blockchain networks and obtain staking income while retaining asset sovereignty. On the other hand, for these PoS networks, the introduction of Bitcoin not only enhances their security, but also increases users' confidence in the network, which may lead to a significant increase in their TVL. Behind this win-win mechanism is the pursuit of maximizing capital utilization, and it also promotes the further expansion of Bitcoin's role as "digital gold", transforming it from a single value storage tool to a financial asset that can generate sustainable returns.
In the future, as cross-chain technology continues to mature, one of the evolutionary directions of Bitcoin staking income may be to focus on improving cross-chain interoperability and optimizing liquidity management. The current cross-chain solution still has certain security and efficiency issues. Once these bottlenecks are broken, Bitcoin staking will no longer be limited to a single blockchain network, but will be able to circulate and use freely between multiple chains. This will not only greatly improve the capital utilization of Bitcoin, but will also promote the deep integration of the entire crypto-financial market, creating more income opportunities for Bitcoin holders and participants.
At the same time, the deepening of the CeDeFi model will become an important trend in this field. By combining the efficiency of CeFi with the transparency of DeFi, CeDeFi provides users with a staking service that is both secure and efficient. This model is particularly suitable for Bitcoin holders who have high security requirements but want to maintain a certain liquidity. The improvement of CeDeFi infrastructure will attract more traditional financial institutions to participate and provide a more stable and sustainable income environment for crypto assets. In addition, with the gradual popularization of staking income, the derivatives market around Bitcoin will also usher in further expansion, providing the market with a wealth of hedging and speculation tools, and injecting new financial innovation momentum into the Bitcoin staking ecosystem.
