Dialogue with Babylon Co-founder Fisher Yu: How to Unlock the Liquidity of 21 Million BTC through Staking?

Interview: Grapefruit, ChainCatcher

Guest: Fisher Yu, Co-founder of Babylon

Editor: Nianqing, ChainCatcher

Bitcoin has surpassed $70,000, with a market capitalization nearing $1.5 trillion, overtaking silver to become the eighth largest asset globally. However, due to Bitcoin's lack of support for smart contracts, trillions of dollars in Bitcoin assets remain dormant in wallets or exchanges, existing merely as a store of value without realizing their liquidity potential.

Nevertheless, with the development and prosperity of the Ordinals protocol, the Bitcoin ecosystem has experienced a renaissance, with various applications and protocols being built around Bitcoin. The Babylon protocol is one of the standout products, unlocking Bitcoin's liquidity through staking, enhancing holders' yields, and sharing Bitcoin's security with PoS networks and related applications through extraction and decoupling.

From a product functionality perspective, Babylon is a middleware protocol based on Bitcoin, co-created by Stanford professor David Tse (referred to as David) and Dr. Fisher Yu. It introduces staking functionality to Bitcoin, allowing BTC holders to stake their assets into other protocols or services that require security and trust without the need for trust, thereby earning PoS staking rewards and governance rights. It also extends Bitcoin's security to various middleware, data availability layers, sidechains, and other protocols, enabling them to enjoy Bitcoin-level security at a lower cost.

In terms of business scope, Babylon covers two aspects: first, BTC holders can stake BTC to provide security and trust layers for other protocols; second, it allows PoS chains or new protocols or applications within the Bitcoin ecosystem to utilize BTC stakers as validation nodes, enhancing security and efficiency.

In terms of operational mechanism, Babylon is consistent with Ethereum's restaking protocol EigenLayer. In this ChainCatcher interview, Babylon co-founder Fisher Yu stated, he, David, and EigenLayer founder Sreeram Kannan (referred to as Sreeram) are friends. The two co-authored a research paper on blockchain data availability called "coded Merkle tree," and together proposed the concept of "security sharing." However, EigenLayer chose to extract Ethereum's security, while Babylon opted to extract Bitcoin's security.

"Bitcoin + Babylon" can be seen as "Ethereum + EigenLayer," but since Bitcoin does not support smart contracts, Babylon needs to take an additional step compared to EigenLayer, which is also the most challenging step from 0 to 1: making non-stakable Bitcoin stakable first, and then proceeding to Bitcoin restaking.

As of April 2, Babylon has received support from numerous well-known capital sources and has established partnerships with multiple project parties. According to the crypto data platform Rootdata, Babylon has publicly raised a cumulative amount of $26 million, with investment institutions including Polychain Capital, Framework Ventures, Polygon Ventures, Binance Labs, and other prominent capital.

On March 21, the Bitcoin data availability layer Nubit announced a partnership with Babylon, planning to leverage Babylon's technology to enhance the security of its data availability layer. On March 14, the Bitcoin-native liquidity and stablecoin DeFi protocol Yala announced integration with the Bitcoin staking protocol Babylon, allowing users to participate in Babylon's staking using Bitcoin and other assets on the Yala platform.

Additionally, on February 28, Babylon launched a staking testnet event and provided early participants with Pioneer Pass NFTs, which were highly sought after by the community. Within less than 48 hours of launch, the number of participating users exceeded 100,000.

In the ChainCatcher interview, the Babylon co-founder stated, Babylon will launch the second round of testnet activities in April-May, covering a broader audience; the mainnet will go live in Q3.

ChainCatcher invited Babylon co-founder Fisher Yu to discuss "the principles of Babylon Bitcoin staking, the development story behind it, and its relationship with EigenLayer."

The Story Behind the Development of Babylon

1. ChainCatcher: Before creating the Babylon product, what was Fisher Yu doing? What prompted you to enter the Web3 field? What experiences do you have in the Web3 industry? What are your main responsibilities at Babylon now?

Fisher Yu: Personally, I studied for my PhD at the Australian National University from 2012 to 2016, focusing on network information security. In my final year, I invented a decentralized streaming distribution protocol and patent, which I sold to Dolby Laboratories, thus beginning my journey with decentralized networks.

I then went to the University of Southern California for a postdoc, focusing on decentralized network security (i.e., blockchain security). During this time, I met Professor David Tse (referred to as David), who is also a co-founder of Babylon, and we published two important research results: one is the "coded Merkle tree," co-authored with EigenLayer founder Sreeram Kannan (referred to as "Sreeram"), which is one of the most influential results in the field of blockchain data availability; the other is polyshard, a well-known result in the field of blockchain scalability.

After six months of my postdoc, I was invited to join Dolby Laboratories to lead the development of decentralized streaming systems. While working at Dolby, I continued to collaborate with Professor David on some academic research in blockchain and large public chain project consulting, such as security upgrades, accumulating a lot of experience. At the end of 2021, we began to think about the "security sharing concept" with Professor Sreeram, providing security services from larger chains to smaller chains.

Ultimately, Professor Sreeram chose Ethereum, while David and I chose Bitcoin, aiming to create bitcoin security sharing and invented the first related protocol, founding Babylon.

Currently, I am the co-founder and CTO of Babylon, leading the engineering team.

2. ChainCatcher: What is the product positioning of Babylon? What problems does it aim to solve?

Fisher Yu: Babylon's vision is to create a decentralized world protected by the Bitcoin network. To achieve this goal, Babylon needs to build a complete set of security sharing protocols, extracting various securities from the Bitcoin network and sharing them with other decentralized systems.

Currently, Babylon has developed the Bitcoin Time Stamping protocol and the trustless Bitcoin Staking protocol. The former mainly addresses long-distance attack issues in PoS networks, significantly reducing the unbinding period for PoS staking from several weeks to one day; the latter solves the low security, high inflation, and low liquidity issues caused by PoS networks' excessive reliance on native asset staking, and activates a third use case for Bitcoin holders beyond value storage and payment (staking for yield).

In summary, Babylon is a set of protocols implemented through the Cosmos SDK.

3. ChainCatcher: On February 28, Babylon opened its staking testnet to the public and offered Pioneer Pass rewards to users who completed the staking experience. According to the original plan, this event was supposed to end on March 5. Why was the event closed early before the scheduled date? What were the results of the testnet staking operation? What issues still need improvement?

Fisher Yu: This was mainly because the Pioneer Pass NFT event not only had a 7-day time limit but also a limit of 100,000 slots, which were all claimed within just 48 hours of opening, forcing us to take the event offline early.

The issue encountered during this event was that community users repeatedly reported difficulties in claiming water (faucet), as we did not anticipate such high enthusiasm from the community. This was mainly because, in the early stages, to ensure fairness, Babylon did not provide its own faucet but instead shared Kalle Alm's faucet, the owner of the BTC Signet, a week in advance.

Although we had synchronized with Kalle Alm and his company DG Labs weeks in advance regarding the potential high traffic, the actual traffic far exceeded expectations, causing the Signet faucet website to crash multiple times, preventing many from claiming water. To address this issue, Babylon set up its own Discord faucet for everyone to use within four hours of the event launch, but due to the overwhelming traffic, many still could not claim water.

4. ChainCatcher: According to Rootdata's crypto data, Babylon has publicly raised a total of $26 million, with investment institutions including Polychain Capital, Hack VC, Framework Ventures, Polygon Ventures, IOSG Ventures, and others, as well as Binance Labs and ABCDE Capital, whose investment amounts have not been disclosed. The crypto community regards it as a "star" project favored by many. Why do you think capital is optimistic about Babylon? What memorable experiences did you have during the process of connecting with institutions?

Fisher Yu: Those who are optimistic about and support Babylon are not just simple capital but partners who have faith in a decentralized world and a long-term commitment. Babylon has solid technology and continuous innovation as its foundation, aiming to achieve the vision of a unified decentralized world. Only partners with similar aspirations are willing to move toward the goal together.

The process of connecting with institutions has left me somewhat shadowed by DD (due diligence); there are many issues in VC's due diligence that are impossible to complete.

Babylon's Product Operation Mechanism

5. ChainCatcher: The Babylon protocol not only allows BTC holders to stake Bitcoin without trusting any third party but also enables BTC holders to earn staking rewards without transferring assets out of their wallet addresses, while bringing Bitcoin's security mechanism into PoS chains. How is this technically achieved, and how does it operate?

Fisher Yu: To answer this question, we first need to understand what staking assets are and what qualifies an asset to be recognized as a staking asset.

For an asset to become a staking asset, it must meet at least two conditions: first, it must be lockable, meaning the staked asset cannot be traded or transferred; second, it must be forfeitable, meaning that when the staker attacks its staking target (usually a PoS chain), the locked assets can be forfeited.

On this basis, there are additional functional characteristics, such as delegability (PoS staking delegation), the ability to unstake at any time, partial forfeiture, and restaking.

Babylon's Bitcoin staking protocol not only meets all the conditions and characteristics mentioned above, making Bitcoin a first-class native staking asset, but also allows users to stake Bitcoin on PoS blockchains and earn rewards without having to hand over their Bitcoin to any third-party custody, bridging solution, or wrapping service, and without needing to trust any price oracle. It is truly a trustless staking solution on the original chain.

Babylon is a Bitcoin staking protocol that pioneered the concept of native Bitcoin staking.

The industry generally perceives this as impossible because Bitcoin lacks smart contracts and cannot correctly execute forfeitures. However, the Bitcoin network actually has a scripting language that allows users to define simple conditions for Bitcoin usage, which can only be executed when the conditions are met. We utilized Bitcoin's scripting language, combined with clever cryptographic techniques, to implement a protocol equivalent to a staking smart contract on Bitcoin.

For example, the Bitcoin scripting language allows for time locks, meaning users can define a lock-up period during which the Bitcoin (UTXO) cannot be transferred. For instance, if a time lock of 1000 Bitcoin blocks is placed on a Bitcoin, it will be locked for about a week, thus fulfilling the locking requirement in staking.

Additionally, the Schnorr signature algorithm supported by Bitcoin has an interesting property under specific constructions: if the signature holder signs two conflicting pieces of information simultaneously, anyone who sees these two sets of signatures can reverse-engineer the private key of that signature.

Babylon leverages this property to construct a signature that allows Bitcoin holders to lock their staked Bitcoin. Once locked, Bitcoin holders can use this signature to participate in the consensus of the PoS system. If they attack the PoS system by voting randomly during consensus participation, their Schnorr private key can be reverse-engineered by anyone, leading to the forfeiture of their staked Bitcoin.

Throughout this process, Bitcoin stakers do not transfer their Bitcoin to anyone, nor do they hand over the private key for unlocking the stake to anyone, ensuring complete trustlessness.

The above is just a simple principle; the actual construction is much more complex. Babylon will launch the BTC Staking 101 Series blog, and we welcome you to follow and learn!

6. ChainCatcher: As a user, what are the main roles and participants in Babylon? What tasks does each role handle? How can ordinary users participate?

Fisher Yu: From an ecological perspective, the roles in Babylon's ecosystem are not much different from those of other infrastructure projects, so here we will focus on the participants in the Bitcoin staking protocol.

The main participants in PoS network staking include holding users, validator nodes, wallets, etc. Once the Bitcoin staking protocol is introduced, holding users expand to Bitcoin holders, while validator nodes can choose to run validation nodes or operate finality providers supported by Bitcoin staking. Wallet providers need to seamlessly support multiple currencies, including Bitcoin and PoS native tokens.

7. ChainCatcher: What are the scenarios for utilizing Bitcoin's security in Babylon? Can you provide some specific examples to explain?

Fisher Yu: PoS systems protected by Bitcoin staking can achieve security far exceeding the market value of their native assets, thus attracting more users and value TVL.

Moreover, since holding Bitcoin itself does not provide any reliable yield, Bitcoin holders' expectations for staking rewards should be lower than those of PoS native assets. Therefore, when PoS systems provide staking rewards through inflation, the inflationary pressure aimed at Bitcoin staking will be much smaller.

8. ChainCatcher: Regarding staking platforms, especially BTC staking, holders are more concerned about the security of their assets on the platform. Previously, there have been instances where on-chain deposit and interest platforms ran away after accumulating a certain amount of assets, whether due to hacking incidents or other reasons, resulting in the loss of both earnings and principal. How does Babylon ensure the security of staked users' assets?

Fisher Yu: Aside from system vulnerabilities, most issues with these systems arise because their underlying structure requires Bitcoin holders to transfer Bitcoin to wallets controlled by third parties. Babylon's Bitcoin staking does not require this method, fundamentally eliminating the possibility of running away.

9. ChainCatcher: Besides asset security, what is the exit process for staked assets on Babylon? How long does it generally take?

Fisher Yu: Staked Bitcoin is locked on the Bitcoin network by a time lock. After the time lock expires, users can withdraw immediately at any time. Before the time lock expires, the protocol also allows for early exit.

However, to prevent stakers from immediately escaping forfeiture by exiting early after attacking the PoS chain, similar to most PoS chains, early exit for Bitcoin will have a waiting period of several days, during which the staked Bitcoin cannot participate in consensus or be withdrawn.

About EigenLayer and the Development of Bitcoin Layer 2

10. ChainCatcher: How does Babylon differ from Ethereum's EigenLayer?

Fisher Yu: EigenLayer's founder, Professor Sreeram Kannan, is a good friend of David and me. My paper on the Coded Merkle Tree in the data availability direction was co-authored with him, and security sharing was a vision and effort we jointly conceived between 2021 and 2022. Ultimately, Sreeram chose the Ethereum network, while David and I chose the Bitcoin network.

EigenLayer has achieved the evolution of ETH staking from 1 to 10: ETH can already be staked, and EigenLayer allows it to be restaked. Babylon needs to take an additional step from 0 to 1: making non-stakable Bitcoin stakable first, and then proceeding to Bitcoin restaking, achieving 1-10.

The DA layer is just one of the application scenarios that can be protected by (re)staking protocols, and many decentralized services can be realized under (re)staking.

11. ChainCatcher: According to statistics, there are already over 50 Bitcoin Layer 2 networks, with a level of competition comparable to Ethereum Layer 2. In the face of a chaotic Layer 2 market, how do you think the competitive landscape will evolve? What dimensions do you consider when selecting Layer 2 projects?

Fisher Yu: The Bitcoin ecosystem does not have a single thought leader, unlike Ethereum with Vitalik, which allows for a flourishing of ideas and voices. I hope the Bitcoin ecosystem can give rise to multiple great thoughts and directions, leading the development of the decentralized world, much like the Spring and Autumn period and the Warring States period.

Personally, I am particularly interested in projects that can genuinely benefit both the Bitcoin network and other networks, creating positive value (positive sum).