Gathering of Experts: Analyzing BTC Halving Trends from the Perspective of New Economics

Author: Cobo

The Bitcoin halving is about to break new highs again, while the BTC ecosystem continues to develop comprehensively, with projects like Layer 2 and (Re)Staking emerging continuously. Why does Bitcoin need its own (re)staking, and what is its legitimacy? What new opportunities will arise for entrepreneurs and investors after the BTC halving? What is the market size for BTC staking? Is this a long-term opportunity or a short-term hotspot?

On the evening of May 22, Cobo, in collaboration with Deep Tide, Babylon, Lorenzo Protocol, and FBTC, launched a Space on X themed "The New Economic Script After BTC Halving," delving into this topic.

Cobo has organized the core viewpoints of the guests and shares them with Cobo's users and readers.

Participants in this event included several players and participants representing the BTC ecosystem, including Cobo co-founder and CEO, veteran miner Shen Yu; Babylon CSO Xinshu Dong, the first decentralized trustless Bitcoin staking protocol; Lorenzo Protocol Founder & CEO Matt, who provides tokenization and financial derivatives solutions for BTC restaking; and FBTC core contributor Zuki.

As participants in the BTC ecosystem and long-term practitioners, the four guests unanimously agreed that regardless of the short, medium, or long term, the BTC ecosystem harbors numerous opportunities. So, how can these opportunities be captured and meet the demand overflow from the BTC ecosystem? The guests discussed breakthroughs and opportunities in the BTC entrepreneurial track from their backgrounds and products, and provided an optimistic outlook on future potential and opportunities.

Here are the key points summarized:

• This Bitcoin halving is influenced by multiple factors, and the future market trend is uncertain. The halving mainly affects the supply side, leading to a sharp decline in miner income, significantly impacting miners using old mining machines. Miners will be forced to accelerate the upgrade of mining machines, optimize electricity costs, and shut down or relocate to low electricity cost areas. However, due to the strong risk resistance of large mining companies and traditional capital, the overall network has limited decline in hash rate.

• Bitcoin mining revenue will gradually decrease, ultimately converging to zero. In the future, the real returns from Bitcoin will come from treating it as an investment asset, investing in L2, DeFi, CeFi, and other ecosystem projects, from which holders will gain returns. This will become an important development trend in the Bitcoin ecosystem.

• Future miner revenue will come from two parts: newly issued Bitcoin and transaction fees, the latter of which depends on the activity level of the Bitcoin ecosystem. More interesting staking projects can incentivize ecosystem development, bringing more on-chain activities and transactions, enhancing network security, and increasing miners' transaction fee income.

• PoS lacks external economic incentives, and its security is limited by the scale of the on-chain economy, posing a risk of being controlled. Bitcoin staking and restaking protocols introduce large external Bitcoin assets to provide security for PoS networks, addressing its inherent flaws, which is the legitimacy of Bitcoin (re)staking.

• Cobo co-founder and CEO Shen Yu predicts: Bitcoin staking will be a multi-billion dollar market, comparable to the early days of PoW mining, meeting the future demand for secure infrastructure from high-performance application chains.

• Lorenzo Protocol CEO Matt: The four key areas that the Bitcoin ecosystem needs to focus on in the future are architecture innovation, L2 development path selection, efficient asset circulation, and security assurance.

• For ecosystem builders and entrepreneurs, in the short term, they can focus on solving congestion issues in the BTC network to meet overflow demand; in the medium term, they can pay attention to holders' income needs; and in the long term, they should aim for the potential development prospects after potential script language upgrades. It is worth noting whether more closely related application scenarios around Bitcoin will emerge in the future, whether better tools will assist Bitcoin usage, and whether there will be innovative programming models to break its non-Turing completeness.

• As an EigenLayer of the Bitcoin ecosystem, Babylon's solution addresses objective violation issues, while EigenLayer deals with subjective attacks.

What impact will the upcoming Bitcoin halving have on various participants in the ecosystem, including miners, individuals, and project parties, and what significant changes will occur in this ecosystem?

Shen Yu: The Bitcoin halving mainly affects the supply side, which will have a certain impact on various participants:

For miners: The halving leads to a sharp decline in miner income, significantly impacting miners using old generation mining machines (such as S19 Pro, M21, etc.), with marginal costs exceeding costs, forcing them to shut down or relocate to low electricity cost areas, pushing miners to accelerate the upgrade of mining machines and optimize electricity costs. However, due to the strong risk resistance of large listed mining companies and traditional financial capital entering the market, the overall network hash rate decline is limited.

For individual investors: For individual investors, the main impact is psychological and emotional, with expectations that the market may welcome a new trend in the months following the halving. However, this year, due to multiple factors such as the macro economy and Bitcoin ETFs, the market trend is uncertain.

Xinshu: This Bitcoin halving is relatively smooth. With institutional involvement, the entire market is becoming more professional and institutionalized. People are starting to think about whether Bitcoin can have other uses and sustainable returns beyond holding and mining, rather than relying solely on inflation subsidies. As the leader of the cryptocurrency industry, can Bitcoin further radiate to a broader crypto community?

Babylon's first attempt is to extend Bitcoin's security to other PoS chains. Currently, PoS chains maintain their native currency staking through high inflation, one reason being that low APY is difficult to attract holders to hold long-term.

Babylon establishes a public market that allows idle Bitcoin to participate in staking, providing security for other chains. Compared to small public chains that expect high APY, Bitcoin stakers have relatively lower APY expectations. This provides opportunities for PoS chains to introduce Bitcoin as collateral, increasing returns for Bitcoin holders while significantly reducing their own inflation.

In the long run, it is more important that Bitcoin may gain more uses and revenue scenarios, attracting more participants, not just relying on mining profits. Ecosystem projects like Babylon will bring new application scenarios to Bitcoin, making the entire ecosystem more diverse.

Matt: The Bitcoin halving occurs every four years and is a fixed trend, with mining revenue gradually decreasing and ultimately converging to zero. At that time, the real returns for holding Bitcoin will come from investing it in L2, DeFi products, CeFi products, etc., empowering these businesses, expanding the boundaries of the Bitcoin ecosystem, and bringing new returns will become a major trend.

Many Bitcoin holders and project parties are jointly promoting this trend. For example, Babylon invests scarce Bitcoin in the demand side, providing security for PoS chains or L2, allowing investors to profit from it. If Bitcoin ultimately becomes an investment asset or currency, it will require an efficient liquidity distribution market and liquidity assetization.

How do miners view staking, and what impact does it have on the overall miner revenue and network security?

Shen Yu: From the miners' perspective, staking is beneficial for the development of the Bitcoin ecosystem.

Firstly, Bitcoin itself does not need staking, but holders and miners want to obtain the benefits brought by staking. As a hard currency, Bitcoin has long been difficult to obtain native returns, while staking allows BTC holders to earn Token rewards from new projects.

Secondly, future miner revenue comes from two parts: newly issued Bitcoin and transaction fees. The latter depends on the activity level of the Bitcoin network ecosystem. More interesting staking projects can incentivize ecosystem development, bringing more on-chain activities and transactions, thereby enhancing the network security of Bitcoin.

Therefore, both miners and BTC holders hope for more staking and restaking protocols to emerge. The more prosperous the Bitcoin ecosystem, the more returns can be obtained.

What is the market size of staking? Is this a long-term opportunity or a short-term hotspot?

Shen Yu: The core issue of PoS lies in the lack of external economic incentives, with the security of its underlying assets relying on the scale of on-chain native assets, ultimately limiting security to the total scale of the on-chain economy. In a bear market, controlling network nodes may lead to the entire chain's assets being controlled.

Bitcoin staking and restaking protocols introduce large external assets unrelated to the chain, providing security for PoS networks. With the scale of Bitcoin assets exceeding one trillion dollars, continuously injecting external economic incentives into PoS networks significantly enhances security. This innovation addresses the inherent flaws of PoS's lack of externality, making it eye-catching and already beginning to take shape, with huge growth potential.

I believe BTC staking is at least a multi-billion dollar market, comparable to the early days of PoW mining. With the development of modularization, a large number of high-performance application chains requiring secure infrastructure will emerge in the future, and Bitcoin staking protocols can meet their needs.

In 2024, I will focus on the upstream and downstream related assets and targets of the restaking track. At the company level, we are also investing heavily in human and material resources to fully embrace this innovative opportunity.

For ecosystem builders, entrepreneurs, and other builders, how can they seize the opportunities presented by this BTC narrative wave? What key areas are worth participating in?

Shen Yu: In the past six months, the Bitcoin ecosystem has shown signs of innovation, stemming from over a year of bottom-up innovations like inscriptions and runes, attracting a large number of new users. The demand from new users has led to network congestion, causing overflow demand that compels us to explore better service solutions through Layer 2.

For ecosystem builders and entrepreneurs, seizing the opportunities presented by the BTC narrative wave mainly involves three stages:

• Short term: In response to the current network congestion, provide better services and solutions to accommodate the overflow demand.

• Medium to long term: A large number of Bitcoin holders hope to obtain native asset returns. Entrepreneurs can consider how to bring stable, low-risk returns to BTC holders, perhaps looking into CeDeFi and restaking applications, which represent medium to long-term opportunities.

• Long term: If the script language of the Bitcoin network can be upgraded (such as OP Code, OP_CAT, etc.), it can develop truly large-scale ecological applications under the premise of trustlessness and permissionlessness. This is a long-term prospect and an opportunity for the entire ecosystem.

In summary, focusing on network services in the short term, paying attention to holders' returns in the medium term, and aiming for ecological applications after network upgrades in the long term, all three stages present significant opportunity windows.

Matt: Overall, the Bitcoin ecosystem faces several key challenges:

• Architecture innovation: The Bitcoin architecture may need some updates to support truly decentralized on-chain settlements, such as promoting OP Code improvements to achieve more advanced functions, which would be a significant breakthrough and a milestone for all DeFi projects and BTC L2.

• L2 development path: Will there be an all-encompassing L2, or will various interoperable L2s connect through common protocol standards? Regardless, efficient circulation of Bitcoin assets is crucial, requiring efficient matching of markets, on-chain financial derivatives markets, etc.

• Security: Providing higher security at the infrastructure level and offering financial security guarantees to investors is essential. Insurance-related products can be provided on DeFi infrastructure to keep risks within acceptable limits.

In summary, architecture innovation, L2 development path selection, efficient asset circulation, and security are the key challenges facing the Bitcoin ecosystem.

What is the original intention of the Babylon protocol? Why does BTC need staking? What is the biggest difference from Ethereum's staking or restaking (like EigenLayer)?

Xinshu: The original intention of the Babylon protocol is to allow Bitcoin to participate in a broader decentralized ecosystem, providing security for other PoS chains or Layer 2 networks. By staking BTC assets, Babylon can provide a trusted and "inexhaustible" collateral asset pool for these networks, thereby enhancing their security. This differs from Ethereum's staking/restaking mechanism in several ways:

• Different purposes: Ethereum stakes for its own chain security, while Babylon provides collateral for other chains/networks;

• Different implementation methods: Ethereum aggregates in-chain smart contracts, while Bitcoin allows each user to independently stake locked in UTXO scripts, making it more decentralized.

Babylon utilizes the Bitcoin UTXO model to achieve an innovative decentralized, distributed staking architecture, fundamentally differing from Ethereum's contract pool staking model, which is a core technological innovation.

The rationale for restaking lies in the ability to punish malicious behavior by locking cryptocurrencies as collateral, thereby ensuring network security. The traditional approach is to stake native tokens, but this has issues such as a small total token supply and high inflation incentives. Babylon incorporates Bitcoin, the most secure blockchain asset, into the staking system, expanding the staking scenarios.

Why did Lorenzo choose the BTC restaking track? What is the scale of this track? What opportunities are there?

Matt: Lorenzo chose to layout the entire track because it is very optimistic about BTC restaking. The total circulation of the US dollar is about 2.4 trillion, and the debt market is about 50 trillion; while the total market cap of Bitcoin is 1.4 trillion, approximately 60% of the dollar circulation. Based on this calculation, the BTC restaking market size could theoretically reach 30 trillion dollars, offering immense imaginative space.

Essentially, BTC restaking involves lending Bitcoin liquidity, locking a portion as collateral to provide security, and recovering the principal and interest upon maturity, which is a risk-free lending behavior, similar to purchasing government bonds.

Lorenzo is addressing the first step of the problem of securitizing the principal and lending behavior. By using two asset standards, STBTC (principal) and yield tokens (interest), liquidity can be unified, and a richer financial derivatives market can be developed based on yield tokens, such as options and futures. At the same time, lending also releases a large amount of Bitcoin liquidity, which can cooperate with DeFi lending protocols, stablecoins, exchanges, etc. The asset standards can also collaborate with other restaking projects, providing additional collateral through STBTC.

What position does FBTC occupy in the BTC DeFi ecosystem?

Zuki: FBTC is an asset pegged 1:1 to Bitcoin, serving as a bridge connecting the native Bitcoin asset pool with DeFi/infrastructure projects in the Bitcoin DeFi ecosystem. As a conduit, FBTC will ensure security, allowing users to choose services and yield scenarios independently. Unlike WBTC, FBTC will explore new mechanisms to improve Bitcoin's utilization efficiency, providing ecological incentives that allow holding and trading FBTC to yield multiple returns, aiming to migrate Ethereum's yield model to Bitcoin and foster more innovation.

The Babylon protocol requires signing two transactions. If the second transaction results in the node being slashed, it may expose the private key, leading to the loss of all funds in the wallet. How is this functionality designed? Is it friendly to retail investors?

Xinshu: The penalty mechanism for Babylon BTC staking is that if a node signs two different blocks at the same block height (double signing), the private key of that node will be exposed. Once the private key is exposed, anyone can complete the missing penalty transaction signature, thus executing the penalty. It should be noted that:

• Only the node's private key is exposed, not the staker's private key.

• The node's private key is only used for block signing and does not store other assets, so even if a penalty occurs, it will not affect other assets controlled by that private key.

• Not all Bitcoin staked on the node will be penalized in the event of double signing; there are adjustable local penalty parameters.

• The penalty transaction requires a three-party signature, with two parties pre-signing, and the node party temporarily not signing. Once the node acts maliciously and exposes the private key, anyone who obtains the private key can complete the signature and broadcast the transaction.

• The reason for exposing the node's private key during double signing is that digital signatures require using different nonces (random numbers) each time. If the same nonce signs two different messages, it will compromise the signature's privacy. Babylon stipulates that nodes must use a predetermined nonce for signing at the same height; once repeated use leads to double signing, it will expose the private key.

Will existing AVS based on EigenLayer migrate to Babylon? Will there be entirely new projects on the Babylon ecosystem? What forms will these projects take?

Xinshu: The main problem that Babylon addresses is the signing of two different blocks at the same block height, referred to as the "double signing" or "equivocation" problem. This is a type of attack behavior that can lead to forks and is classified as an objective safety violation. Double signing must be implemented by nodes, as only nodes control the private keys. The key issue that Babylon addresses is this objective security threat, which occurs either on blockchains with multiple nodes and valuable data (like Cosmos chains) or on Layer 2 networks with only a single sequence.

EigenLayer deals with subjective attacks, requiring community consensus to judge, which is significantly different from Babylon's focus on "objective safety violations." Some community projects stake, such as staking BTC on Babylon to generate Liquity staking tokens, which can implement subjective slash functions.

From a technical perspective, the AVS situations faced by these types of projects are similar to those handled by EigenLayer. However, these projects focus more on AVS forms related to the Bitcoin ecosystem and applications.