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In summary
- Bitcoin staking, a feature once exclusive to proof-of-stake Cryptocurrency networks, is quickly becoming a reality thanks to Babylon.
- Babylon allows HODLers to lock up their BTC to secure and earn yield from multiple staking-based blockchains at the same time, with significant implications for Bitcoin’s layer-2 networks.
- Babylon launched Phase 1 of its staking mainnet, initially limiting the system to 1,000 BTC, sparking a fee war between users to process their staking deposits.
Bitcoin staking, a feature once the sole privilege of proof-of-stake cryptocurrency networks, is quickly becoming a reality.
Thanks to Babylon, HODLers can now lock up their BTC, which will soon be used to secure and earn yield from multiple staking-based blockchains at the same time. While this has huge implications for the entire cryptocurrency economy, its consequences may be felt most strongly in an ecosystem that is just getting started: Bitcoin’s layer-2 networks.
“Bitcoin L2s are definitely a very important part of our customers,” said David Tse, co-founder of Babylon, in an interview with Decrypt. “Bitcoin staking becomes a mechanism by which L2s can gain security from Bitcoin.”
Since the emergence of the Bitcoin Ordinals protocol in early 2023, development and experimentation activity in Bitcoin has seen a marked renaissance. In particular, after Robin Linus introduced the “BitVM” computational framework in October last year, a flood of new models for Bitcoin decentralized layers have arrived on the scene.
The term “Bitcoin L2” is used informally, but is generally understood to mean a system that is built “on top of Bitcoin.” Whether it complements Bitcoin, inherits its decentralization and security, or uses BTC as its currency, or some combination of the three.
Babylon adjusts that understanding to include security backed by the BTC asset, not just the network.
“Bitcoin L2s are a very important source of demand for us,” Tse said. “They want to get liquidity from Bitcoin, and they want to get security from the most secure chain in the world.”
The co-founder said he is already in talks with Build On Bitcoin (BOB), a hybrid Ethereum and Bitcoin L2 solution, to potentially introduce Bitcoin staking on the network.
To clarify, Babylon’s Bitcoin staking functionality does not require a “wrapped” or transferred version of BTC on a separate Blockchain. All staked coins are locked on layer-1 and are fully controlled by their owners’ Bitcoin private keys.
Earlier this month, Babylon launched Phase 1 of its staking mainnet, opening the floodgates for users to lock up their BTC for future staking. Initially, the team limited its system to hold up to 1,000 BTC, which was far below the demand Babylon had already built up for its product.
This triggered an on-chain race and fee war between users to see their staking deposits processed first, which significantly increased the Bitcoin network transaction fees far more than even the team expected.
“The 1,000 Bitcoin limit is mainly for security reasons,” Tse said. “We expect that as the limit increases, the competition in terms of the gas war will become less.”
Compared to Altcoin chains, the co-founder said that accessing Bitcoin staking will be much easier. Unlike Ethereum, Babylon’s staking model allows validators to handle the technical burden of running the network and providing security. Additionally, while Ethereum requires at least 32 ETH ($80,800) for solo staking, Babylon imposes no minimums other than the cost to process the transaction.
After that, a user’s Bitcoin will be able to generate what Babylon calls a secure yield, potentially on multiple blockchains at once. The only risk involved would be the risk of staking at the protocol level, if the validator you trust with your staking behaves dishonestly.
Theoretically, a protocol like Babylon could put hundreds of billions of dollars worth of BTC that is currently sitting idle to work, strengthening its current role as a store of value asset.
When asked whether BTC staking could pose a competitive threat to the value of altcoins that once had this functionality over BTC, Tse offered a more optimistic outlook. He said Babylon could save proof-of-stake chains from the need to quickly dilute their native assets to keep their systems secure, by securing their networks using BTC capital instead.
“It’s very expensive to attract people to buy the native asset in order to provide staking,” he explained. “They end up paying a very high yield. So it’s very detrimental to the tokens of these projects.”
Tse predicts a future where Bitcoin staking is as popular as it is on Ethereum, where roughly 28% of the circulating supply is currently staked. However, that staked capital would still be available through liquid staking tokens, with which stakers can still access other emerging Bitcoin applications, such as lending, borrowing, and trading.
“I think that’s why staking is a fundamental use case for an asset,” he concluded, “and that’s why we’re excited to offer this to the largest asset.”
Edited by Ryan Ozawa
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