TL; DR

• Babylon is a staking protocol with its core component being a POS public blockchain compatible with Cosmos IBC. It enables the locking of Bitcoin on the Bitcoin mainnet to provide security for other POS chains, while also earning staking rewards on either the Babylon mainnet or the POS chains.
• The project operates within the realms of the Bitcoin ecosystem, Bitcoin programmability, Bitcoin Layer 2, Bitcoin staking, re-staking, shared security, modularity, and the Cosmos ecosystem. It aligns well with the current mainstream narratives and has strong narrative appeal.
• The project team has strong technical capabilities, with core technical personnel and advisors possessing deep technical backgrounds.
• The project’s current funding totals at least $96.8 million, indicating a high level of investment and participation from numerous institutions.
• Babylon has established collaborations with over 60 Cosmos application chains, wallet service providers, Bitcoin Layer 2 solutions, DeFi protocols, Rollup service providers, and other projects, showcasing a rich ecosystem.
• Currently in the testing phase, the mainnet has not yet launched, and the token economic model has not been disclosed.
• The project faces risks related to the acceptance of its narrative in the market, insufficient staking demand, and leverage risks.

1. Project Introduction

The Babylon Protocol is a Bitcoin staking protocol that allows users to lock Bitcoin on the Bitcoin network to provide security for other POS chains, while also earning staking rewards. Babylon enables Bitcoin to leverage its unique security and decentralization features to economically secure other POS chains, facilitating the rapid launch of other projects.

The core structure of the Babylon Protocol is the Babylon blockchain, a POS blockchain built on the Cosmos SDK and compatible with Cosmos IBC. It facilitates data aggregation and communication between the Bitcoin chain and other Cosmos application chains.

Founded in February 2023, the Babylon project is currently in the testing phase, with the mainnet not yet launched and no tokens issued.

This report will focus on analyzing the project’s fundamentals from the perspective of its narrative. It will cover aspects such as the project team, funding, technology, ecosystem, economic model, market landscape, development status, and risk factors.

2 Project narrative

In the crypto world, narratives refer to mainstream viewpoints, stories, or beliefs related to the crypto industry, cryptocurrencies, or crypto projects that influence public understanding and evaluation. In speculative investment areas like crypto or Web3, narratives are often driven by technological advancements and socio-economic events. They play a crucial role in shaping market sentiment, price fluctuations, and the acceptance of technology, sometimes determining the success or failure of an industry, sector, or project. In highly speculative segments like Meme coins, the importance of narratives can often outweigh the fundamental aspects. Narratives can attract market attention, interact with project fundamentals, or drive them in a positive direction, or they can leave a project in a stagnant state. Thus, this analysis of the Babylon Protocol will first focus on its narrative.

Since 2023, many Ethereum liquid staking/re-staking protocols like Lido and EigenLayer have attracted substantial funds. EigenLayer leverages the security and decentralization of ETH assets to secure other POS chains, allowing them to avoid the high inflation associated with early token launches. EigenLayer has been successful, attracting over $13 billion in TVL within just five months, with its governance token $EIGEN potentially valued between $3 billion and $15 billion.

Bitcoin, with a current market cap of approximately $1.4 trillion, is three times the market cap of ETH at $445 billion. Replicating EigenLayer’s success on Bitcoin could unlock liquidity from Bitcoin’s trillion-dollar market cap and create a new liquidity market, drawing in significant investment.

Babylon, a Bitcoin staking protocol, aims to develop new use cases for Bitcoin, moving beyond the old narratives of “digital currency” and “digital gold.” It enables Bitcoin to use its unique security and decentralization features to provide economic security for other POS chains while allowing Bitcoin holders to earn rewards, facilitating the rapid launch of other protocols.

Babylon also aims to create a secondary staking market for Bitcoin, extending its use cases by staking Bitcoin across more POS networks, thus broadening both Bitcoin and Babylon’s application scenarios.

Additionally, the modular narrative around Ethereum remains strong, with various DA projects like Celestia, EigenDA, Near DA, and Eclipse emerging. Babylon also utilizes a modular approach, integrating as a module into other POS networks, thus aligning with the modular narrative.

On the other hand, the Bitcoin ecosystem is in a phase of explosive growth, with numerous projects, including Layer 2 solutions, emerging and receiving increased VC funding and market attention. In Messari Research’s quarterly “Narrative Game” conference, the narrative around Bitcoin programmability received top scores. Investors and developers are actively seeking new ways to unlock Bitcoin’s programmability. A Bitcoin staking protocol certainly meets this need, serving as a Bitcoin Layer 2 dedicated to staking, which will also boost Bitcoin’s use demand. Therefore, Babylon is well-timed and positioned in a prominent sector, laying a strong foundation for early development.

In summary, the Babylon Protocol addresses several issues: the low yield on Bitcoin investments, the limited use cases for Bitcoin, and the non-expandable security of the Bitcoin system. It fits within the Bitcoin ecosystem, Bitcoin programmability, Bitcoin Layer 2, Bitcoin staking, as well as re-staking, shared security, modularity, and the Cosmos ecosystem, aligning with mainstream narratives and possessing strong narrative appeal.

3. Team background and funding situation

3.1 Team background

According to the official website, the Babylon team consists of 32 technical staff and advisors, showcasing strong technical capabilities and active involvement in various Web3 and project marketing activities, indicating high team engagement. Here are some key team members:

Co-founder David Tse holds a Ph.D. in Electrical Engineering from MIT and previously worked at AT&T Bell Labs. Tse’s research focuses on information theory and its applications in wireless communication, machine learning, energy, and computational biology. He was awarded the Claude E. Shannon Award in 2017 and was elected to the National Academy of Engineering in 2018.

Co-founder Mingchao (Fisher) Yu earned a Ph.D. in Telecommunications from the Australian National University. He has developed theories and algorithms in network information theory and coding, with a particular focus on wireless communication.

The team’s advisors include Sunny Aggarwal, co-founder of Osmosis Lab, and Sreeram Kannan, founder of Eigenlayer, who serves as a strategic advisor.

3.2 Funding situation

On May 22, 2023, Babylon announced the completion of an $8.8 million seed round, led by IDG and Breyer Capital.

On December 7, 2023, Babylon announced completing an $18 million Series A funding round, led by Polychain Capital and Hack VC. Other participants included Framework Ventures, Polygon Ventures, Castle Island Ventures, OKX Ventures, Finality Capital, Breyer Capital, Symbolic Capital, IOSG Ventures, Web3.com Ventures, GeekCartel, Dovey Wan, Chain Fund Capital, Cluster Capital, L2 Iterative Ventures, ABCDE Labs, and Kingsley Advani.

On February 27, 2024, Binance Labs announced an investment in Babylon, although the amount was not disclosed.

On May 30, 2024, Babylon announced completing a $70 million funding round led by Paradigm, with a total of 30 institutional investors participating.

As of June 1, 2024, Babylon has disclosed multiple rounds of funding, totaling over $96.8 million.

Looking at the Bitcoin ecosystem from March 1, 2023, to May 31, 2024, there have been 143 funding rounds related to the Bitcoin ecosystem, with a total amount exceeding $2.3 billion. Of these, 85 rounds occurred in 2024, totaling over $945.3 million. In comparison, Ethereum-related funding during the same period totaled 727 rounds, Solana had 121, Cosmos had 50, and Avalanche had 82. This indicates a relatively high level of funding for the Bitcoin ecosystem, reflecting interest from some institutions and VCs.

Comparing Babylon’s funding status with other related projects provides a rough valuation. As seen in the table, Babylon’s funding amount is higher compared to other Bitcoin Layer 2 projects, with numerous institutions involved, though many are second-tier VCs. In contrast, Babylon’s funding and institutional involvement are lower compared to Ethereum re-staking projects like EigenLayer and even compared to Ethereum Layer 2 projects like Arbitrum and Optimism.

Table 1: Related project financing status table

However, it is worth noting that compared to Ethereum Layer 2 projects, many Bitcoin Layer 2 projects disclose funding information in a less transparent manner. For example, the funding amount for Binance Labs’ investment in Babylon has not been disclosed, nor has the amount for B Square. This lack of transparency raises concerns among investors about potential collusion between project teams and investors to inflate project valuations or make promises to major institutions for project endorsement, which could benefit them during an exit.

Another notable trend is the deep involvement of Chinese and ethnic Chinese teams or capital in many Bitcoin ecosystem projects, especially Bitcoin Layer 2 projects. Projects with core teams of Chinese or ethnic Chinese backgrounds include Babylon and Merlin Chain. Chinese or ethnic Chinese-backed investors include Binance Labs, ABCDE, OKX Ventures, HashKey Capital, HTX Ventures, MEXC Ventures, Bixin Venture, IDG Capital, and Waterdrip Capital.

4. Technical principles

4.1 Project logic

Babylon aims to create a Bitcoin staking protocol that leverages the security of the Bitcoin network to provide economic security for POS networks, while reducing the time and cost of building a trusted network from scratch for POS chains.

A trusted Bitcoin staking protocol should have several features:

1. Security, decentralization, and censorship resistance. The protocol should offer “trustless” staking, allow delegation of staking, and support restaking.

2. Slashing. If a staker acts maliciously, their locked Bitcoin should be slashed.

3. Freely redeemable. As long as the staker adheres to the staking protocol, they should be able to freely redeem (withdraw) Bitcoin, even if all other stakers on the POS chain are dishonest. Redemption should not be subject to censorship.

To achieve these goals, the Babylon protocol has created a Babylon blockchain network compatible with Cosmos IBC, connecting the Bitcoin blockchain with IBC-compatible PoS chains and providing Bitcoin-based timestamp services. It uses “remote staking” to lock Bitcoin on the Bitcoin chain while issuing rewards on the Babylon chain. It employs Bitcoin contract emulation for staking, redemption, and slashing functions, and mechanisms like accountable assertions and finality gadgets to slash malicious users. Bitcoin timestamp protocol is used for Bitcoin redemption. Babylon has also built a platform allowing Bitcoin restaking protocols to be constructed on its network.

4.2 Protocol architecture

The main goal of the Babylon protocol’s architectural design is to provide scalability for more networks and protocols through the Babylon protocol. The architecture of the Babylon protocol is divided into three layers: 1. Bitcoin Network Layer 2. Control Layer 3. Data Layer

figure 2: Schematic diagram of Babylon protocol architecture

The Bitcoin Network Layer is the foundational layer that provides timestamps for all POS consumption chains connected to the Babylon protocol. It has four characteristics:1. High decentralization. 2. High system robustness (extremely simple), with a non-Turing complete scripting language that cannot execute complex smart contracts. 3. Uses the UTXO model for its data structure, rather than an account-based model.4. Chain security does not require staking Bitcoin to maintain it.

The Control Layer is a middleware consisting of the Babylon blockchain network, which connects the Bitcoin network, Cosmos Hub, and the Data Layer. The Babylon blockchain network is the core of the Babylon protocol’s architecture. Its consensus mechanism is POS (specifically DPOS), and its main functions include: Providing timestamp services based on the Bitcoin network for PoS chains and synchronizing the state between PoS chains and the Bitcoin chain. Running a market to match Bitcoin staking rights with PoS chains and track staking and verification information. Recording finality signatures for PoS chains.

The project has not yet disclosed the maximum number of mainnet validators, which will affect the decentralization level of the mainnet. The Babylon protocol acts as an intermediary that provides additional security for PoS networks and the Bitcoin network by writing the block headers of PoS consumption chains to the Bitcoin blockchain, ensuring that transactions within those blocks are confirmed.

The Babylon blockchain network is built on Cosmos-SDK and is compatible with Cosmos-IBC, enabling efficient aggregation of timestamps from any number of Cosmos SDK chains and data aggregation and communication between the Bitcoin chain and other Cosmos application chains. The project hints at future communication capabilities with any POS chain.

There is an IBC messaging layer between the Babylon mainnet and PoS consumption chains, consisting of IBC relayer nodes. These relayer nodes are computer nodes running relay clients that provide cross-chain messaging services, enabling communication between the Control Layer (Babylon chain) and the Data Layer (POS application chains).

The Data Layer consists of various POS consumption chains that seek to use the economic security of Bitcoin through the Babylon protocol. These POS consumption chains must meet certain conditions, including: Open IBC connections with Babylon. Validator nodes must run the corresponding Babylon protocol modules.

Comparing with Eigenlayer’s architecture, Babylon’s role is similar to Eigenlayer, serving as middleware connecting the base network and upper networks. The POS consumption chains in the Babylon ecosystem correspond to Eigenlayer’s AVS.

To illustrate, if the Bitcoin mainnet and Ethereum mainnet are compared to Android operating systems, then Babylon and Eigenlayer protocols can be compared to WeChat or Alipay, while the POS consumption chains on Babylon and AVS on Eigenlayer are analogous to mini-programs on WeChat or Alipay. The Bitcoin mainnet and Babylon together provide security for POS consumption chains, similar to how Android and WeChat provide a secure operating environment for mini-programs.

4.3 Technical implementation principles of staking contracts

4.3.1 Babylon’s staking mechanism

Staking refers to the process of locking a certain amount of tokens as a validator in a PoS or its variant blockchain network, participating in activities such as transaction validation, block production, consensus, and network security, and ultimately earning rewards. Staking also generally means locking a certain amount of tokens to earn rewards, similar to “liquidity mining” in DeFi. In this context, staking in a PoS network refers to the former, while in the Bitcoin network, which uses a PoW consensus mechanism and does not have a staking mechanism, staking refers to the latter. Since regular users cannot operate PoS blockchain network validators themselves, they often use liquid staking or delegating staking to participate in network maintenance and rewards.

The Babylon protocol allows Bitcoin holders to lock Bitcoin in a Bitcoin mainnet contract address controlled by Babylon’s multi-signature contract while providing staking validation services to other networks. The protocol will slash malicious users in the Bitcoin network and distribute rewards on the Babylon chain or PoS consumption chains. This mechanism is known as “Remote Staking.”

This remote staking method is very similar to Eigenlayer’s staking method and can be compared with Eigenlayer’s staking approach discussed previously. Babylon does not use the “lock-map-mint” cross-chain bridge model, nor does it choose to cross-chain Bitcoin to the Babylon chain for staking. Instead, it uses remote staking to avoid additional security assumptions introduced by cross-chain bridges. Remote staking eliminates the need for trust assumptions in cross-chain bridges but still does not achieve “trustlessness,” as the security of the locked Bitcoin depends on the security of the staking contract on the Babylon chain. Both staking contracts and cross-chain bridge contracts fall under the same contract-layer security level, requiring similar security assumptions.

On the other hand, Bitcoin clients verify Bitcoin transactions by executing scripts written in Bitcoin’s script language, which is a stack-based programming language and not Turing complete. Therefore, staking contracts and other smart contracts on the Bitcoin network can only be expressed through Bitcoin scripts. This requires a device to convert high-level smart contract languages into Bitcoin scripts, ultimately outputting UTXOs that can be read by Bitcoin clients and recorded on the chain.

The Babylon protocol uses a Bitcoin Covenant Emulator to execute staking contracts. Bitcoin covenants are a series of Bitcoin scripts that implement simple smart contract functions such as staking, redemption, and slashing. The Covenant Emulator is a daemon program similar to a virtual machine (VM) that provides an execution environment for Bitcoin contracts and hardware, translating contract code into Bitcoin scripts to be executed and ultimately outputting UTXOs to be recorded on-chain, thereby bringing smart contracts to the Bitcoin network and enhancing its programmability. The emulator is operated by members of the Covenant Committee. The emulator code is open source and was released and updated on February 8, 2024, and April 2, 2024.

The Bitcoin Covenant Emulator has many similarities with the Ethereum Virtual Machine (EVM) and Bitlayer’s Bitcoin Virtual Machine (BitVM). All three serve similar functions, but the core difference is that the Covenant Emulator is simpler, primarily used for restricting Bitcoin spending through preset rules, and can only implement simple smart contract functions like staking, redemption, and slashing. In contrast, BitVM and EVM are more powerful and support complex smart contracts.

The role of the committee is to protect the Babylon PoS system from attacks by Bitcoin stakers and validators through multi-signature co-signing of transactions. The public keys used for multi-signatures by committee members will be recorded in the Genesis file of the Babylon blockchain.

Currently, the project has not disclosed the identities of the committee members or the number of multi-signatures. The identities and number of committee members will be closely tied to the project’s governance plan, and the actual permissions and number of multi-signatures will impact the decentralization of the entire protocol.

4.3.2 Babylon’s reduction mechanism

To ensure security, a technical solution for shared security must allow for the punishment of misbehavior on the base chain or consumption chain, typically by slashing the staked tokens of the base chain providing security. Slashing is a penalty mechanism in PoS blockchains or protocols, where the staked tokens of a validator or token staker are fined for improper behavior. Common misbehaviors include double spending, downtime, and invalid block production. Slashing is a crucial step in maintaining network or protocol security, ensuring that validators act in the best interest of maintaining the protocol’s security rather than engaging in malicious activities.

The Babylon protocol implements automatic slashing of Bitcoin through methods such as accountable assertions and finality gadgets.

Accountable assertions are a cryptographic concept that uses EOTS (Extractable One-Time Signatures) to punish malicious signers. EOTS refers to the leakage of a private key when a signer uses the same private key to sign two different pieces of information. EOTS can be achieved using Bitcoin Schnorr signatures.

Finality gadgets are a consensus mechanism concept, which can be understood as an additional consensus protocol layered on top of the Bitcoin consensus protocol, providing extra security assurances. When a staker exhibits misbehavior (such as double spending), Babylon will send proof that leads to the leakage of the staker’s private key, resulting in the slashing and forfeiture of part or all of the staker’s Bitcoin by the Babylon protocol. This process is known as “automatic slashing.”

4.3.3 Babylon’s redemption mechanism

The Babylon protocol uses the Bitcoin timestamping protocol to facilitate Bitcoin unbonding while defending against long-range attacks. The Bitcoin timestamping protocol is a time-proof technology that allows arbitrary data to be sent to Babylon to generate Bitcoin timestamps, creating timestamps for PoS chains, thereby enhancing their integrity and security, such as protecting against long-range attacks. The timestamping protocol uses the Bitcoin blockchain as the timestamp layer, the Babylon chain as the checkpoint aggregation and data availability (DA) layer, and other PoS chains as the security usage layer.

Through the Bitcoin timestamping protocol, Babylon supports fast unbonding to maximize Bitcoin liquidity. This is an advantage of the Babylon protocol compared to other staking protocols. The unbonding time for Bitcoin will be about 1 day. This duration seems long compared to Bitcoin’s 10-minute block interval. However, it is relatively faster compared to Optimism Rollups’ 7-day challenge period, Ethereum’s approximately 10-day unbonding period, and the 21-day unbonding period in most PoS networks within the Cosmos ecosystem.

A long-range attack is a type of attack that a PoS chain might face, where an attacker creates a chain longer than the original main chain from the genesis block, altering the entire (or part of the) transaction history to replace the original main chain.

4.3.4 Babylon’s final confirmation mechanism

Finality refers to the state where transactions on a blockchain are immutable and cannot be altered. In proof-of-work (PoW) blockchains like Bitcoin, finality is probabilistic, meaning it requires the confirmation of multiple blocks to achieve finality, resulting in a longer confirmation time. In contrast, most proof-of-stake (PoS) consensus mechanism networks, including the Babylon mainnet, use economic finality, which provides faster confirmation times.

To prevent the transaction speed and finality on the Babylon network from being constrained by Bitcoin’s finality, the Babylon protocol mainnet has introduced finality provider (FP) nodes to achieve rapid finality and protect against forking attacks. FP nodes function similarly to sequencers in Ethereum Layer 2, where they validate transactions, package blocks, and sign each Layer 2 block before submitting it to the Bitcoin mainnet. With the presence of FP nodes, the finality of the Babylon mainnet is achieved within seconds. FP nodes will be operated by the FP Node Committee, running the FP Daemon program.

The decentralization and censorship-resistance of FP nodes, and how to avoid the centralization issues faced by Ethereum Layer 2 sequencers, still require further discussion. Similar to the Covenant Committee, the identity and number of FP Node Committee members will also determine the overall decentralization and censorship-resistance of the protocol.

4.4 Summary

From Babylon’s system architecture and technical principles, it is evident that the Babylon protocol does not introduce technical innovations but rather replicates protocols such as Ethereum Rollups and Eigenlayer on the Bitcoin network.

The Babylon protocol employs various technical methods to minimize the security assumptions of the protocol. However, the overall security, decentralization, censorship-resistance, and scalability of the Babylon protocol will ultimately depend on the weakest link in the entire protocol. This includes the security of the Babylon network’s consensus mechanism, staking, unbonding, and slashing contracts, the permissions and number of multi-signatures, the identity and number of the Covenant Committee and FP Node Committee, and the security of IBC relayer nodes.

Clearly, attacking the Babylon network is easier than attacking the Bitcoin network. Ultimately, the security of PoS consumption chains depends on their own security, not that of the Bitcoin network or the Babylon protocol. Therefore, the Babylon white paper’s claim of “trustless” operation still carries many implicit assumptions.

5. Ecosystem

The blockchain ecosystem refers to the collection of all elements related to a blockchain project, including the project itself and all stakeholders such as developers (project teams), maintainers (miners and validators), investors, collaborators, users, media, exchanges, and more. The number and scale of applications within a project’s ecosystem are key factors in its success. A well-developed and thriving ecosystem helps achieve positive network effects for the project and the entire ecosystem.

As of April 27, 2024, Babylon has partnered with over 60 Cosmos application chains, which will integrate with Babylon for IBC cross-chain communication once the Babylon mainnet launches. Babylon has also established partnerships with various wallet service providers, Bitcoin L2 projects, DeFi protocols, Bitcoin re-staking protocols, Rollup service providers, and other projects, which will support Babylon’s development. Notable ecosystem partners include Cosmos Hub, Osmosis, Talus, Akash Network, Injective, Sei, Stride, B Squared Network and Nubit

Bitcoin staking and re-staking protocols collaborating with Babylon include StakeStone, UniPort, Chakra, Lorenzo, and Bedrock. StakeStone is a multi-chain liquid staking/re-staking protocol building Bitcoin re-staking features based on Babylon. UniPort Network, a zk-Rollup application chain built on Cosmos SDK, is integrating Bitcoin re-staking functionality with Babylon, supporting cross-chain interoperability for assets like BRC20, Ordinals-NFT, ARC20, Runes, and RGB++. Chakra is a ZK-based Bitcoin re-staking protocol integrating with Babylon to allow Bitcoin from Babylon to be mapped to other ecosystems. Lorenzo is a Bitcoin re-staking protocol based on Cosmos Ethermint, with its core component being a Cosmos application chain. Bedrock is a multi-asset re-staking protocol on Ethereum that allows users to lock WBTC on Ethereum, mint uniBTC, and map the equivalent amount to the Babylon chain for @bedrock_defi/how-bitcoin-liquid-restaking-unibtc-works-54a7be02a248">staking rewards.

Babylon’s ecosystem is expanding beyond the Cosmos ecosystem into other areas. Once these ecosystem applications are fully deployed, it will create a “sky garden” for Bitcoin.

Babylon integrates into the Cosmos ecosystem rather than building an Ethereum Layer 2, Polkadot parachain, or Avalanche subnet for several reasons: IBC is currently the only protocol capable of securely and efficiently transmitting messages between different PoS networks and nodes; there are already over 90 existing application chains in the Cosmos ecosystem that can partner with Babylon without the need to build from scratch like Eigenlayer; and Babylon can share liquidity with other Cosmos application chains through IBC while retaining protocol autonomy, unlike in other ecosystems where some autonomy might be sacrificed.

Babylon hints at the future possibility of providing Bitcoin re-staking for any PoS chain, which will require new cross-chain messaging protocols to link other PoS chains with IBC, introducing new security assumptions. Fortunately, such new protocols are under development, such as the Composable protocol, which aims to connect Ethereum, Polkadot, Solana, NEAR, and TRON with Cosmos, and the LandslideAVAX protocol, which aims to extend IBC to Avalanche ecosystem sub-chains. The success of these projects will benefit the expansion of the Babylon ecosystem.

image 3:Babylon ecosystem map

image 3:Babylon ecosysteml diagram 2

6. Economic issues

Babylon has not yet issued a token and has not disclosed its tokenomics. Future economic models of the project may focus on the functions, supply, distribution (whether it follows a “low circulation, high inflation” model), and incentive schemes of the native $BBN token of the Babylon mainnet. Therefore, this chapter will not discuss tokenomics but will concentrate on economic issues such as Bitcoin staking yield, protocol demand, and leverage-related concerns.

6.1 Babylon’s staking yield issue

Babylon allows Bitcoin holders to lock their Bitcoin on the Bitcoin chain to provide security for POS consumer chains, which, in turn, pay a “protection fee,” often in the form of additional issuance of their native tokens as rewards. Babylon also rewards stakers. Thus, stakers’ earnings come from both Babylon’s native token ($BBN) rewards and inflationary rewards from the POS consumer chains. This is similar to EigenLayer. The yield from Bitcoin staking will depend on the amount of Bitcoin locked and the number of POS consumer chains renting Bitcoin network security via the Babylon protocol. The more POS consumer chains that connect to Babylon, the higher the Bitcoin staking yield.

According to DefiLlama, the current Bitcoin locked value exceeds $10 billion, primarily concentrated in lending, with annual percentage yields (APY) ranging from 0.01% to 1.25%, which is very low. Many of these locked Bitcoins are through cross-chain or wrapped Bitcoin solutions, adding centralized trust assumptions and technical risks. Bitcoin holders hope their idle Bitcoin can earn higher yields with lower risks and fewer trust assumptions.

Before its collapse in 2021, Celsius Network promised an 8% annual yield for Bitcoin holders, attracting participation from 43,000 Bitcoins. This highlights the strong appeal of high yields to Bitcoin holders. In fact, the primary driver of growth in the crypto market is the new users’ desire for high returns.

For most POS chains, the staking yield of their native tokens ranges between 3% and 15%, more than 50 times higher than Bitcoin’s lending yield. Currently, the staking yield for $BBTC is about 4%. Babylon’s initial staking yield is expected to be within this range, which will be a significant attraction for yield-seeking holders and is likely to greatly increase Bitcoin staking demand.

6.2 Babylon’s demand issues

Unlike Ethereum and other altcoins, there are many Bitcoin maximalists (HODLers) in the market who are not willing to use Bitcoin for DeFi activities. According to data from Coinshares last March, Bitcoin has a high rate of idleness: 25% of Bitcoin’s circulating supply has been idle for over 5 years, 67% has been idle for over 1 year, and over 66% of the circulating supply is idle. Therefore, a low staking rate could severely impact the project’s development.

On the other hand, reviewing the Lido protocol’s locked value and yield curve reveals that, after Ethereum withdrawals were opened in May 2023, despite increasing locked amounts, the yield dropped from 7% to around 4% over the year. EigenLayer is also facing a severe yield crisis. EigenLayer has over $15 billion in locked value (TVL), but the demand for AVS is less than 10% of its locked amount. This means the expected ETH staking yield will not meet expectations, and there will be a risk of capital outflow once ETH withdrawals are allowed. The Celestia protocol sells data availability (DA) services to other Rollup networks to provide economic security. The value of its native token, $TIA, comes from Rollups’ need for its security. However, Celestia’s value capture capability remains in question.

It can be argued that while shared security and liquid staking/re-staking protocols like EigenLayer are well-supplied on the supply side, the demand for security consumption must match this supply to achieve economic closure and avoid a death spiral. Thus, the long-term success of such projects depends on the increasing number of high-quality protocols willing to pay for security.

For Babylon, the key question is whether, like ETH’s liquid staking/re-staking protocols, Bitcoin staking will initially increase as the project launches; however, without sufficient staking demand, yields will inevitably decrease. When yields drop below a certain level, Bitcoin holders’ willingness to participate will diminish, leading to a bottleneck in project development, or even decline. The sustainability of the project will depend on the amount of Bitcoin staked and the yield, which will ultimately rely on the growing number of POS consumer chains and their development status. Matching the demand side of staking with the supply side will be crucial for overcoming bottlenecks, posing a long-term challenge for the project’s business expansion. The project team should also consider how to build a stronger moat to counter users’ speculative tendencies and prevent users from leaving after initial gains.

6.3 Babylon’s leverage risk

In Eigenlayer, ETH is subjected to liquid staking and secondary staking, effectively adding leverage, which amplifies both returns and risks. A similar principle applies to Babylon: by leveraging Bitcoin through staking and secondary staking, Babylon introduces leverage to Bitcoin’s price.

This minor leverage effect may not impact the price during a bull market. However, when a bear market arrives, the market will undergo a process of deleveraging and deflating bubbles. This leverage could then have a significant impact on the prices of ETH, Bitcoin, and the overall cryptocurrency market.

7. Development

The key development milestones of the Babylon project are as follows:

February 2023: The Babylon project was founded, and its Twitter account went live.

May 22, 2023: Babylon announced the completion of an $8.8 million seed round, led by IDG and Breyer Capital.

July 13, 2023: Babylon released a litepaper.

September 11, 2023: The Bitcoin staking waitlist went live.

December 7, 2023: Babylon announced the completion of an $18 million Series A round, led by Polychain Capital and Hack VC.

February 27, 2024: Binance Labs announced an investment in Babylon, amount undisclosed.

February 28, 2024: Babylon’s testnet went live, allowing users to claim its test token, Signet BTC (SBTC). The testnet implemented Bitcoin timestamp protocol and Bitcoin staking protocol. As of March 1, the cumulative number of staking test participants reached 100,000.

March 14, 2024: Through the OKX exchange, Babylon distributed 97,329 Bitcoin Staking Pioneer Pass NFTs to early testnet participants on the Polygon chain.

April 27, 2024: Babylon announced that its protocol had established partnerships with over 60 Cosmos application chains, as well as Ethereum RAAS provider AltLayer, Bitcoin L2 protocol Lorenzo Protocol, Bison Labs, Nubit, and others.

May 17, 2024: Babylon established collaborations with various project parties, including wallet service providers, Bitcoin L2, DeFi protocols, and Rollup service providers.

May 28, 2024: Babylon Testnet-4 went live.

May 30, 2024: Babylon announced the completion of a $70 million funding round, led by Paradigm with participation from 30 institutions.

Currently, the Babylon protocol is in the testing phase, with no mainnet launch date announced. There is no published development roadmap or protocol governance plan, but its governance will follow the Cosmos SDK governance rules. The tokenomics model has not been disclosed. However, from its development trajectory, it is evident that the Babylon team is continuously establishing partnerships with other projects, steadily advancing its project ecosystem, and increasing its funding, showing a promising development trend.

8. Overview of the track and its competitive landscape

The Babylon protocol operates within multiple domains, including the Bitcoin ecosystem, Bitcoin programmability, Bitcoin Layer 2, Bitcoin staking, re-staking, shared security, modularity, and the Cosmos ecosystem. This chapter will provide an overview of three selected domains.

8.1 Shared Security and Re-Staking Domain

Shared security is a technical solution that allows the security of one blockchain network to be derived from other networks. It can be understood as an underlying network “leasing” part of its security to an upper-layer network. Common shared security solutions include Avalanche’s Subnets, Cosmos’s replicated security, Polkadot’s parachains, Ethereum’s Layer 2, and Eigenlayer’s Restaking. These solutions can be categorized into two types based on their technical principles: (1) Re-Staking Solutions: This category includes Avalanche’s Subnets, Cosmos’s replicated security, Polkadot’s parachains, and Eigenlayer’s Restaking. These solutions allow a network’s validators to participate in the consensus (such as block production) of other networks.(2) Checkpoint Solutions: This category includes Ethereum’s Layer 2 and Babylon.

As mentioned earlier, the Babylon blockchain is built on the Cosmos SDK and is compatible with Cosmos IBC (Inter-Blockchain Communication), enabling it to aggregate timestamps from Cosmos SDK chains. Cosmos is a decentralized network ecosystem of independent parallel blockchains, primarily including the Cosmos Hub and over 90 IBC-compatible POS application chains. In the Cosmos ecosystem, liquidity can be shared securely and efficiently through IBC, fostering cooperation rather than competition between chains. Consequently, Babylon can synergize with other Cosmos application chains, collectively contributing to a thriving Cosmos ecosystem.

Figure 4:Cosmos ecosystem diagram

Another shared security solution, EigenLayer, has a deep connection with Babylon. It allows ETH stakers or holders of ETH liquid staking tokens (LSTs) to re-stake their LSTs in EigenLayer’s smart contracts, thereby extending the security of the Ethereum mainnet to other networks and earning additional rewards. The EigenLayer protocol itself acts as middleware between the Ethereum mainnet and AVS (Active Verification Services), with core components including restakers, operators, AVS (second-layer networks built on EigenLayer), and AVS consumer applications (Dapps built on AVS). The protocol operates as follows:

Users re-stake their BETH or LST (such as stETH, mETH, swETH, ETHx, etc.) from the Ethereum mainnet into EigenLayer operator contracts. The operators match users’ tokens with corresponding AVS (such as sidechains, DA layers, oracles, cross-chain bridges, shared sequencers, etc.), providing a secure network for these AVS while AVS pays fees to the re-staking users. If re-staking users engage in misconduct, the operator contracts will slash their re-staked tokens. Thus, EigenLayer can lease part of the Ethereum network’s security to AVS through re-staking, reducing the setup costs for the AVS network. AVS’s trust is derived from the economic security of Ethereum and EigenLayer. Honest staking behavior is rewarded, while misconduct is penalized. The value of the staked tokens determines the level of trust.

For EigenLayer middleware, the value of staked tokens (ETH) determines the level of trust. Given that Bitcoin’s value is higher than ETH, Babylon can potentially provide its PoS consumer chains with higher economic security and trust levels with the same amount of staking. In other words, for Babylon’s consumer chains, achieving the same economic security as EigenLayer’s middleware would require less inflation or fewer fees paid to stakers. This is where Babylon’s protocol holds an economic advantage over EigenLayer.

The advantages of shared security solutions include: (1) improving the security of upper-layer networks by extending part of the security of lower-layer networks or protocols; (2) enhancing the convenience of deploying new networks by building on a secure and mature network, thus enabling faster setup; (3) increasing the efficiency of capital usage by allowing token stakers to participate in the maintenance of multiple PoS chains without deploying additional capital.

In investment theory, there is a classic principle: “The higher the odds, the higher the risk,” which is also applicable here. Shared security solutions often involve trade-offs between decentralization and security. For instance, when the entire system is under high pressure, it increases global systemic risk and the risk associated with deploying contracts. Re-staking and liquid staking solutions may increase centralization risks since fewer validator nodes control both the underlying network and upper applications. Checkpoint solutions (like Ethereum Layer 2) often face risks related to sequencer failures and state validity, and withdrawal multi-signatures can further hinder Layer 2 networks’ resistance to censorship. Shared security solutions can also lead to issues like redundant development and liquidity fragmentation.

In reality, many Web3 projects exhibit a certain degree of centralization, such as Polygon POS security being decided by a 5/8 multi-sig, Lido’s node operators being selected through a whitelist system, and many protocols being initially governed by their teams.

Centralization threatens a protocol’s resistance to censorship and trustworthiness. Therefore, any blockchain and Web3 project should strive to avoid or even eliminate centralization throughout its development process, especially with Babylon’s committee and multi-sig issues. An ideal decentralized protocol should achieve decentralization across technical, economic, legal, and governance aspects.

8.2 Bitcoin Ecology and Bitcoin Layer 2 Track

For years, Bitcoin has been celebrated as “digital gold” and a “store of value,” but its limited programmability has resulted in a lack of ecosystem development and frequent criticism. The launch of the Ordinals protocol in March 2023 opened the door to Bitcoin programmability, revealing a Pandora’s box for the Bitcoin ecosystem. Following this, various standards and protocols emerged, such as BRC-20, Atomical, Runes, BRC100, SRC20, BRC420, Taproot Asset, and RGB. By April 2024, the halving of Bitcoin’s supply further fueled the development and investment surge in the Bitcoin ecosystem.

The Babylon protocol’s mainnet can be viewed as a Bitcoin Layer 2 Rollup specifically designed for staking. To date, the Bitcoin Layer 2 space has grown to include dozens of projects, flourishing in a diverse environment. Notable projects currently attracting attention include Lightning Network, Stacks, Taro Protocol, Liquid Network, B squared (B2) Network, Bitlayer, Merlin Chain, Arch Network, and Nervos Network. Stacks is an early Layer 2 smart contract platform built on Bitcoin, with operational principles similar to Ethereum Layer 2. B2 is an EVM-compatible Bitcoin Layer 2 project that introduces Turing-complete smart contracts to the Bitcoin ecosystem. Bitlayer uses BitVM-based Bitcoin Layer 2, employing layered virtual machine technology and zero-knowledge proofs to support various computations. Merlin Chain integrates ZK-Rollup, decentralized oracles, data availability layers, and fraud proofs into a Bitcoin Layer 2 solution. Arch Network is a Bitcoin-native application platform that uses a Rust-based zero-knowledge virtual machine (ArchVM) to bring smart contract functionality directly to Bitcoin. Nervos Network extends to Bitcoin Layer 2 using a custom module Cell Model for state storage and CKB-VM for transaction execution, thereby enhancing Bitcoin’s programmability.Recently, the software company StarkWare also released a video and article announcing its plan to build a STARK-based Bitcoin Layer 2 solution.

For Bitcoin Layer 2 projects, key technical metrics typically examined include protocol security, degree of decentralization, censorship resistance, scalability, execution environment (EVM compatibility), throughput, and transaction fees. The following table provides a comparative analysis of these technical metrics for several prominent Layer 2 projects.

Table 2: Bitcoin Layer2 projects Comparison of technical indicators

As mentioned earlier, from March 1, 2023, to May 31, 2024, there have been 143 funding rounds related to the Bitcoin ecosystem, with a total amount exceeding $2.3 billion. Of these, 85 funding rounds occurred after 2024, with a total amount surpassing $945.3 million. The development of these projects and the substantial funding activity directly demonstrate that the Bitcoin ecosystem is in a period of explosive growth. The emergence and launch of Bitcoin staking protocols will undoubtedly attract significant attention, establishing a strong foundation of enthusiasm and funding for Babylon’s early development.

8.3 Bitcoin staking track

In the Bitcoin staking sector, besides the previously mentioned Bitcoin restaking protocols such as StakeStone, Uniport, Chakra, Lorenzo, and Bedrock, there are other notable projects including Stroom DAO—an EVM-compatible Bitcoin restaking protocol on the Bitcoin Lightning Network; SataBTC—a Bitcoin restaking protocol based on Stacks, currently in its initial stage; Botanix—an EVM-compatible Bitcoin Layer 2 and Bitcoin staking protocol; Solv Protocol—a multi-chain yield and liquidity protocol that can convert staked WBTC on Arbitrum, M-BTC on Merlin, and BTCB on BNB Chain into yield-bearing assets solvBTC; and Pell Network—a Bitcoin staking and restaking aggregation protocol that consolidates native Bitcoin and BTC LSD services, with current integrations including Bitlayer, BounceBit, Merlin, and services on BNB Smart Chain.

Figure 5: Schematic diagram of Bitcoin ecological related projects

The BounceBit protocol is another Bitcoin staking protocol similar to Babylon and is the focus of this discussion. BounceBit’s primary function is to act as a foundational component that supports other restaking protocols and allows Bitcoin stakers to earn rewards across multiple networks, including Ethereum Mainnet and BNB Chain. Its core components include an EVM-compatible POS blockchain—BounceBit blockchain—as well as Bitcoin cross-chain bridges and oracles.

The BounceBit mainnet utilizes a dual-token staking verification mechanism, requiring stakers to lock both Bitcoin (native BTC, WBTC on Ethereum, BTCB on BNB Chain) and BounceBit’s native token $BB to participate in network validation. The locked Bitcoin is cross-chain wrapped into BBTC on the BounceBit chain. The native Bitcoin, WBTC, and BTCB are held in custody by institutions such as @bouncebit/bouncebit-explained-37c0e5bafcc8">Mainnet Digital and Ceffu. As of now, the staking yield for $BBTC is approximately 4%.

As of April 11, 2024, BounceBit has completed three funding rounds with a total amount exceeding $6 million. On May 13, 2024, @bouncebit/bouncebit-mainnet-timeline-3c0cab355878">BounceBit’s mainnet went live and an airdrop of the native token $BB was completed. By May 10, 2024, BounceBit’s TVL was around $1 billion, with a total user base of 215,480.

Comparing Babylon, BounceBit, and other Bitcoin staking protocols reveals that they share similarities in seeking to provide security for other networks through Bitcoin staking. They all serve as platforms for other projects to quickly launch and attempt to create new liquidity markets by utilizing Bitcoin’s liquidity. The core differences lie in that Babylon serves the Cosmos ecosystem while BounceBit and similar protocols are based in the Ethereum ecosystem. Babylon does not use centralized custodians, while BounceBit employs centralized custodians. Babylon’s architecture is more complex, whereas BounceBit’s is simpler and resembles mining protocols developed by centralized exchanges. For staking, BounceBit uses a cross-chain-wrapping-staking approach, while Babylon uses remote staking.

A critical question is whether the presence of so many Bitcoin staking protocols could lead to excessive fragmentation of Bitcoin liquidity. Looking at current data from ETH liquidity staking and restaking sectors, with ETH’s market cap around $452 million, liquidity staking protocols have a total locked value of about $48 billion, and restaking protocols hold around $19 billion, together accounting for roughly 1/8 of ETH’s supply. Bitcoin’s market cap is currently around $1.4 trillion, and if the Bitcoin staking market absorbs 1/10 of this value, it would generate a locked amount of $140 billion. Given the current state, it is challenging for existing staking protocols to absorb such a large locked value in the short term, suggesting that competitive pressures among Bitcoin staking protocols are currently minimal.

8.4 Summary

The Babylon protocol operates in a sector that intersects with many of the major hot sectors of the current bull market. In the Bitcoin ecosystem sector, significant funds have flowed in, with numerous projects actively developing. Babylon is leveraging this momentum for a rapid launch and has established partnerships with many protocols. In the staking sector, although there is a similar competitor in BounceBit, the two serve different ecosystems and have different technical paths, which means they are not directly competing in terms of absorbing Bitcoin’s massive liquidity. In the Cosmos ecosystem, Babylon can utilize IBC to share liquidity with other application chains, fostering mutual dependence and collectively building a blockchain internet.

9.Risk factors

9.1 Technical risks

9.1.1 Contract code security risks.

Like any new protocol, vulnerabilities can exist in the protocol client code, contract simulators, and contract code. The security of the code can only be confirmed after the protocol has been running safely for some time. On the other hand, introducing more advanced smart contracts into the Bitcoin network increases the network’s load and may even introduce systemic risks.

9.1.2 Centralization risk.

As previously mentioned, centralization can threaten a protocol’s resistance to censorship and trustworthiness. Babylon should avoid centralization issues concerning its committee and multi-signature setups, the number of mainnet validation nodes, FP nodes, and governance in the later stages.

9.1.3 Development progress is less than expected.

The project is currently in the testing phase and will require additional time before its official launch. Further maturation will take even longer. If the project fails to leverage the current Bitcoin halving hype to launch promptly and address its technical, ecological, tokenomics, and governance issues, it risks missing the bull market opportunity. This could lead to investor disappointment and negatively impact the project’s long-term development.

9.2 Market risk

9.2.1. Track narrative and logic are not recognized.

In the Bitcoin ecosystem, especially within the Bitcoin Layer2 sector, there remains considerable skepticism. From a system perspective, Bitcoin is an exceptionally simple (robust) network with a non-Turing complete scripting language, making it incapable of executing complex smart contracts. Given the existence of smart contract platforms like Ethereum and Solana, building Web3 on the Bitcoin network now seems both complex and inefficient, akin to reinventing the wheel without real progress.

Key questions that need addressing include: Is there a genuine need for Bitcoin to develop an ecosystem? Are Bitcoin Layer2 and staking innovations meaningful? Do they address actual problems? Is there a real demand? After a market cycle of bull and bear trends, how many projects in the Bitcoin ecosystem will gain market acceptance and sustain long-term growth?

Since the Bitcoin ecosystem and Bitcoin Layer2 emerged during this bull market cycle and have yet to be validated by the market, these questions and skepticism should not be overlooked.

9.2.2. Risk of insufficient demand for Bitcoin staking.

As mentioned earlier, if the Bitcoin staking rate is too low, it will significantly impact the project’s development. Moreover, over time, Bitcoin staking yields are expected to decrease. When the yield drops to a certain level, it will reduce Bitcoin holders’ willingness to participate, potentially leading the project to reach a bottleneck or enter a downward trend.

9.2.3. Babylon’s leverage risk

As mentioned earlier, Babylon will leverage Bitcoin’s price through staking and restaking. During a bear market, this leverage will have a significant impact on the project itself, Bitcoin’s price, and even the broader cryptocurrency market, and should not be underestimated.

10. Summary

Babylon aims to establish a Bitcoin staking protocol that unlocks new use cases for Bitcoin, allowing it to provide economic security to other PoS chains, much like ETH does, and thereby replicate the success of EigenLayer. If successful, the project could create a flourishing ecosystem on the Bitcoin network, akin to the “hanging gardens” or even a metropolis as implied by its name.

Babylon is involved in several key areas: Bitcoin ecosystem, Bitcoin programmability, Bitcoin Layer 2, Bitcoin staking, restaking, shared security, modularity, and the Cosmos ecosystem. The team has a strong background, significant funding, and numerous partnerships. Although currently in the testing phase, the ecosystem already shows substantial growth.

However, potential technical risks in the early stages of development and market risks in the later stages cannot be ignored.

Overall, the project is worth keeping an eye on.

References

[1] Babylon project official website,https://babylonchain.io/

[2] Babylon project technical documentation,https://docs.babylonchain.io/docs/introduction/overview

[3] Bitcoin pledge feasibility verification paper,https://arxiv.org/pdf/2207.08392

[4] Babylon protocol simplified white paper,https://docs.babylonchain.io/assets/files/Bitcoin_staking_litepaper-32bfea0c243773f0bfac63e148387aef.pdf

[5] Babylon protocol simplified white paper Chinese version,https://docs.babylonchain.io/papers/btc_staking_litepaper(CN).pdf.pdf)

[6] Bitcoin restriction emulator client Github repository,https://github.com/babylonchain/covenant-emulator/

[7] Bitcoin pledge contract technical documentation,https://x.com/babylon_chain/status/1787909109595128065

[8] Babylon project official Twitter,https://twitter.com/babylon_chain

[9] Babylon project official medium,https://medium.com/babylonchain-io

[10] Babylon research report-messari,https://messari.io/report/babylon-bitcoin-shared-security-and-staking

[11] Babylon GitHub repository,https://github.com/babylonchain/babylon/tree/dev

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