Is BTCFi the biggest opportunity in the second half of the year? A detailed explanation of the Babylon ecosystem's re-staking protocol Lombard

Original Title: New Utility for Bitcoin with LBTC: The Security-First Bitcoin Primitive

Author: Lombard

Compiled by: Lyric, ChainCatcher

Editor’s Note:

Recently, BTCFi has sparked a new wave, with more and more DeFi protocols eyeing this $1.5 trillion market, contemplating how to enhance the capital efficiency of BTC.

On August 22, the first phase of the Babylon mainnet officially launched, allowing BTC holders to lock tokens on the Bitcoin network. Babylon aims to leverage Bitcoin's security to provide safety for other PoS chains while also bringing potentially massive liquidity into DeFi.

The re-staking protocol of the Babylon ecosystem, Lombard, launched its beta version on the 21st and released it the next day after Babylon's mainnet went live. Lombard's flagship product, LBTC, is a yield-bearing, cross-chain, highly liquid Bitcoin, backed 1:1 by BTC. In July, Lombard completed a $16 million seed round led by Polychain Capital.

How does Lombard utilize LBTC to drive innovation in the Bitcoin re-staking ecosystem? This article, translated from Lombard's official blog, explains how LBTC works in detail.

Introduction

Lombard is committed to driving the development of the digital economy by transforming Bitcoin's use from merely a store of value into a productive financial tool. Although Bitcoin remains the largest crypto asset globally, the value of Bitcoin exceeding a trillion dollars often remains idle, with its actual utility being quite limited compared to other digital assets. Lombard believes that connecting Bitcoin with decentralized finance (DeFi) presents a significant opportunity to change this situation.

Assuming that only 10% of Bitcoin's $1.5 trillion market cap flows into DeFi, the total value locked (TVL) in the ecosystem could more than double, catalyzing unprecedented growth and achieving sustainable market dynamics. Lombard believes this potential can be unlocked through the security-first, liquid Bitcoin primitive—LBTC.

The Current State of Bitcoin

Bitcoin has long been hailed as "digital gold," a powerful store of value and a hedge against inflation. Its decentralized nature and security make it the "leader" of cryptocurrencies, with a market cap exceeding a trillion dollars, far surpassing all other cryptocurrencies. However, while Bitcoin dominates the market, its actual utility in the broader crypto ecosystem remains relatively limited. Unlike Ethereum, Bitcoin's architecture is not easily applicable to more complex financial applications (such as DeFi), while other cryptocurrencies like USDC, USDT, and Ethereum are thriving in DeFi.

Currently, Bitcoin is primarily used for holding and transferring value, with little use for generating yield or participating in decentralized financial markets. This limitation results in many Bitcoins being idle, missing out on opportunities in the DeFi space that more flexible assets like Ethereum are capitalizing on.

What Hinders Bitcoin's Development?

One major factor hindering Bitcoin's development is its simple scripting language. Bitcoin's script is not Turing complete, meaning it cannot support complex logic or smart contracts like Ethereum. While this design enhances security and stability, it also limits Bitcoin's functionality in more advanced decentralized applications. As a result, Bitcoin cannot fully integrate into the thriving DeFi ecosystem, which requires more complex scripting and contract capabilities.

Another factor is Bitcoin's proof-of-work (PoW) consensus mechanism. While it is very secure, it requires significantly more resources and is less adaptable compared to newer proof-of-stake (PoS) systems. PoW demands substantial computational power and energy consumption, which not only limits its scalability but also restricts Bitcoin's integration with other blockchain ecosystems. The design of PoW focuses on security and decentralization but sacrifices flexibility and efficiency, limiting Bitcoin's widespread usability in the rapidly evolving crypto space.

Babylon and Lombard Bring Utility and Liquidity to Bitcoin

Now, Bitcoin's immense economic value can be used to secure PoS networks. The launch of Babylon's Bitcoin staking mainnet represents a significant milestone. Babylon enables Bitcoin to be staked in a trustless and self-custodial manner, allowing BTC holders to contribute to the economic security of various PoS systems, including PoS chains, Layer 2 (L2) aggregators, and data provision layers. By staking Bitcoin through Babylon, users can maintain complete control over their assets while earning rewards and enhancing the security of these networks. The liquidity for directly staking Bitcoin on Babylon is insufficient, which is where Lombard comes in.

Lombard's liquid Bitcoin, LBTC, can interact directly with the Babylon protocol, keeping staked Bitcoin liquid and available in the DeFi space. This integration not only unlocks new utility for Bitcoin holders—enabling them to earn yields, stake, trade, and transfer assets—but also enhances the security of PoS networks. Through Babylon, Lombard's LBTC bridges the gap between Bitcoin's immense economic value and security capabilities and the dynamic opportunities within the PoS and DeFi ecosystems, marking a transformative phase for Bitcoin in the decentralized economy.

About LBTC: A New Bitcoin Primitive

LBTC aims to expand the utility of Bitcoin for anyone, from individual holders to large institutions. It allows users to earn native yields, participate in DeFi, and maintain the security and liquidity of their assets. Here are five features associated with LBTC:

Yield-Bearing Bitcoin: Unlock Native Yields and Rewards with LBTC

If you've already experienced the benefits of platforms like EigenLayer, you'll find LBTC's yield capabilities even more compelling. BTC deposited into Lombard is staked on Babylon, allowing users to earn yields while still utilizing it in DeFi. This makes LBTC a versatile product, ideal for Bitcoin holders looking to earn passive returns through staking with low risk.

Seamless DeFi Integration: Highly Liquid and Versatile LBTC

LBTC is considered a promising DeFi collateral. It can be used with various DeFi protocols (such as Pendle, Morpho, and Gearbox) alongside Bitcoin. LBTC is designed to keep Bitcoin liquid while making it productive, thereby enhancing capital efficiency. This move may encourage Bitcoin holders to move their assets out of cold storage and participate in lending pools, yield vaults, and trading platforms for potential additional returns.

Flexibility: Cross-Chain Accessibility of LBTC

Lombard allows users to mint Bitcoin on their chosen networks and supports trustless transfers between different ecosystems. With LBTC, Bitcoin can be utilized across multiple blockchains, such as Ethereum, Solana, and Cosmos, transforming each blockchain into a Bitcoin DeFi ecosystem. By making LBTC natively available on multiple blockchain networks, Lombard unlocks Bitcoin's potential, reduces fragmented liquidity, enhances market efficiency, and enables seamless movement across ecosystems.

Security Design: Advanced Protection for LBTC

Security is a crucial component of LBTC's design, providing it with high security within the Bitcoin ecosystem. Lombard collaborates with cryptographers from Stanford University and Carnegie Mellon University to implement industry-standard key management and signature infrastructure, effectively addressing challenges related to Bitcoin's programmability. Lombard's security alliance verifies every transaction within the protocol, enhancing LBTC's security. Additionally, the architecture is further strengthened through multi-party audits and real-time security monitoring, capable of detecting and responding to potential threats before they arise.

Decentralized Infrastructure of LBTC

From the outset, Lombard has focused on building an infrastructure that minimizes trust. The security alliance structure, where multiple independent entities verify transactions on the Lombard protocol, aims to reduce the risk of single points of failure. The design of LBTC allows it to operate without trusted intermediaries, achieving transparency and community-driven governance. Due to its permissionless nature, any DeFi platform can choose to integrate LBTC without going through a centralized approval process. Moreover, the time-lock mechanism for multi-party approvals and governance decisions may help reduce counterparty risk, maintaining LBTC's stability within the ecosystem.

LBTC represents an innovation within the Bitcoin ecosystem, with functionalities that may extend beyond traditional uses. By generating yields, enhancing liquidity, and supporting decentralized networks, LBTC has the potential to transform Bitcoin's application in the digital economy. The collaboration with Lombard and Babylon signifies that Bitcoin may enter a new phase, capable of playing a greater role in the decentralized finance (DeFi) space, providing new opportunities for future growth and sustainability.

How LBTC Works

The LBTC process is as follows:

1. Deposit BTC on the Bitcoin network: Users deposit their native Bitcoin through the Lombard WebApp. Deposits can be made from any Bitcoin address or any Bitcoin wallet (including DeFi wallets, hardware wallets, or any centralized exchange).
2. After staking the deposited BTC on Babylon, Lombard will stake the Bitcoin into Babylon's secure staking infrastructure. Lombard manages all fees associated with staking on Babylon on behalf of Lombard users.
3. Mint LBTC on Ethereum: After staking, users can mint LBTC tokens equivalent to the amount of staked BTC and send them to a pre-selected Ethereum address. Since the Bitcoin remains staked on Babylon, staking rewards will be directly credited to the LBTC tokens.

LBTC can be deployed across multiple blockchain ecosystems and can be used on various chains, such as Ethereum at launch, and may eventually be used on Solana and Cosmos over time. Throughout the process of transferring and using LBTC across different networks, it will always maintain its 1:1 backing with BTC.

In summary, LBTC aims to change the way Bitcoin is utilized in the digital economy by enabling yield generation, enhancing liquidity, and protecting decentralized networks.

Currently, Lombard is implementing a phased rollout strategy to ensure LBTC is widely used across the DeFi space. Initially, LBTC will launch on the Ethereum mainnet, where most Bitcoin liquidity and blue-chip protocols currently reside. Subsequently, Lombard plans to expand LBTC to Ethereum Layer 2 networks and eventually to innovative Bitcoin Layer 2 and next-generation blockchain networks.