Cobo: BTCFi - The Best Opportunity for Developers to Reshape Bitcoin Finance

Author: Cobo Global

On August 22, the first phase of the Babylon mainnet officially launched, allowing BTC holders to lock their tokens on the Bitcoin network. For security reasons, the initial staking limit is set at 1,000 BTC, with a maximum of 0.05 BTC per stake.

Staking refers to the process where cryptocurrency holders provide tokens to support network operations and earn rewards, similar to earning interest on savings. While staking is fundamental to most blockchains, Bitcoin, as the world's most secure and highest market capitalization cryptocurrency, does not support this feature.

The launch of Babylon will change this situation, bringing Bitcoin's security and liquidity into the DeFi world, enabling a wide range of financial services such as lending and trading, thereby enhancing Bitcoin's utility.

As the underlying protocol for remote secure staking, Babylon lays the foundation for the rise and development of BTCFi. However, to fully realize its potential, developers need to build more practical applications on this foundation. This provides developers with a blue ocean to create various innovative liquid staking, re-staking, and financial management products based on the world's safest asset—Bitcoin.

In this context, Cobo's launch of the Babylon BTC Staking API technology service provides strong support for developers. This API significantly simplifies the complexity of the Bitcoin system, enabling developers to quickly access the Babylon ecosystem and easily build applications without needing to deeply understand the technical details of Bitcoin. In terms of security, Cobo employs MPC-TSS technology, providing a high-security level for private key co-management/self-management solutions, combined with enterprise-level risk control strategies and a complete workflow to ensure the safety and efficiency of the staking process. On the day of the Babylon mainnet launch, Cobo's API successfully assisted clients in staking over 742 BTC, accounting for more than 74% of the total staking volume.

The Financial Dilemma of Bitcoin

As the largest asset by market capitalization in the blockchain ecosystem, Bitcoin has long been viewed as a store of value, yet it appears relatively lacking in practical applications and yield generation. This limitation primarily stems from the scalability of the Bitcoin network and the inherent constraints of its scripting language, making it difficult to support complex decentralized finance (DeFi) applications.

For Bitcoin holders, the traditional options for earning yields on their BTC have been limited to depositing assets into centralized exchanges or using bridging services to convert them into wrapped tokens (like WBTC). However, these methods introduce additional risks, particularly the trust risks associated with centralized platforms, which contradicts the decentralized nature of Bitcoin.

The limitations of Bitcoin in the DeFi space not only restrict holders' opportunities to participate in broader financial activities but also hinder the overall development of the crypto economy to some extent. A sharp summary circulating online encapsulates this situation: "As an investment target, Bitcoin seems to have no other option but long-term holding ('hodl')."

This limitation results in a very limited variety of financial products available for investors within the Bitcoin ecosystem. Existing products are often too simplistic, lacking complex structural designs and risk hedging strategies, making it difficult to meet investors' diverse needs for returns and risks. This makes it challenging for BTC holders to participate in a wide range of DeFi activities and obtain diversified yields, unlike other crypto assets.

Babylon Makes Bitcoin Financial Management Possible

The emergence of Babylon has completely changed this situation, enabling permissionless secure staking of Bitcoin and ushering in the BTCFi era. Babylon achieves this breakthrough through the following means:

• Introducing a Unique Framework: Creating special scripts within the Bitcoin network that allow BTC holders to lock their assets.

• Cross-Chain Interoperability: Using locked BTC to enhance the security of external PoS networks.

• Maintaining Self-Custody: Users do not have to give up custody of their BTC, maintaining control over their assets.

• Creating Tokenized Versions: Enabling secure "staking" of Bitcoin within the DeFi ecosystems of Ethereum and other chains.

This permissionless Bitcoin staking mechanism changes the asset properties of BTC. It enables PoS blockchain staking without third-party custody or wrapping, enhancing the security and economic benefits of PoS systems. Holders can maintain self-custody while obtaining diversified yields by participating in a diverse DeFi ecosystem.

Thus, the era of BTC as an interest-free idle asset has ended, and it is now in a self-custodial manner.

What is BTCFi?

Like other decentralized finance systems, BTCFi is also a mapping of traditional finance on the blockchain, with main categories including:

• Lending: Users can lend Bitcoin to earn interest or use Bitcoin as collateral to borrow other assets, bringing the concept of "savings earning interest" into the cryptocurrency world.

• Staking: Although staking is traditionally associated with Proof of Stake (PoS) blockchains, Babylon enables BTCFi to support similar staking mechanisms, allowing users to lock Bitcoin to earn rewards or participate in the governance of parallel protocols.

• Exchange: Decentralized exchanges (DEX) built on BTCFi allow for peer-to-peer exchanges of Bitcoin and other cryptocurrencies without relying on centralized intermediaries.

• Yield Farming: Users can provide liquidity to BTCFi protocols and earn rewards.

The Babylon protocol, as the underlying infrastructure, enables remote secure staking of Bitcoin, introducing Bitcoin into the PoS economy and laying the groundwork for BTCFi. However, to fully unleash Bitcoin's potential in the DeFi space, having just the underlying protocol is far from sufficient; a rich variety of applications need to be built on top of Babylon.

Developers need to build robust and reliable products with user needs as the foundation. Successful BTCFi applications should focus on two core aspects:

From the user experience perspective, developers should provide an intuitive and simple staking front-end interface, allowing users to easily participate in diverse staking and earn yields. This simplified operational process can significantly lower the barriers to entry for participating in BTCFi.

In terms of investment product design, the key is to meet the diverse financial needs of Bitcoin holders of different scales. Developers should expand functionalities based on the Babylon protocol, creating solutions that allow participation in BTC staking as a unit of overall risk and return. By packaging these solutions into different yield strategies and participating in various DeFi projects on Ethereum to earn additional yields (such as providing liquidity, participating in lending, etc.), more holders can be attracted to participate, while developers can also earn fee revenues from this.

To meet the investment preferences and risk tolerance of different users, applications should offer a range of diversified risk-return options from conservative to aggressive. For example, products similar to "Bitcoin savings accounts" can be designed, allowing users to deposit and withdraw freely while enjoying stable returns. This flexibility not only increases the freedom of fund usage but also effectively avoids the minimum staking amount and lock-up period requirements that the Babylon protocol may set, enabling more ordinary users to participate.

Overview of Babylon Ecosystem Projects

Although the Babylon mainnet has just launched, the construction of its ecosystem has already begun, attracting a large number of quality projects and developers to build applications on it. The BTCFi applications within the Babylon ecosystem provide Bitcoin holders with a diverse range of investment options, from simple staking to complex yield aggregation. These applications are transforming Bitcoin from a mere store of value into a productive asset, creating more value for holders.

Cobo Babylon BTC Staking API Simplifies BTCFi Development

Cobo's Babylon BTC Staking API creates a secure and efficient development environment for BTCFi developers. This API simplifies the complexity of the Bitcoin system, allowing developers to build applications without needing to deeply understand the technical details. It provides a complete staking process interface, including deposit, withdrawal, and early unbinding operations, significantly shortening the development cycle and lowering the technical barrier.

You may wonder, since Babylon has achieved a decentralized staking solution, why should we still consider using third-party services? What role does Cobo play here?

In fact, Cobo plays a key infrastructure role in the Babylon ecosystem, primarily providing two core advantages:

• Enhanced Risk Management: For many project parties, the secure storage of initial funds is crucial. Cobo's third-party custody service effectively eliminates external and internal risks to funds, which is an important factor for project parties to consider when participating in staking.

• Lowering Technical Barriers and Providing Professional Solutions: Not all project parties have the technical capability to quickly respond to Babylon's needs. Cobo not only has a dedicated team to respond to Babylon's requirements but also offers customized technical solutions based on the Babylon BTC Staking API. This API supports key functions such as UTXO splitting, pre-signing of staking transactions, and batch broadcasting, greatly improving the success rate of staking.

Through these optimizations, Cobo's API creates a critical advantage for clients in the competitive staking landscape. When the first phase of the Babylon mainnet was activated, facing an initial staking limit of 1,000 BTC and a maximum of 0.05 BTC per transaction, Cobo's API performed excellently in a high-concurrency environment, assisting clients in successfully staking over 742 BTC, accounting for more than 74% of the total staking volume, fully demonstrating Cobo's effectiveness and reliability as a technical solution provider.

In terms of security, Cobo employs multi-party computation (MPC) technology and threshold signature schemes (TSS), providing robust self-custody asset solutions. Combined with enterprise-level risk control strategies, such as approvers, transaction limits, black and white lists, IP and frequency restrictions, it further enhances asset security.

It is worth emphasizing that Cobo's solution is fully self-custodial, allowing users to maintain complete control over their assets without needing to entrust private keys or assets to third parties. This not only enhances security but also aligns with the core principles of decentralization, allowing users to truly control their digital assets.

Through this comprehensive solution, Cobo provides developers with a secure and efficient environment, helping them quickly build applications in the Babylon ecosystem and seize the development opportunities of BTCFi.