While we talk about the Bitcoin Renaissance, few are aware of what lies behind it. In fact, the Medici family is considered the “patrons of the Renaissance,” and the Medici Bank was the financial driving force behind this cultural rebirth.

If we compare the noble families of medieval Europe to the dazzling stars in a summer night sky, the Medici family shines as the brightest star. They were not only the de facto rulers of Florence but also produced three popes and two queens of France. They gathered and funded artists such as Botticelli, Da Vinci, Michelangelo, and Raphael. This significant patronage largely came from Lorenzo di Piero de’ Medici, known as “Lorenzo the Magnificent,” the fourth-generation successor of the Medici family.

Behind the Italian Renaissance was the liquidity provided by the Medici Bank, and the same holds true for the Bitcoin Renaissance: it revolves around stimulating and unlocking BTC liquidity to construct richer and more complex financial scenarios for BTC assets. Babylon has achieved native staking of BTC on the Bitcoin mainnet, providing shared security for any PoS chain and opening the doors to financial opportunities within the Bitcoin ecosystem. However, BTC’s liquidity has not been fully unleashed yet. The current liquidity limitations of Babylon resemble the “Prisoner of Babylon.” While many projects hope to solve this issue, they have not delved as deeply as Lorenzo, leading to an incomplete release of liquidity finance.

Today, Lorenzo has positioned itself perfectly, aiming to create a Bitcoin liquidity finance layer that integrates Lido, Renzo, and Pendle. It will offer returns based on Babylon’s native BTC, facilitating a full process of liquid staking, restaking, principal and interest separation, and StakingFi. In other words, Lorenzo will serve as the entry point for users to access various BTC financial products. Currently, Lorenzo has received investment from Binance Labs and has launched a mainnet test version, with mainnet V2 set to debut in June. Additionally, Lorenzo has recently initiated @lorenzoprotocol/join-lorenzos-pre-launch-staking-event-for-babylon-earn-lorenzo-points-rewards-and-participate-57514903fa30">a joint mining campaign with Babylon and Bitlayer for Bitcoin pre-staking. To thank early supporters, Lorenzo has set up incentive pools for users participating in pre-staking on Babylon, bridging stBTC to Bitlayer for ecological projects, as well as other collaborative projects.

So, how will Lorenzo maximize the release of Bitcoin’s liquidity, recreate the Medici Bank’s financial empire, and lead Bitcoin toward a new Renaissance? Today, Foresight News will conduct an in-depth analysis and interpretation.

Lorenzo: The Wealth Manager of the Pope

In the Middle Ages, the Pope was the patron of Italian banks and trading companies, holding tax authority across all corners of Europe. Banks were established specifically to manage the Pope’s wealth, providing services like tax collection, transferring tax funds, currency exchange, and lending. The Medici Bank became the wealth manager for the Pope very early on. In confidential ledgers, the accounts of the Pope’s treasury were under the Roman branch, similar to how the U.S. Treasury maintains an account in a Federal Reserve Bank today.

During Lorenzo’s time, the Pope, nobility, and aristocrats believed that the Medici Bank had the capacity to lend unlimited amounts. However, the reality was that the Medici Bank was over-leveraged, and the Papacy struggled to repay its debts. By 1494, the Medici Bank was on the brink of bankruptcy, with the pivotal Roman branch heavily tied up in loans made to the Pope’s treasury. As the wealth manager for the Pope, the Medici Bank became too entangled in political affairs. With a shortage of English wool and a decline in silver prices, the Medici Bank’s reinvestment opportunities shrank, and sources of income became severely limited, with cash reserves falling below 10% of total assets, ultimately leading to a liquidity crisis.

Today’s Lorenzo also acts as a manager of “religious wealth.” Bloomberg has referred to Bitcoin as “the first true religion of the 21st century,” with Bitcoin maximalists and holders being its followers. From a financial perspective, today’s public chains resemble banks, from which various financial products are derived, including deposits, loans, mortgages, exchanges, structured products, and insurance products. However, due to the limitations of Bitcoin’s scripting language and technology, it has been unable to natively construct DApps, leaving Bitcoin without its own liquidity finance. This has led to a persistent phenomenon where the number of addresses holding over 100 BTC has remained stable at around 16,000 over the past four years. Despite the largest wrapped token, WBTC, having a market cap of about $10.5 billion, Bitcoin’s total market cap is a staggering $1.3 trillion, representing only 0.8%. Additionally, the Bitcoin community’s strong belief in “Not your keys, not your coins” discourages many from taking the risks associated with cross-chain and DeFi protocols on other chains.

Lorenzo targets the long-dormant BTC. It is the first Bitcoin liquidity finance layer built on Babylon and serves as an issuance, trading, and settlement platform for Bitcoin’s liquid staking tokens, providing true safety for native earnings for Bitcoin users and issuing interest-bearing LSTs for various Bitcoin staking projects. Lorenzo can be understood as a combination of Lido, Renzo, and Pendle, creating a massive bond market that offers integrated products for matching, issuing, settling, and structured finance, thoroughly releasing the liquidity of staked BTC, activating financial scenarios for BTC assets, and supporting the development of the downstream DeFi ecosystem.

Babylon-based LRT competitive market

The year 2024 marks a new beginning for the Bitcoin ecosystem, transitioning from narratives of inscriptions and runes to discussions about income-generating assets. Previously, due to Satoshi’s consensus, Bitcoin could not be staked like PoS tokens to generate yields. However, today, users can deposit BTC into their self-custodied deposit address on Babylon’s Bitcoin mainnet. By incorporating PoS verification information through timestamp protocols into the Bitcoin blockchain, they can provide shared security for existing PoS chains and earn staking rewards without the need for any third-party custody, cross-chain operations, or wrapping. At the same time, Schnorr signatures and the Extractable One-Time Signatures (EOTS) mechanism make BTC a forfeitable asset, effectively preventing double-spending attacks.

Babylon’s shared security mechanism opens up possibilities for financial innovation within the Bitcoin ecosystem, presenting limitless potential. However, the current issue is that the BTC staked for PoS chains also loses liquidity, becoming a “prisoner of Babylon,” which affects capital efficiency and results in a single source of income. Therefore, how can we fully unleash BTC liquidity based on Babylon and provide users with more avenues for earning?

To address this, several re-staking protocols such as Uniport, Chakra, BounceBit, Bedrock, Solv Protocol, and StakeStone have emerged, all aimed at further unlocking BTC liquidity. Let’s explore them one by one:

• [ ] Chakra is a ZK-based Bitcoin re-staking protocol that cross-links Bitcoin and Ethereum’s BTC and ETH to the Chakra chain, forming an asset settlement hub for BTC L2. It utilizes lightweight client cross-chain technology to deploy ChakraBTC and ChakraETH across other BTC L2s. Chakra offers re-staking services for PoS chains based on its Settlement Consumption Service (SCS). This aligns with Babylon’s objectives, although BTC is not natively staked on the Bitcoin mainnet. To solve this issue, Chakra has now integrated with Babylon, allowing BTC staked through Babylon to be mapped to any ecosystem via Chakra’s trustless settlement service/layer. Babylon leverages the staked BTC from Chakra to ensure the security of its PoS systems, enabling stakers to share verification rewards. The ZK-STARK staking proofs generated by Chakra allow users to access liquid assets across the Chakra Chain, Starknet, and various other blockchains.

• [ ] BounceBit is a Bitcoin re-staking infrastructure that adopts a dual-token PoS structure, based on the wrapped token BTCB instead of native BTC. It transforms BTCB into BBTC, with a shared security mechanism founded on staked BBTC as LRT stBBTC. The design of BBTC addresses the lower liquidity and fewer application scenarios of Bitcoin on the native chain, although it is somewhat weaker in native Bitcoin functionality compared to Babylon’s solution. While its BTC Bridge allows native BTC to be converted into BBTC directly, cross-chain bridges and oracles always carry risks.

• [ ] Uniport is a Bitcoin re-staking chain built on the Cosmos SDK, utilizing the UniPort zk-Rollup Chain to achieve multi-chain interoperability for Bitcoin ecosystem assets. Its cross-chain solution converts native BTC into UBTC, managed through a centralized multi-signature cold wallet (with plans for multi-signature contracts in the future). UBTC will be deeply integrated with Babylon.

• [ ] Bedrock is a multi-asset liquidity re-staking project that has partnered with Babylon to launch the LRT token, uniBTC. Users can stake WBTC on Ethereum to receive uniBTC. In this process, Bedrock connects with Babylon using both proxy staking and direct conversion methods. The proxy mechanism allows users to stake wBTC on Ethereum while simultaneously staking an equivalent amount of native BTC on Babylon. The direct conversion method allows WBTC to be exchanged for BTC and staked on Babylon. Holding uniBTC enables users to earn BTC rewards and utilize it in other DeFi protocols.

• [ ] Solv Protocol is a full-chain yield and liquidity protocol that converts WBTC on Arbitrum, M-BTC on Merlin, and BTCB on BNB Chain into yield-generating assets, solvBTC, which are not native BTC.

• [ ] StakeStone is a comprehensive liquidity infrastructure that deposits native BTC into Babylon for staking and issues cross-chain liquid yield-generating BTC, STONEBTC.

• [ ] SataBTC is a Bitcoin re-staking layer that has yet to launch.

Upon comprehensive comparison, it becomes evident that LRT projects within the same track are actively exploring their unique approaches. BounceBit, Bedrock, and Solv Protocol prioritize capturing the existing market, utilizing wrapped BTC as their underlying asset instead of native BTC, aiming to unify liquidity and provide yield-generating capabilities for BTC. However, their inherent risks are consistent with those of wrapped tokens like WBTC. Other projects are starting to target the LRT market that Babylon offers; Chakra, Uniport, and StakeStone are focused on the new market potential brought by Babylon. They choose to view Babylon as a foundational source of yield for their underlying assets and issue LRT tokens to release the liquidity of staked BTC, but they all stop at Restaking and LRT.

In fact, LRT with yield also faces the issue of high volatility, which cannot meet the diverse risk appetites of users. Consider Ethereum: any yield-generating asset ultimately flows to Pendle, a feature that Bitcoin’s DeFi still lacks. This is precisely what Lorenzo aims to accomplish. However, they do not see each other as competitors; instead, they are likely to create more opportunities for collaboration.

Lido + Renzo + Pendle: How Will Lorenzo Build Bitcoin’s Liquidity Finance?

Some say that the journey Ethereum has taken over nine years, Bitcoin has completed in just nine months. Thus, what took Ethereum four years and three generations of products to navigate in yield-generating assets, Lorenzo could accomplish with a single protocol.

The Communication Path Between Bitcoin Mainnet and Lorenzo

Let’s first examine the architecture of the Lorenzo protocol, as shown in the diagram below. It consists of three main components: Lorenzo Chain, Bitcoin Relayer, and a comprehensive set of smart contracts.

Lorenzo Chain (corresponding to the EVM-compatible layer) is a Cosmos application chain built using Cosmos Ethermint, compatible with EVM, primarily providing the underlying infrastructure for liquidity-staked tokens.

Bitcoin Relayer: This component can relay information from the Bitcoin mainnet to the Lorenzo application chain. It is a set of smart contracts for validating off-chain information, which manage the issuance and settlement of liquidity-staked tokens.

The initial logic is that when users deposit BTC into the multi-signature addresses of Lorenzo’s cold and hot wallets on the Bitcoin mainnet through the Lorenzo website to obtain the Lorenzo liquidity token stBTC, the Bitcoin relayer of Lorenzo will monitor the deposit address for incoming transactions. Once a transaction is confirmed, the relayer will obtain the Merkle proof of the transaction and submit it to the Lorenzo Chain. It will then call the mint function of the “Lorenzo YAT_Control_Module,” which internally verifies the legitimacy of the transaction proof. Upon successful verification, Lorenzo will mint an equivalent amount of stBTC for the user’s EVM account.

If the user needs to exchange stBTC back to BTC, he or she will initiate a stBTC burning request on the Lorenzo website. Lorenzo Monitor will monitor the stBTC burning on the Lorenzo chain and send the stBTC burning transaction hash and constructed BTC withdrawal transaction to the multi-signature service Vault Wallet System, and apply for a signature. After verifying the legality of the burning transaction, the final signature is generated and sent back to Lorenzo Monitor. After receiving the BTC signature, Lorenzo Monitor broadcasts the signed transaction to the Bitcoin mainnet to complete the user’s withdrawal operation.

Releasing Liquidity, Breaking the “Babylonian Prison”

Lorenzo uses Babylon as a foundational yield layer, providing users with genuinely secure native returns while almost eliminating staking risks. Additionally, like the early EigenLayer, Babylon will also impose deposit limits after its mainnet launch. As mentioned earlier, Babylon currently faces liquidity constraints similar to the “Babylonian Prison,” along with entry barriers.

However, this is not the endpoint of the Babylon narrative; it serves as the financial foundation of the Bitcoin ecosystem and provides possibilities for Lorenzo.

Lorenzo’s first step is to build Bitcoin Lido, releasing the liquidity of staked BTC and addressing the deposit limit issue of Babylon. Users can deposit BTC directly into Babylon through Lorenzo, which acts as an asset issuance and settlement platform, tokenizing BTC for staking and providing users with liquidity-staked tokens. This is similar to Lido’s stETH but differs in certain aspects, which we will elaborate on in the next section.

Of course, as a layer for Bitcoin liquidity finance, similar to Ethena, Lorenzo can utilize users’ deposited BTC for other trading strategies, liquidity mining, and additional sources of returns besides BTC staking yields. Currently, Lorenzo has partnered with Bitlayer to integrate 7 to 8 downstream DeFi projects through the Bitlayer Mining Gala event, allowing participation in on-chain activities such as staking and lending.

Separating Principal and Interest Bonds and Re-Staking Plans: An Attempt to Unify Liquidity

Similar to stETH, Lorenzo’s LST is also a yield-bearing asset for BTC, essentially functioning as a Bitcoin bond that generates returns. However, since staking in Babylon essentially involves staking in different PoS chains rather than anchoring to ETH like Lido’s stETH, different staking projects may lead to the creation of different liquidity-staked tokens. If different LSTs are issued for various staking projects, it would clearly result in fragmented liquidity.

So, how can the issue of liquidity fragmentation be addressed more effectively? Lorenzo has conceived a separation model for principal and interest similar to Pendle and has implemented a Bitcoin Liquidity Re-Staking Plan (BLRP) based on Babylon staking to avoid the dilution of liquidity from yield-bearing tokens due to different projects and varying staking durations. Lorenzo will predefine the BLRP staking plan, which includes the staking projects (PoS chains) as well as the start and end times for staking, allowing users to select their preferred staking plan only before the plan begins.

In other words, if a user chooses the “Babylon-Lorenzo-01” staking plan on Lorenzo, after depositing BTC into Babylon, they will receive two types of tokens: Liquid Principal Tokens (LPT) and Yield Accruing Tokens (YAT). Lorenzo issues the same LPT for all low-risk staking projects; this LPT is equivalent to stBTC, pegged 1:1 to the BTC staked, unifying the liquidity of BTC across different ecosystems. Holders of stBTC can redeem their staked BTC principal after the staking period ends. The YAT, on the other hand, is an ERC-20 token issued through the BLRP, understood as a bond with future yield, representing the income generated from staking. YAT has its own re-staking plan, along with defined start and end times. Before maturity, YAT can be traded and transferred, and holders can also claim rewards from the PoS chains. YAT issued from the same BLRP can also be exchanged among each other.

After YAT expires, holders can obtain the benefits of Babylon, PoS chain and Lorenzo in one go.

Staking Agent: An Asset Issuance and Settlement System Based on CeDeFi

Both stBTC and YAT are part of Lorenzo’s asset issuance side, but it also serves as an asset settlement platform. As I mentioned in my previous article, due to the paradigm shift in asset issuance layers, DeFi has entered a stage of active asset management, and Lorenzo embodies this generational characteristic. As the issuance and settlement layer for stBTC, it also acts as an asset management entity for native BTC, determining the direction of stakers’ BTC.

Lorenzo acknowledges that it does not provide an inherent guarantee to stakers that their managed BTC will not be misused. However, due to the limited programmability of the Bitcoin network, it is currently not feasible to build a fully decentralized settlement system. Therefore, Lorenzo has chosen CeDeFi as a “middle ground” between centralization and decentralization. It introduces a Staking Agent mechanism, with top Bitcoin institutions and TradFi entities jointly serving as the asset issuance and settlement layer, with Lorenzo also acting as one of the staking agents. Should any staking agent engage in improper conduct, their agency will be revoked.

The staking agent is responsible for the entire asset issuance and settlement process within Lorenzo. Simply put, it creates staking plans for users, accepts their BTC deposits into Babylon and the PoS chains, and then sends the restaking proof to the Lorenzo protocol, issuing stBTC and YAT to the users. When the staking plan matures, the agent safeguards the BTC returned by the project and redeems the matured stBTC and YAT, converting them back into the principal BTC and accrued earnings.

In terms of fund settlement, Lorenzo has established a sequencing mechanism. In the first phase, Lorenzo did not introduce YAT; users only needed to burn stBTC to redeem their native BTC. However, after the introduction of YAT in the second phase, users who wish to redeem BTC must not only burn the corresponding stBTC but also burn an equal amount of Staking Proof Tokens (SPT) before Lorenzo will return the BTC to them.

The SPT serves the purposes of sequencing, burning stBTC, and redeeming BTC certificates. When YAT matures, the Lorenzo revenue distribution contract will distribute earnings to YAT holders and convert YAT into an equivalent and non-tradable SPT. These SPTs will enter a unified queue and be placed at the end of the line, thereby determining the order of stBTC burning. The agent ID associated with the burned SPT will decide which staking agent redeems the BTC. Users who generate SPT by claiming YAT can prioritize the burning of stBTC using their generated SPT, up to the number of SPTs they hold, or they can choose to only claim YAT earnings to generate SPT without burning any stBTC. If a user does not hold YAT but needs to redeem BTC, and there are no SPTs available in the queue, they must wait for new SPTs to enter.

For example, if user A stakes 100 BTC and earns 10 BTC, when A redeems the YAT for 10 BTC, an equivalent amount of SPT is generated within the BitMonster staking agent without burning stBTC. User B, on the other hand, buys 50 stBTC on the market and wishes to exchange them for BTC, but without YAT, BitMonster must hold an equivalent amount of SPT (50 SPT) in order to redeem 50 BTC; otherwise, B must wait in line for other users to generate SPT. Once all the BTC in the “Staked_token” has been redeemed, the SPT will pop out of the queue.

The issuance and settlement system based on staking agents effectively releases the liquidity of BTC and expected returns, allowing users to access trading yield-bearing tokens in advance. The SPT settlement mechanism in Lorenzo dictates that users must have sufficient earnings to withdraw BTC, which is why staking plans exist—without the earnings from the staking term, there is no BTC to withdraw. In other words, we can think of the staking agent structure as a large capital pool; as long as the underlying BTC yield sources from Babylon are rich and stable, the more funds users deposit, the greater the earnings, which in turn improves the liquidity of Lorenzo’s dual tokens.

StakingFi: Financial Use Cases of BTC Assets

Certainly, Lorenzo aims not only to release the liquidity of staked BTC but also to provide a robust token structure for this portion of liquidity. Due to the uncertainty of interest rates, the separation of principal and interest essentially reduces reinvestment risk. For users looking to avoid volatility, they can purchase stBTC, which is pegged to BTC, to short the yield; for risk-tolerant users, they can buy YAT to go long on returns. Compared to other BTC LRT projects, this principal and interest separation mechanism can also support the construction of more complex downstream DeFi products, rather than just simple yield-generating strategies.

Currently, Lorenzo’s stBTC can be used across chains with Bitlayer. In the future, stBTC and YAT will be applicable in the following financial scenarios:

Interest Rate Swaps: This refers to the exchange of two amounts of currency with the same debt amount (principal) and the same term, swapping fixed rates for floating rates. stBTC can be seen as another form of wrapped BTC and may eventually replace WBTC in almost all scenarios. The value of YAT comes from accumulated earnings and speculation on future returns, establishing a basic trading pair between stBTC and all YAT. YAT from the same staking plan can be exchanged, and there may also be trading pairs between stBTC, YAT, and other mainstream assets.

Lending Protocols: stBTC and YAT can be used as collateral to borrow any needed assets, ensuring that stakers have greater control over their investments and liquidity.

Structured BTC Yield Accruing Products: For example, products can be developed based on stBTC and YAT that protect the principal while also creating options-based financial derivatives to enhance yield.

BTC-Backed Stablecoins: stBTC can support stablecoins.

Insurance Products: These can be utilized to mitigate the risk of native BTC being slashed by Babylon.

Roadmap and Future Plans

Lorenzo will roll out the testnet and mainnet in phases. The mainnet test version went live at the end of May, and the mainnet V2 is expected to launch in June. At that time, Lorenzo will introduce the principal and interest separation mechanism, and in addition to stBTC, it will support more Yield Accruing Tokens (YAT). The staking agent model and SPT will also be launched in V2, further decentralizing Lorenzo’s asset issuance and settlement. Additionally, Lorenzo plans to support more PoS projects within the Babylon ecosystem, providing users with more yield opportunities.

Conclusion

Like any current BTC LRT project, Lorenzo is also attempting to activate the liquidity of BTC, which has a market value of $1.3 trillion. This represents a blue ocean market worth over $100 billion, and building DeFi around BTC LRT holds immense potential. The “Prison of Babylon” is temporary; what’s important is that Babylon has laid the groundwork for the entire Bitcoin liquidity finance landscape, serving as a foundational source for Lorenzo’s yield-bearing assets. Unlike other BTC LRT projects, Lorenzo is the first Bitcoin liquidity hub based on the Babylon ecosystem and introduces a Pendle-like principal and interest separation mechanism, providing more complex liquidity finance scenarios for principal and interest tokens, catering to different users’ risk investment needs, and fully unleashing BTC’s liquidity.

However, in my opinion, the staking agent model still carries centralization risks. The underlying Bitcoin UTXO opcode can impose certain output limitations on BTC spending conditions, but it cannot provide security restrictions on the operations of staking agents. The Solv team has developed Solv Guard to address this issue, which serves as an additional security layer for third-party fund managers and may impose constraints on the BLRP investment strategy, specifying investment targets and smart contracts, thereby separating the rights to use funds from governance rights. Lorenzo may consider adopting a similar solution for this issue in the future.

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