Reconsidering the BTCFi track launched by Babylon

Author: Revc, Golden Finance

The Babylon platform has announced that its Bitcoin staking mainnet has officially launched. In the first phase, the platform set a staking limit of 1,000 Bitcoins, which has now been fully reached. According to platform data, over 12,700 users have participated in staking, with a total staking value exceeding 1,000 Bitcoins.

What is Babylon

Babylon is a protocol designed to leverage the security of Bitcoin to provide security guarantees for other PoS chains. Babylon can offer secure, non-cross-chain, non-custodial native staking solutions for PoS chains, including BTC layer2, and facilitate cross-chain interoperability. It is often likened to Eigenlayer in the Ethereum ecosystem.

Core Principles of Babylon's Operation

• Remote Staking: Utilizing Bitcoin's UTXO model and scripting system to implement staking, slashing, and rewards for Bitcoin.
• Timestamp Server: Providing immutable timestamps for events on PoS chains by recording them on the Bitcoin blockchain.
• Three-Layer Architecture: Bitcoin as the underlying layer, Babylon as the middle layer, and PoS chains as the upper layer. Babylon is responsible for recording the checkpoints of PoS chains on Bitcoin.

Advantages of Babylon

• Enhanced Security for PoS Chains: Utilizing Bitcoin's security to improve the attack resistance of PoS chains.
• Shortened Staking Cycle: Reducing the staking cycle of PoS chains through Bitcoin's timestamp mechanism.
• Promoting Cross-Chain Interoperability: Achieving seamless communication and data sharing between different blockchains.
• Bringing New Vitality to the Bitcoin Ecosystem: Activating dormant Bitcoins and introducing new application scenarios to the Bitcoin ecosystem.

Overview of the BTCFi Ecosystem

The Bitcoin ecosystem has now entered a phase of significant infrastructure development, with various parties rushing into the BTCFi track, as this track has nearly $15 trillion in assets waiting to be activated. Here are some leading BTCFi projects:

BounceBit

BounceBit integrates CeFi and DeFi to provide more flexible yield options for Bitcoin. Through liquidity custody and re-staking, users can earn yields across multiple chains.

Core Features:

• Combination of CeFi and DeFi: Deposit Bitcoin into CeFi platforms while participating in DeFi protocols to earn dual yields.
• Liquidity Custody: Offering liquidity custody services that allow users to redeem assets at any time.
• Re-staking: Allowing users to re-stake their staked Bitcoins into other protocols for additional yields.
• Technical Design: BounceBit ensures the security of cross-chain assets through a multi-layer security mechanism involving validator consensus, Mainnet Digital's custody services, and Ceffu's MirrorX technology, reducing the risk of hacking.

Solv Protocol

Solv Protocol has created a full-chain yield Bitcoin asset called SolvBTC, bringing Bitcoin liquidity into various DeFi protocols.

Core Features:

• SolvBTC: A derivative asset representing staked Bitcoin that can be used across multiple chains.
• Decentralized Asset Management: Ensuring asset security through smart contracts and multi-signature.
• Cross-Chain Interoperability: Supporting the use of SolvBTC across multiple blockchains.
• Technical Design: Concentrating various liquidity resources and investment opportunities on a single platform, allowing users to automate investments by setting trading strategy Vaults.

Yala

Yala aims to build a multi-chain stablecoin ecosystem utilizing Bitcoin's liquidity.

Core Features:

• Multi-Chain Stablecoin: Providing Bitcoin-based stablecoins that can be used across multiple chains.
• DeFi Ecosystem: Offering lending, staking, and other DeFi services.
• Modular Architecture: Flexible and scalable, supporting customizable modules.

Currently, many protocols adopt centralized security solutions, such as CeFi and multi-signature, in an attempt to maximize the activation of value flow on the Bitcoin chain. Although on-chain verification methods like UTXO ensure security through decentralization, the lack of a comprehensive smart contract system on Bitcoin makes it difficult to stimulate value flow, and on-chain verification is mainly used in the re-staking track.

Thoughts on the Bitcoin Re-Staking Track

Returning to the re-staking track that Babylon is part of, blockchain primarily shares security consensus through modular approaches. Modular blockchains provide infrastructure for other blockchains by "renting" the security, decentralization features, and value consensus of high-quality public chains like Bitcoin and Ethereum, thereby improving blockchain performance and efficiency. Currently, there are three main types of solutions:

Ethereum-based solutions:

• Advantages: High security, strong legitimacy, can directly utilize Ethereum ecosystem resources.
• Disadvantages: Throughput and cost may be lower, not suitable for all types of application chains.

New DA layer solutions (like Celestia):

• Advantages: Good performance, low cost, aiming to provide security and decentralization comparable to Ethereum.
• Disadvantages: Security and decentralization still need time to be validated, lack legitimacy, may face rejection from the Ethereum community.

Proof of Stake (PoS) shared security solutions (like Babylon, EigenLayer):

• Advantages: Inherit the legitimacy and security of Bitcoin or Ethereum, providing more practical value for their assets, high flexibility.
• Disadvantages: Relatively new, long-term performance still needs observation.

The core concept of PoS adopted by Babylon utilizes the asset value of Bitcoin or Ethereum to create shared security services. The advantage lies in inheriting legitimacy and security while providing more practical value for main chain assets, along with greater flexibility. However, this also raises a series of thoughts:

In the Ethereum network, the security responsibility of general stakers is greater than that of non-stakers, as staked ETH participates in consensus maintenance, while circulating ETH actually benefits from network security, and they also incur the opportunity cost of staking. Therefore, from the perspective of shared security, the current PoS shared solutions are below the basic Ethereum solutions unless the assets in the PoS solutions are stETH or similar, as stETH corresponds to the ETH participating in validation in the Ethereum network. Roughly speaking, if the Ethereum network is secure, other PoS networks using stETH for staking are also secure.

However, Babylon's PoW+PoS solution has an incomplete security sharing logic. First, the main personnel maintaining the security of the Bitcoin network are miners. Although miners are also driven by the value of BTC tokens, Bitcoin holders staked in the Babylon protocol do not directly maintain the security of the Bitcoin network, and thus do not directly transmit the security of the Bitcoin network to the PoS networks connected to Babylon. Here we can ponder whether the beneficiaries of security can also pass on security guarantees to others. In other words, the overall security of the PoS network is less related to the Bitcoin network and more strongly related to Bitcoin stakers, so we need to consider whether shared security is a sharing at the asset level (more like a guarantee) or at the network level.

BTC stakers or holders do not actively maintain the security of the Bitcoin and PoS networks. From the design of Babylon's first phase, the Bitcoin network appears to be passively receiving data from the PoS network, and in fact, the overall security depends more on the PoS network of Babylon itself.

From a quantitative perspective, the 1,000 Bitcoins in the first phase represent a very small share of the existing circulating supply of Bitcoin. Economically, the current PoS chains do not share the security of the Bitcoin network, and the security of shared assets is a different concept from the security of the network where the shared assets reside, which deserves further exploration.

Additionally, from a technical standpoint, how the PoS timestamps coordinate with the timestamps of Bitcoin network blocks is crucial. The Bitcoin network's block time is on the minute level, and there is some uncertainty in block time and transaction confirmation, while the finality of transaction confirmation in the PoS network is on the second level, thus creating a PoS and PoW block coordination issue.

Conclusion

The Bitcoin network is the most valuable decentralized network. Numerous projects in the BTCFi track, including Babylon, have the potential to make the Bitcoin network the cornerstone of the entire cryptocurrency industry, bringing new possibilities to the Bitcoin ecosystem.

In the development process, in addition to focusing on the inheritance of decentralization attributes, it is also crucial to pay close attention to the security of protocols and smart contracts, given the massive amount of funds involved in BTCFi projects.