Overview of Babylon

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 earning staking rewards.

Babylon enables Bitcoin to leverage its unique security and decentralization characteristics to offer economic security for other POS chains, facilitating the rapid launch of other projects and promoting the swift development of the entire ecosystem.

Babylon Leading BTC Restaking-Market Potential and Development Prospects

Two Types of Shared Security Mechanisms：

1. Bitcoin Timestamp Protocol

The Bitcoin Timestamp Protocol effectively addresses the long-range attack security challenges faced by POS chains. In such attacks, attackers, after unstaking, can return to a historical block when they were still stakers and easily initiate a forked chain to deceive the community. However, by introducing Bitcoin Timestamping through Babylon, where the historical records of the POS chain are stored on BTC with Bitcoin timestamps, even if someone tries to create a fork, the timestamp can show that it is later than the orthodox chain, thus nullifying long-range attacks.

2. Bitcoin Staking Protocol

Babylon allows Bitcoin holders to lock their assets through a specific mechanism without transferring them out of their wallet addresses. This enables them to earn staking rewards while also solving the inflation and early-stage difficulties of small and medium-sized POS chains through shared security. Staked Bitcoin has two characteristics:

• The Bitcoin is locked and immovable; you cannot sell or spend it, which is a significant feature of staked assets.
• If the POS chain is attacked, the Bitcoin will be forfeited. Through this special mechanism, Bitcoin can be locked and forfeited, meaning it becomes an asset that can be staked and forfeited, usable on any POS chain.

Addressing Pain Points

1. High Inflation

Bitcoin, as an asset, does not inherently generate stable returns. Bitcoin holders have a high demand for stable returns. By using Bitcoin as a staking asset, the issue of Bitcoin’s return stability can be addressed, while also reducing the high inflation costs incurred by chains to attract user staking.

1. Reduced Security Due to Low Market Cap

Leveraging the high market cap of the Bitcoin ecosystem, introducing Bitcoin as a staking asset can significantly enhance security levels. This can quickly improve the security of the chain, thereby attracting users to participate confidently in the ecosystem and transfer their assets onto the chain. Consequently, this increases the Total Value Locked, pushing up the chain’s market cap and creating a positive flywheel effect.

3. Features

• Trustless Protocol: One of the core advantages of the Babylon project is its completely trustless nature. If there is any requirement for trust, the project would not be considered trustless.
• Universal Middleware: Babylon aims to serve as a universal middleware, not limited to any specific POS ecosystem. Anyone can utilize Babylon to gain Bitcoin’s security.
• No Modification to the Bitcoin Network: Unlike other solutions that require a Bitcoin fork (such as BIP 300), Babylon does not require any modifications or proposals to Bitcoin itself. This reduces the complexity and difficulty of implementation, while also avoiding potential disagreements and controversies.
• Absolute Security of Principal: In Babylon, the staked principal remains secure at all times. Even if the protected POS chain or systems other than Bitcoin encounter issues, the Bitcoin within Babylon remains safe and intact. This feature, which many other protocols cannot achieve, provides users with a very high level of fund security assurance.

Current State of the BTC Restaking Ecosystem

The BTC Restaking track derived from Babylon native staking is flourishing, with numerous projects like Lorenzo, Lombard, pSTAKE, Solv protocol, and Bedrock.

Common methods of staking and restaking

• Direct Participation: Users can directly stake through the staking page on the Babylon official website.
• Participation through Professional Institutions/Projects: Users can choose a finity provider to stake BTC to Babylon through the project. The project generates staking certificates (LST) for users, which can be used to participate in other protocol activities, thereby earning higher returns.

BTC Restaking Ecosystem Projects

Lombard

Founded in April 2024, Lombard aims to unleash Bitcoin’s potential as a dynamic financial tool by connecting it with decentralized finance (DeFi). Lombard enables yield-generating Bitcoin to move cross-chain without dispersing liquidity, becoming the greatest catalyst for introducing new capital into DeFi. Its flagship product is LBTC, a yield-generating, cross-chain, highly liquid Bitcoin pegged 1:1 with Bitcoin.

Solv Protocol

An established project since 2021, initially focused on decentralized fund management. Later, it expanded to staking across different chains and currently holds approximately 20,000 BTC. Recently, Solv Protocol added Babylon’s vault as one of its product offerings.

Lorenzo

The Lorenzo protocol is a modular Bitcoin L2 infrastructure based on Babylon. By leveraging Babylon’s Bitcoin staking and timestamp protocols, Lorenzo is laying the foundation for scalable and high-performance Bitcoin application layers. Features supported by the Lorenzo architecture include enhancing Bitcoin’s scalability through BTC security modules, supporting smart contract execution, L2 as a service, and asset compatibility.

pSTAKE

The pSTAKE BTC liquid staking solution is built on Babylon infrastructure. It allows users to stake BTC and mint yBTC, a yield-bearing liquid staking derivative. The yields come from Babylon’s shared security solution, which provides security for POS blockchains while bringing additional returns.

Ecosystem Development and Outlook

Other Protocols: Symbiotic - Launched in June 2024, Symbiotic is a shared security protocol that allows network builders to create and manage their staking implementations in a permissionless manner.

Features:

• Customization: Symbiotic allows networks to customize their staking processes, types of staked assets, node operator selection, reward and slashing mechanisms, while maintaining security through non-upgradable core contracts on Ethereum.
• Flexibility: Symbiotic has become the second-largest restaking protocol after EigenLayer. Unlike EigenLayer, which centers around ETH, Symbiotic offers a wide range of staking options for greater flexibility.

Outlook

Similar to EigenLayer, which has evolved from the concept of shared network security and generating additional revenue into a large ecosystem meeting the needs of infrastructure builders and investors, Symbiotic has a promising future:

• Expansion of AVS: Introduce more AVS (Application Verification Services) to provide customized services, thereby expanding its service range and influence.
• Enhanced Security: Implement advanced security measures and auditing mechanisms, such as slashing mechanisms, to ensure AVS operations are protected from malicious attacks or vulnerabilities.
• Cross-Chain Integration: Develop cross-chain solutions to interoperate with other major blockchains, enhancing its market applicability and user base. Collaborate with more blockchain and crypto projects to achieve technical interoperability and improve overall network efficiency.
• Ecosystem Expansion: Establish partnerships with more ecosystem projects like DeFi, DAO, and NFT platforms, bringing value to these platforms through efficient restaking solutions.
• Integration of Emerging Technologies: Explore the potential of combining AI, Depin, and other emerging technologies with its infrastructure, creating new application models.

Challenges Faced by Babylon and BTC Restaking

Babylon Native Ecosystem

Supply Side:

• The number of BTC participating in staking may experience explosive growth initially, partly driven by Babylon’s airdrop incentives, attracting a large user base. However, a critical question is whether sufficient funds will continue to participate post-airdrop and if there is significant room for growth, similar to issues faced by EigenLayer.
• Once liquidity is unlocked, there may be an outflow of liquidity from the BTC ecosystem. The DeFi protocol income will need to compete with native staking returns and ETH ecosystem yields, posing a challenge to maintaining enough attraction to retain funds.

Demand Side:

• The rise of various AVS (Application Verification Services) will divide staking returns, and none are currently at the stage of providing significant yields. The future demand for AVS and whether it can sustain a large ecosystem and provide sufficient returns for users is uncertain.
• In comparison to EigenDA, if Babylon directly participates in high-yield sectors within its ecosystem, it may discourage project teams from participating in the ecosystem’s development and operation, potentially siphoning off user funds. If the platform fails to effectively manage project development and operations, it could lead to negative outcomes, reduced returns, and a continuous outflow of user funds.

Node Operators

Ensuring stable, long-term returns to incentivize ongoing participation and infrastructure development is crucial.

Challenges Inside the Ecosystem

Security: Restaking involves the reuse of staking certificates, enhancing liquidity within the ecosystem. While Babylon has a certain security advantage over some other protocols, if the scale reaches a massive level and a project’s smart contracts encounter issues, it could impact the entire ecosystem. Babylon itself requires long-term validation, and any issues could be disastrous.

Economic: The ingenuity of restaking lies in its avoidance of competition with native tokens, but this raises another value concern: whether the value of the restaked certificates matches the value of the tokens they provide. For example, if an AVS secures 10,000 BTC through restaking, the economic security it offers should ideally match the value of 10,000 BTC. However, it might only represent a portion of that value. Therefore, while restaking can enhance security and decentralization in the BTC ecosystem, its impact should not be exaggerated. The main demand for security currently appears to be from various rollups. Future interactions between rollups and Babylon could significantly impact rollup development.

Impact from ZK Technology

The rapid development of zk technology, which ensures that node tasks in the proof network are verifiable, might reduce the urgency of using restaking for security. However, zk development will take time, and integrating zk with restaking is a medium to long-term development direction.

Challenges Outside the Ecosystem

Other POS ecosystems are likely to develop their restaking protocols, but due to BTC’s unique characteristics, its security might not be threatened. However, whether Babylon can keep up with potential competitors in other aspects remains to be seen. There is already fierce competition among leading restaking protocols in various ecosystems.

*Not Financial Advice