Staking Bitcoin is fast becoming a reality—a functionality once the sole privilege of proof-of-stake crypto networks.
Thanks to Babylon, HODLers can already lock up their BTC, which will soon be used to secure and earn yield from multiple staking-based blockchains at a time. While this has enormous implications for the entire crypto economy, its consequences may be most strongly felt in an ecosystem that’s just getting started: Bitcoin layer-2 networks.
“Bitcoin L2s [are] definitely a very important part of our customers,” said David Tse, co-founder of Babylon, in an interview with Decrypt. “Bitcoin staking becomes a mechanism where the L2s can get security from Bitcoin.”
Since the rise of Bitcoin's Ordinals protocol in early 2023, developer activity and experimentation on Bitcoin have seen a stark revival. In particular, after Robin Linus unveiled the computational framework “BitVM” last October, a flurry of new models for decentralized Bitcoin layers have come onto the scene.
The term “Bitcoin L2” is thrown around loosely, but is generally understood as a system that builds “on top of Bitcoin.” It either complements Bitcoin, inherits its decentralization and security, or uses BTC as a currency—or some combination of the three.
Babylon adjusts that understanding to include being secured by BTC the asset—not just the network.
“Bitcoin L2 is a very important source of demand for us,” said Tse. “They want to get liquidity from Bitcoin, [and] they want to get security from the most secure chain in the world.”
The co-founder said he’s already in conversation with Build On Bitcoin (BOB), a hybrid Ethereum and Bitcoin L2, to potentially introduce Bitcoin staking to the network.
To clarify, Babylon's Bitcoin staking functionality does not require a “wrapped” or bridged version of BTC on a separate blockchain. All staked coins are locked up on layer-1, and are fully controlled by their owners’ Bitcoin private keys.
Earlier this month, Babylon launched Phase 1 of its staking mainnet, opening the floodgates for users to lock up their BTC for future staking. At first, the team capped their system to hold up to 1,000 BTC, which was well under the demand that Babylon had already accrued for their product.
This triggered an on-chain race and fee war among users to see their staking deposits processed first, which spiked the Bitcoin network’s transaction fees far higher than even the team expected.
“The 1,000 Bitcoin cap is very much for security reasons,” Tse said. “We expect as the cap increases, the competition in terms of the gas war will be lower.”
Compared to altcoin chains, the co-founder said that accessing Bitcoin staking will be much easier. Unlike Ethereum, Babylon’s delegated staking model lets validators handle the technical burden of running the network and providing security.
Furthermore, whereas Ethereum requires at least 32 ETH ($80,800) to solo stake, Babylon imposes no such minimums aside from the cost to process the transaction.
After that, a user’s Bitcoin will be able to generate them what Babylon calls safe yield—potentially across multiple blockchains at once. The only risk involved would be slashing risk at a protocol level, if the validator you trust with your stake behaves dishonestly.
Theoretically, a protocol like Babylon could put to work hundreds of billions of dollars in BTC that is currently idle, bolstering its current role as a store of value asset.
When asked whether BTC staking could pose a competitive threat to the value of altcoins that once held this functionality over BTC, Tse provided a more optimistic outlook. He said Babylon could save proof-of-stake chains from needing to rapidly dilute their native assets to keep their systems secure, by securing their networks using BTC capital instead.
“It is very expensive to attract people to buy the native asset in order to provide staking,” he explained. “They end up paying a very high yield. Therefore, it is very unhealthy for the tokens of these projects.”
Tse predicts a future where staking on Bitcoin is as popular as it is on Ethereum, where about 28% of the circulating supply is currently staked. However, that staked capital would still be unlocked through liquid staking tokens with which stakers can still access other emerging Bitcoin applications, like lending, borrowing, and trading.
“I think that is why staking is such a fundamental use case of an asset," he concluded, "and that is why we’re excited about giving this to the biggest asset."
Edited by Ryan Ozawa
