As the father of cryptocurrencies, Bitcoin has proven its resilience and value over the years. However, it faces limitations, especially regarding liquidity and accessibility. Traditional financial systems don’t fully integrate with Bitcoin, hindering its growth potential.

Enter Lorenzo Protocol—a groundbreaking solution that bridges the gap between Bitcoin and decentralized finance (DeFi). Lorenzo aims to unlock Bitcoin’s liquidity, making it more versatile and accessible for users across the DeFi ecosystem.

What is Lorenzo Protocol?

Source: Lorenzo Protocol Website

Lorenzo Protocol is a decentralized financial infrastructure designed to address the liquidity challenges faced by Bitcoin holders, enabling them to participate in the broader DeFi ecosystem.

Lorenzo, founded by Matt Ye and Fan Sang, acts as a bridge, allowing Bitcoin to flow seamlessly into decentralized applications (dApps) and protocols. It leverages smart contracts to facilitate secure interactions between Bitcoin and other assets. By providing liquidity, Lorenzo enhances the utility of Bitcoin beyond its role as a store of value.

Lorenzo Protocol serves as the conduit through which Bitcoin liquidity enters the DeFi landscape. It enables stakers to participate in yield farming, lending, and other DeFi activities while maintaining exposure to Bitcoin.

Key Features of Lorenzo Protocol

• Immutability: Transactions on Lorenzo are tamper-proof, ensuring trustless operations.
• Enhanced Liquidity: Lorenzo bridges the gap between Bitcoin and DeFi tokens, creating a dynamic ecosystem.
• Integration Flexibility: It seamlessly integrates with existing DeFi platforms and protocols.

Lorenzo Architecture

Source: Lorenzo Protocol Whitepaper

Lorenzo Protocol boasts a modular architecture to enhance Bitcoin’s scalability and functionality within the DeFi (decentralized finance) landscape. Lorenzo’s top priority is to assist projects that require Bitcoin restaking to obtain Bitcoin. Conversely, through Lorenzo, Bitcoin holders are able to find decent yielding opportunities by getting matched with projects that desire Bitcoin liquidity. Here is the modular architecture that underpins Lorenzo Protocol and its components.

Phase 1: Bitcoin Network (Foundation Layer)

1. Users: At the heart of Lorenzo lies its user base. Individuals can stake their Bitcoin (BTC) with Lorenzo, initiating the process.

2. Lorenzo Cold Multisig2 Wallet: This secure, offline wallet safeguards staked BTC, ensuring maximum protection.

3. Vigilante: Acting as a guardian, the Vigilante component monitors the Bitcoin network for potential forks or security threats. If any suspicious activity arises, such as a fork or security breach, it promptly raises an alarm to safeguard users’ investments.

Phase 2: Babylon Integration (Expansion Layer)

1. Stake Agent: The Stake Agent is a critical intermediary between Bitcoin stakers and the Lorenzo network. Its primary role is to facilitate the conversion of staked BTC (Bitcoin) into BTC liquid restaking tokens (BLRTs). By connecting stakers to the Lorenzo ecosystem, the Stake Agent ensures a smooth flow of liquidity.

2. Lorenzo Relayers: The Lorenzo Relayer serves as a bridge, ensuring efficient communication between the Lorenzo smart contracts and external DeFi platforms. Its responsibilities include token swaps, liquidity provision, and settlement.

3. Lorenzo Hot Multisig2 Wallet: This wallet is designed for more frequent transactions, it complements the cold storage option.

4. Cove Modules:

• StakeAgent Module: This manages the staking process, handling user deposits and withdrawals.
• Control Module: This governs overall protocol operations and interactions with other modules.
• SPT & YAT Control Module: This oversees issuing and managing Stake Pool Tokens (SPTs) and Yield-Accrued Tokens (YATs). SPTs represent staked BTC, while YATs capture accrued rewards.
• Governance: This module enables decentralized decision-making through a voting system by empowering users.
• EVM Compatibility Layer: By interacting with Ethereum Virtual Machine (EVM)-based DeFi applications, Lorenzo expands its reach and functionality.
• Reward Distribution: This ensures users receive rewards for staking BTC, incentivizing participation.

Cosmos Appchain and Ethermint

Lorenzo Protocol is built on a Cosmos appchain using Ethermint technology. The Cosmos appchain provides scalability, interoperability, and security while Ethermint ensures compatibility with Ethereum smart contracts, allowing for seamless interaction with existing DeFi protocols.

Benefits of Lorenzo Modular Architecture

1. Scalability: Lorenzo’s separation of functionalities allows it to handle more transactions without compromising security.

2. Flexibility: Seamless integrating new modules ensures adaptability to evolving DeFi needs.

3. EVM Compatibility: Interoperability with Ethereum’s DeFi ecosystem opens new possibilities.

4. User Governance: Decentralized decision-making empowers Lorenzo’s community.

How Does Lorenzo Work?

Source: Lorenzo Protocol Whitepaper

Lorenzo Protocol acts as a digital matchmaker, orchestrating connections between two crucial players:

• Stakers: These are individuals who stake their BTC (Bitcoin) within the Lorenzo ecosystem. By staking BTC, they contribute to the overall liquidity pool.
• Babylon: Babylon represents DeFi platforms hungry for additional BTC liquidity. It seeks to utilize staked BTC effectively within its ecosystem.

Lorenzo ensures that stakers find suitable projects while simultaneously assisting projects in accessing the Bitcoin liquidity they require.

When Babylon stakes BTC, Lorenzo initiates a transformation process:

• Staked BTC: Babylon locks up a certain amount of BTC as collateral.
• BTC Liquid Restaking Tokens (BLRTs): Lorenzo converts the staked BTC into BLRTs, a flexible form of BTC that can be used within the DeFi ecosystem. These tokens maintain BTC’s value while allowing seamless interactions with other DeFi assets.

The BLRTs, now infused with liquidity, flow downstream into the broader DeFi ecosystem. This ensures that yield farming, lending, and other DeFi applications gain access to this enhanced liquidity making BLRTs tradable, usable, and versatile assets.

Tokenization of Bitcoin Restaking

Bitcoin Liquid Restaking Plan (BLRP)

The Bitcoin Liquid Restaking Plan (BLRP) aims to unlock liquidity that is typically locked due to BTC restaking. When users stake BTC, Lorenzo converts it into BTC liquid restaking tokens (BLRTs) through BLRP. BLRTs retain the value of BTC while allowing seamless interactions within the DeFi ecosystem.

Liquid Principal Token (LPT)

Liquid Principal Tokens represent the rights to claim the staked Bitcoin principal after the restaking concludes. LPTs do not have to be in the same form as the original staked BTC. However, Lorenzo promotes stBTC, a BTC-pegged token, as its official LPT to avoid liquidity fragmentation.

Yield Accruing Token (YAT)

Yield Accruing Tokens represent the right to claim restaking yield once the restaking period ends. Each YAT accrues yield from Bitcoin restaking activities. YATs are ERC-20 tokens issued by restaking to a BLRP (Bitcoin Liquid Restaking Plan).

Since both LPTs and YATs are tradable, users who own them can separately claim yield and withdraw restaked BTC.

How to Use Lorenzo

Stake BTC with Lorenzo

Start by staking your BTC within the Lorenzo ecosystem. Choose a non-slashable PoS chain in the Babylon ecosystem. Lorenzo will then convert your staked BTC into BTC liquid restaking tokens (BLRTs).

Claim Liquid Restaking Tokens (LRTs)

Once staking has begun, the Staking agents mint Liquid Restaking Tokens (LRT) Liquid Principal Tokens (LPT), and Yield-Accruing Tokens (YAT) on Lorenzo and transfer them to the Staker.

Use/Hold

As BTC restaking generates rewards, YATs accrue additional value. Stakers can hold/use liquid principal tokens (LPT) and yield accruing tokens (YAT) in the DeFi ecosystem of Lorenzo Layer.

Withdrawal

Once the Staker is ready to redeem their accrued yield and withdraw Bitcoin, they do so on the Lorenzo Layer, then retrieve their Bitcoin and yield from the same Staking Agent who issued their yield-accrued YAT.

Lorenzo Ecosystem

The Lorenzo Ecosystem is a dynamic space where Bitcoin liquidity meets DeFi ingenuity. Here are some dApps building on Lorenzo Protocol:

Zulu Network

Zulu Network pioneers Bitcoin Layer 2 solutions with Bitcoin-level security. Zulu network enables developers to seamlessly deploy dApps on both EVM liquidity and UTXO innovation layers. Zulu is poised to launch the first trust-minimized Bitcoin bridge, enhancing interoperability.

The EVM and UTXO layers are interconnected through a seamless bridge, facilitating swift asset transfers between them. The validity of Zulu’s state transitions is verified directly on the Bitcoin Network through a BitVM bridge, introducing Turing-complete programmability to Bitcoin.

This innovative approach enhances the overall functionality and compatibility of the Zulu Network, marking a significant step forward in the realm of DeFi on the Bitcoin blockchain and beyond.

Movement

Movement Labs is building a network of Move-based blockchains with their flagship networks M1 and M2.

M1 is a community-first blockchain providing the highest possible TPS through Move, instant finality, native day-zero access to mass liquidity, and modular customizations. M2 will be the first Move Layer-2 on Ethereum. It will support Sui Move, Aptos Move, and also our embedded EVM interpreter

Movement combines smart contract security and parallelization with the liquidity and user base of the EVM.

Citrea

Citrea is the first rollup that leverages zero-knowledge technology to enhance Bitcoin’s capabilities. Citrea makes it possible for developers to build everything on Bitcoin, expanding its utility by using Bitcoin both as a data availability and a settlement layer, via its BitVM-based trust-minimized two-way peg program - Clementine.

Every transaction occuring on Citrea, is fully secured by zero-knowledge proofs and optimistically verified by Bitcoin via BitVM. The execution environment of Citrea is trustless with respect to Bitcoin and is accessible to all participants of the Bitcoin Network.

Citrea’s vision is to build scalable infrastructure that advances Bitcoin into its next phase, foundation for world’s finance. Citrea represents Bitcoin Security at Scale with its execution shard that keeps the settlement and data availability on-chain, on-Bitcoin.

Macaron

Macaron is the First & Native DEX on Bitlayer, the first Bitcoin security-equivalent Layer2 based on BitVM. It offers users the most seamless trading experience and competitive yield-making schemes.

Macaron is more than just a DEX; it is a collection of yield-generating tools for users, including liquidity farming, staking incentives, and trade-to-earn.

Satoshi Protocol

Satoshi Protocol is a universal stablecoin protocol built for Bitcoin. It empowers users to deposit their Bitcoin as collateral and borrow stablecoin SAT, on either Bitcoin Layer 1 or Layer 2.

The protocol revolves around two primary components: SAT, a stablecoin pegged to the US dollar, and OSHI, a utility token that benefits participants in the ecosystem. Users can generate liquidity by minting SAT against collateral, ensuring a minimum collateral ratio of 110%. Plus, it allows SAT holders to redeem their collateral through a well-designed redemption mechanism, maintaining the stable value of SAT.

This innovative platform empowers Bitcoin holders to unlock liquidity from their assets without the burden of unpredictable interest payments, marking a significant advancement towards making Bitcoin truly spendable and enhancing its utility beyond merely being a store of value.

Conclusion

By leveraging Babylon’s Bitcoin staking and timestamping protocol, Lorenzo lays the foundation for a scalable and performant Bitcoin application layer. Functions enabled by the Lorenzo architecture include enhancing Bitcoin’s scalability through the BTC security module, enabling smart contract execution, L2-as-a-Service, and asset compatibility.

To learn more about the Lorenzo Protocol, visit their website.