Forward the Original Title‘ 流量新宠，比特币质押能否引领下一个流动性释放浪潮？’.

In recent years, Bitcoin’s scalability issue has been a central topic in the blockchain field. As Bitcoin gains widespread recognition as digital gold, its inherent limitations have prompted market participants to continuously seek technical solutions to enhance its liquidity and scalability. From sidechains and Lightning Network to Layer 2 scaling solutions, various attempts have emerged. However, these solutions are still in their exploratory stages and have yet to achieve large-scale adoption and consensus.

Meanwhile, staking for yield, as an innovative method of capital utilization, is gradually changing the financial logic of the Bitcoin ecosystem. Particularly in the realm of staking and re-staking, users can enhance asset liquidity and increase Bitcoin’s potential in DeFi by staking Bitcoin for additional returns. Especially after the launch of the Babylon mainnet, market attention to re-staking reached new heights, with the ensuing on-chain fee wars further highlighting the popularity of this sector.

On August 22, Babylon initiated the first phase of its Bitcoin staking mainnet. Data from mempool.space showed that Bitcoin network transaction fees briefly soared to over 1000 satoshis/byte, while in recent times, these fees had long remained below 5 satoshis/byte. According to information provided by Babylon, the first phase’s 1000 BTC staking cap was reached within just 6 Bitcoin blocks. Babylon’s staking platform data indicated that the confirmed staking TVL was 1000.04549438 BTC, with approximately 12,720 users participating in the staking.

The launch of Babylon’s mainnet not only attracted substantial liquidity but also prompted market participants to reassess Bitcoin’s capital efficiency. Through re-staking protocols, investors can optimize their capital returns without compromising asset security, thereby enhancing overall market liquidity. This model has shown high appeal in the current market environment, especially as on-chain transaction costs continue to rise, leading more users to turn to efficient re-staking protocols.

ArkStream Capital, in their “Nine Alpha Predictions for 2024,” stated that the combination of fundamentalism and market trends would unleash energy beyond the imagination of technology purists. The value of unlocking Bitcoin’s liquidity is an untapped gold mine. Following the narrative of inscriptions, a wave of Bitcoin L2 and Bitcoin applications is expected. With the potential release of over 10% of Bitcoin’s liquidity, BTCFi is projected to support a market worth over $100 billion.

This article will review the latest developments and future prospects in the Bitcoin re-staking sector, analyze the underlying financial logic, and explore potential future directions and market opportunities.

Bitcoin Liquid Staking

As a Proof of Work (PoW) network, Bitcoin relies on miners contributing computational power to maintain network consensus. However, with the rapid development of DeFi, Bitcoin’s application scenarios are continuously expanding. Liquid staking is an emerging mechanism aimed at enhancing Bitcoin’s capital efficiency and liquidity. This mechanism allows users to lock their Bitcoin in staking contracts to participate in consensus and earn returns while still maintaining asset liquidity.

A key advantage of liquid staking lies in its wide applicability in DeFi. As Bitcoin is viewed as an asset with high economic security, an increasing number of financial applications and blockchain projects are beginning to rely on Bitcoin’s economic security to enhance their own security and credibility. The liquidity tokens generated from staking Bitcoin can be used in various financial applications such as decentralized money markets, stablecoins, and insurance, thereby bringing higher capital efficiency to these applications.

Currently, there are three main implementation approaches for Bitcoin liquid staking, each with its own characteristics, advantages, and disadvantages.

The first approach is the on-chain self-custody model. This model creates staking contracts through Bitcoin scripts and introduces complex cryptographic technologies such as one-time signatures (EOTS) and timestamp protocols to ensure the security and finality of staked assets. The core idea is to keep Bitcoin on its native chain while extending its security to other chains through remote staking technology. This approach is theoretically very secure and maintains the decentralized nature of Bitcoin assets. However, its implementation complexity is high, especially when dealing with cross-chain synchronization and responsiveness issues. Projects like Babylon fall into this category.

The second approach relies on centralized custodial institutions. In this model, Bitcoin is transferred to regulated custodial accounts and then mapped to other blockchains through a series of off-chain and on-chain operations. The advantage of this method is its lower implementation difficulty and faster progress. Due to the use of trusted custodians, user asset security is somewhat guaranteed. However, this model has a lower degree of decentralization, and users need to rely on centralized custodians, which may raise concerns about trust and security. BounceBit is a representative of this type of solution.

The third approach is a custodial model based on Multi-Party Computation (MPC) and cross-chain bridges. This model stores Bitcoin in multi-signature wallets and relies on decentralized oracle networks 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 asset circulation between different chains. However, the security of cross-chain bridges themselves remains a potential risk point, especially when handling large amounts of assets. Moreover, due to the upgradability of on-chain contracts and the presence of centralized roles, the complete security of user assets still needs further verification.

These three approaches each have their own advantages and disadvantages in implementing Bitcoin liquid staking. The on-chain self-custody model offers the highest level of decentralization and security, but is complex to implement. The centralized custodial model has advantages in terms of operational simplicity and implementation speed, but has a lower degree of decentralization. The MPC and cross-chain bridge model strikes a balance between security and decentralization, but still needs to address the inherent risks of cross-chain bridges.

Babylon

Babylon is an innovative project that leverages Bitcoin’s native staking mechanism to provide Proof-of-Stake (PoS) security assurance for other blockchains. Through cryptographic technology, Babylon enables cross-chain staking of Bitcoin, allowing Bitcoin holders to earn on-chain returns through staking while providing economic security support for other PoS chains.

Babylon’s staking process relies on cryptography rather than third-party bridges or custodians. BTC stakers initiate staking by sending a transaction with two UTXO outputs. One UTXO is locked by a time-lock script, which the staker can unlock with their private key after the lock-up period ends. The other UTXO is transferred to a temporary Bitcoin address that complies with the “Extractable One-Time Signature (EOTS)” standard. When stakers run nodes on the PoS chain and validate the only valid block, they sign it using the EOTS private key. If stakers operate honestly, they receive validator rewards from the PoS chain; otherwise, their private key may be reverse-engineered, resulting in the forfeiture of their staked BTC. This project’s staking mechanism doesn’t use traditional cross-chain bridge models but instead implements “remote staking,” reducing dependence on cross-chain bridges and lowering additional security assumptions. However, the security of the staking still relies on the security of the Babylon protocol itself, which is fundamentally similar to traditional cross-chain bridge models in this aspect.

Babylon Architecture

Babylon’s protocol architecture is divided into three layers: the Bitcoin network layer, the control layer, and the data layer. The Bitcoin network layer provides timestamp services for PoS consumer chains. The control layer consists of the Babylon blockchain network, connecting the Bitcoin network and Cosmos Hub, while also running a market that matches Bitcoin staking interests with PoS chains. The data layer comprises various PoS consumer chains that leverage the Babylon protocol to obtain economic security support from Bitcoin.

The architectural design of the Babylon protocol is similar to Eigenlayer in that it acts as an intermediary connecting the underlying network and the upper network. However, Babylon’s unique feature lies in its Bitcoin-based architecture, which can provide enhanced security for other blockchains. The protocol implements staking contracts through a Bitcoin covenant emulator, supporting functions such as staking, redemption, and slashing. Its slashing mechanism uses EOTS (Extractable One-Time Signatures) and finality gadgets to punish malicious signers, thereby ensuring network security. Furthermore, Babylon’s Bitcoin timestamp protocol can provide fast redemption services, enhancing BTC liquidity and giving it some advantages over other staking protocols.

Chakra

Chakra is a ZK-based Bitcoin re-staking protocol that bridges BTC and ETH from the Bitcoin and Ethereum mainnets to the Chakra chain, forming an asset settlement center for BTC L2. It deploys ChakraBTC and ChakraETH to other BTC L2s through lightweight client cross-chain technology. Chakra provides re-staking services for PoS chains based on SCS (Settlement Consumption Service).

Chakra employs the STARK zero-knowledge proof system to verify the security of the staking process. This mechanism allows users to verify staking events off-chain, ensuring privacy and security. Additionally, Chakra’s self-custodial staking model is implemented through time-locked scripts and multi-signature vaults, enabling users to stake without transferring their Bitcoin assets out of their wallets, thus avoiding the security risks associated with third-party custody.

In May 2024, Chakra announced the completion of a new funding round, with participation from StarkWare, ABCDE, Bixin Ventures, Cogitent Ventures, Trustless Labs, Web3.com Ventures, and angel investors. The specific funding amount was not disclosed. As a modular settlement network, Chakra can support staking on the Bitcoin mainnet and seamlessly integrate with other protocols. Currently, Chakra has integrated with Babylon, allowing users to stake BTC on Chakra and seamlessly transition to the Babylon mainnet, earning both Babylon staking rewards and Chakra’s Prana rewards. The ZK-STARK staking proofs generated by Chakra also enable users to access liquid assets on Chakra Chain, Starknet, and various other blockchains.

Lombard

Lombard is a re-staking protocol within the Babylon ecosystem, aiming to promote Bitcoin’s application in the DeFi ecosystem and unlock its immense economic potential through LBTC, a cross-chain liquidity token backed 1:1 by Bitcoin.

LBTC achieves liquidity and yield generation for Bitcoin in the DeFi ecosystem through a series of steps. Users first deposit native Bitcoin through Lombard. The deposited Bitcoin is then staked in Babylon’s secure staking infrastructure, with Lombard managing all staking-related fees. Once the 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 user’s staked BTC and is sent to the user’s pre-selected Ethereum address. Although these Bitcoins are staked on Babylon, users can continue to earn staking rewards by holding and using LBTC tokens.

In July 2024, Lombard completed a $16 million seed round funding, 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 Bitcoin liquidity financial layer built on Babylon. It offers simplified Bitcoin management and security measures such as staking insurance, node operator credit scoring, anti-slashing mechanisms, and validator permissions. Lorenzo introduces principal-interest separation innovation to Bitcoin staking. After completing the stake, users receive two types of liquid staking tokens: Liquid Principal Tokens (LPTs) and Yield Accumulation Tokens (YATs). stBTC is currently the main LPT promoted by the platform, pegged 1:1 to native BTC. stBTC has good downstream applications in various L1/L2 ecosystems. In the future, Lorenzo will also launch a YAT trading market, allowing users to trade future staking yields in advance.

Lorenzo Cap 1 pre-staking only collected 250 BTC, staking 128.6 BTC in Babylon’s first round of staking, achieving a completion rate of nearly 52%. In addition to Babylon rewards and Lorenzo points, Cap 1 users were provided with an additional $1.5 million worth of YAT (consisting of future Lorenzo token airdrops).

On August 31st, Lorenzo announced the official launch of the first phase of its mainnet, further expanding to BNB Chain. The upgrade includes opening BTCB staking and improving the YATs section, allowing users to claim YAT on BNB Chain. At the same time, the pre-staking Babylon activity Cap 2 has officially started, accepting native BTC and BTCB staking.

Solv Protocol

Solv Protocol is a cross-chain yield and liquidity distribution layer that tokenizes staking yields, re-staking yields, and trading strategy yields from various networks through a decentralized asset management framework, providing liquidity for different ecosystems. Since April this year, Solv has attracted over 20,000 bitcoins, with more than 70% of these bitcoins being used for Bitcoin staking to generate yields. SolvBTC is a yield solution launched by Solv Protocol. Native BTC, widely recognized wrapped bitcoin on mainstream public chains, and even BTC from BTC ETFs can be minted into SolvBTC, which can then be used to participate in various Bitcoin staking activities.

Currently, Solv has launched Babylon LST (SolvBTC.BBN) and Ethena LST (SolvBTC.ENA), with plans to introduce more products including SolvBTC.Core and fixed-income product SolvBTC.CASH in the future. In Babylon’s first round of staking, Solv subscribed to a 250 BTC quota, becoming the project with the largest share in Babylon LST.

Solv’s investors include top Western and Eastern institutions such as Binance Labs, Blockchain Capital, and Nomura Securities.

BounceBit

BounceBit is a Bitcoin re-staking infrastructure designed to address the issues of low liquidity and limited application scenarios on Bitcoin’s native chain. By introducing a dual-token PoS structure, BounceBit utilizes wrapped tokens BTCB, rather than native BTC, to create a new liquidity ecosystem. BTCB is converted to BBTC and transformed into the liquid re-staking token LRT stBBTC through a staking shared security mechanism.

The architecture of BounceBit consists of three main components: BounceBit Protocol, BounceBit Chain, and Share Security Client (SSC). BounceBit Protocol is its CeFi component, where users can deposit BTC into the protocol and receive Liquid Custody Tokens (LCT), such as BounceBTC (BBTC), at a 1:1 ratio. The deposited assets are stored in multi-party computation (MPC) custody accounts and, through a partnership with Binance, participate in low-risk trading strategies like funding rate arbitrage, with returns distributed back to users.

In May 2024, BounceBit officially announced the launch of its mainnet. The BounceBit Chain operates as an independent Layer 1 network, with BB serving as the gas fee token. The BounceBit mainnet introduced a series of new features, including node staking and delegation, Premium Yield generation, liquidity custody, cross-chain functionality to BounceBit, and BounceClub. In September, BounceBit formed a partnership with the intent execution network dappOS, where dappOS intent assets will use stBBTC issued by BounceBit as one of the underlying yield sources while maintaining the flexibility of native asset usage.

Bedrock

Bedrock is a multi-asset liquid restaking project that has collaborated with Babylon to launch the LRT token uniBTC. Users can stake WBTC on Ethereum and receive uniBTC. In this process, Bedrock establishes a connection with Babylon through proxy staking and direct conversion. The proxy mechanism works as follows: when users stake wBTC on Ethereum, an equivalent amount of native BTC is simultaneously staked on Babylon. Direct conversion involves exchanging WBTC directly for BTC and staking it on Babylon. Holding uniBTC allows users to earn BTC yields and utilize it in other DeFi protocols.

Uniport

Uniport is a Bitcoin restaking chain that uses the UniPort zk-Rollup Chain built on Cosmos SDK to achieve multi-chain interoperability for BTC ecosystem assets. Its cross-chain solution converts native BTC into UBTC and manages it using a centralized multi-signature cold wallet (with plans to use multi-signature contracts in the future). UBTC will be deeply integrated with Babylon.

In terms of technical implementation, Uniport initially adopts a multi-signature alliance approach to manage cross-chain assets, ensuring the security and decentralization of cross-chain transactions. To further enhance the security of cross-chain transactions, Uniport has introduced a series of mechanisms, including economic design and reserve management mechanisms, node staking and rotation mechanisms, as well as security and anti-malicious behavior mechanisms. For cross-chain asset transfers on smart contract chains, Uniport employs zero-knowledge proof and lightweight client verification technologies to ensure the efficiency and security of cross-chain operations. Uniport has also optimized existing ZK proof generation systems and launched the UniVirgo proof system.

PumpBTC

PumpBTC is a Bitcoin liquid staking protocol on Babylon. PumpBTC collaborates with licensed custodians Cobo and Coincover to ensure maximum protection of native Bitcoin assets. Staked Bitcoin can be used across various Ethereum Virtual Machine (EVM) compatible chains as well as 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 receive native yields directly from the Babylon protocol.

PumpBTC successfully delegated 118.4288 BTC in Babylon’s first phase of mainnet staking, accounting for 11.8% of the total.

pSTAKE Finance

pSTAKE Finance is a cryptocurrency project focused on liquid staking services, initially launching liquid staking services in the Cosmos ecosystem. In July this year, pSTAKE Finance launched a Bitcoin liquid staking solution on Babylon. The protocol has a deposit limit of 50 BTC to ensure protocol security.

Additionally, pSTAKE Finance plans to further enhance user experience through the upcoming v2 version, which will introduce yBTC tokens on Ethereum. This token will offer automatic compound Bitcoin yields similar to the popular cToken model and will be integrated into various blockchains, Ethereum L2s, Bitcoin L2s, and other major DeFi ecosystems.

StakeStone

StakeStone is an all-chain liquidity infrastructure that deposits native BTC into Babylon staking and issues STONEBTC, an all-chain liquid yield-bearing BTC.

In August this year, StakeStone announced a strategic partnership with Berachain, with the STONE token fully deployed on the Berachain bArtio testnet. Users will be able to use StakeStone’s liquidity assets STONE, ssBTC, and STONEBTC to participate in the Berachain ecosystem and earn yields.

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 both the Lightning Network (LN) and DeFi.

In August 2023, Stroom Network announced the completion of a $3.5 million funding round, led by Berlin-based crypto investment firm Greenfield, with participation from Ankr’s venture capital arm Mission Street, Lemniscap, No Limit Holdings, Cogitent Ventures, and others. The new funds will be used for team expansion and the launch of Bitcoin “liquid staking” on the Lightning Network, including the release of the corresponding Ethereum-wrapped token lnBTC.

Summary

In the financial logic of Bitcoin staking yields, the value of liquidity release occupies a central position. As the cryptocurrency with the highest global market capitalization, Bitcoin has traditionally been used as a store of value, with its liquidity often locked in cold wallets or other conservative storage methods. While this static holding pattern ensures asset security, it fails to fully leverage Bitcoin’s potential in the capital market. Liquidity release is the key to breaking this limitation.

The core concept of staking yields lies in creating dual value by combining Bitcoin’s security with other proof-of-stake networks. On one hand, this model allows Bitcoin holders to participate in securing other blockchain networks and earn staking rewards while retaining asset sovereignty. On the other hand, for these PoS networks, the introduction of Bitcoin not only enhances their security but also boosts user confidence in the network, potentially leading to significant growth in TVL. Behind this win-win mechanism is the pursuit of maximizing capital utilization, while also pushing Bitcoin’s role as “digital gold” further, transforming it from a single store of value tool into a financial asset capable of generating continuous returns.

In the future, as cross-chain technology continues to mature, one of the evolutionary directions for Bitcoin staking yields may focus on improving cross-chain interoperability and optimizing liquidity management. Current cross-chain solutions still have certain security and efficiency issues, but once these bottlenecks are overcome, Bitcoin staking will no longer be limited to a single blockchain network but can freely circulate and be used across multiple chains. This will not only significantly improve Bitcoin’s capital utilization but also promote the deep integration of the entire crypto financial market, creating more profit opportunities for Bitcoin holders and participants.

Meanwhile, 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 staking services that are both secure and efficient. This model is particularly suitable for Bitcoin holders who have high security requirements but also wish to maintain a certain level of liquidity. The improvement of CeDeFi infrastructure will attract more traditional financial institutions to participate, providing a more stable and sustainable yield environment for crypto assets. Furthermore, as staking yields become more widespread, the derivatives market surrounding Bitcoin will also see further expansion, offering the market rich hedging and speculative tools, while injecting new financial innovation momentum into the Bitcoin staking ecosystem.

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