In 2024, numerous liquid restaking protocols emerged within the Ethereum ecosystem, allowing users to leverage their staked Ethereum as capital to support new proof of stake networks. There is now a growing interest in exploring methods to stake bitcoin as well. A lot of techniques are being developed to make the idle bitcoin “liquid” without having to alienate them in complex financial assets.
We will go over the latest projects in the bitcoin ecosystem. We’ll explore the latest advancements in this field and assess their benefits, drawbacks and risks.
Wrapped BTC
Bitcoin’s lack of smart contract support led to the initial idea of encapsulating Bitcoin in another token on Ethereum. This token maintains a 1:1 peg to Bitcoin’s value. It is tradable across various decentralized exchanges and can be utilized in Ethereum’s decentralized finance ecosystem. Users have the option to redeem the token for BTC at any time.
Custodial projects like cbBTC function similarly to USDT or USDC. Wrapped Bitcoin is held in custody by entities such as Coinbase. These companies are responsible for issuing and burning the wrapped tokens. They ensure that the amount of wrapped Bitcoin on chains like Ethereum corresponds 1:1 to the Bitcoin held in reserve. This model relies on on-chain proof of reserves for transparency, confirming the existence of the underlying Bitcoin.
WBTC is one of the first and largest examples. It has a market cap of around $10 billion, compared to cbBTC’s $0.5 billion market cap. However, custodial wrapped Bitcoin introduces certain risks. It includes smart contract vulnerabilities, potential insolvency of the custodial entity, and the risk of de-pegging if reserves become insufficient.
As blockchain is often synonymous to decentralization, new technologies have emerged to decentralize the storage of the wrapped Bitcoin. In the context of wrapped Bitcoin (WBTC), there have been attempts to decentralize the storage and issuance process. Newer technologies and protocols are emerging to address this centralization, aiming for more decentralized control over the Bitcoin collateral used in wrapped tokens.
Decentralized wrapped BTC
- tBTC: A decentralized protocol where Bitcoin is locked in a trustless manner, using multiple signers to manage Bitcoin collateral without a centralized custodian.
- renBTC: It allows users to mint wrapped Bitcoin on Ethereum through a decentralized network of nodes.
These systems aim to remove the reliance on a single centralized custodian by distributing the responsibility of managing Bitcoin reserves. However, decentralization in this space is still evolving and is not as widespread as centralized models like WBTC. Therefore, while decentralization efforts exist, custodial wrapped Bitcoin still dominates the space.
Babylon
Babylon allows users to stake their bitcoin to secure other chains while keeping them on bitcoin’s chain under their full custody. However, they have to provide a slashing guarantee. Whenever a malicious activity occurs, a slashing can be triggered. Babylon uses Bitcoin in self-custodial vaults for staking, and slashing penalties apply when misbehavior like double-signing occurs. If you double-sign, the network can extract your private key via Extractable One-Time Signatures (OTS), proving the violation and triggering a slashing event. Babylon likely does not penalize validators for simply going offline, as its focus is on preventing provable malicious behavior.
It is important to note that the private key exposed is the key of the validator (finality provider). It is only possible to expose the key when the validator tries to double spend by signing the same block twice at the same height. A regular user will usually delegate the validation process to a finality provider and not himself. This exposes him to slashing only, without exposing his private key and compromising his other assets. The finality provider has to be vigilant about the assets present in its account and refrain from using the same keys for validating many POS. So users can reduce their risk by not signing blocks for securing any PoS.
Risks
Since Bitcoin does support smart contracts, the design of Babylon is limited to cryptography and Bitcoin’s timestamping and scripting language. This limitation increases the risks of malfunctions and reduces the flexibility of the protocol, which uses drastic techniques such as private key exposure to ensure slashing guarantees.
Babylon is in its beginnings and the risks are real. Even if you are planning on delegating your votes, make sure to use a newly created wallet with the amount of Bitcoin you’re ready to stake and that no other BRC20 tokens are present.
Here’s a good article that explains how Babylon works. We can view Babylon as a native staked protocol for Bitcoin.
Lombard LST
You may have heard of protocols like Lombard and solvBTC, which offer Liquid Staked Bitcoin (LSBTC) solutions. These protocols issue their own liquid staking tokens, such as LBTC (from Lombard), representing Bitcoin staked via the Babylon protocol. The key benefit of holding an liquid staked Bitcoin like LBTC is that it allows users to continue earning staking rewards without locking up their Bitcoin. This token can be used in decentralized finance (DeFi) platforms to generate additional yield or swapped for other assets.
When you deposit Bitcoin into a protocol like Lombard, it stakes that Bitcoin through Babylon. In return, you receive a proof of deposit. This proof is then used to mint the LBTC token on the Ethereum network via a smart contract. However, while LBTC offers flexibility and yield opportunities, it carries certain risks. Users are still subject to the same slashing risks associated with Babylon’s staking mechanism. Additionally, there are smart contract risks involved in issuing and burning LBTC on Ethereum. as well as potential de-pegging risks.
These additional risks highlight the need for careful consideration when engaging with liquid staking protocols.
SolvBTC LST
SolvBTC is similar to Lombard with the main difference that it has a Staking Abstraction Layer that is designed to support different staking protocols such as Babylon, CoreDAO, Ethena etc… This makes it more robust since it does not depend on a single protocol like Babylon, but it adds a complexity. SolvBTC is also available on many L2s and different chains such as BNB and Avax.
Bitcoin LRT & DEFI
New protocols and DeFi platforms are evolving to offer users the ability to re-stake liquid staked Bitcoin (LSBTC). This enables them to secure additional blockchain networks while earning even more rewards. This process, called liquid restaking, allows the LSBTC—tokens like LBTC or solvBTC—to be staked again on other chains or DeFi platforms. By doing this, users can simultaneously participate in securing multiple protocols and earn additional yield from each network.
For example, a user might stake their LSBTC in a DeFi protocol that offers additional rewards for providing liquidity or securing another layer of blockchain infrastructure. This could include cross-chain staking, where a single LSBTC can help validate transactions on Ethereum, Cosmos, etc. The restaked LSBTC creates a compounding effect where users are not only benefiting from the underlying Bitcoin’s yield but also from the staking rewards and incentives provided by the additional protocols. Some platforms even provide a liquid version of the restaked token that can be further used in DEFI compounding the yield.
However, with re-staking comes the potential for additional risks, including cross-chain security vulnerabilities, increased exposure to slashing, and liquidity risks, as multiple chains rely on the same staked asset for security.For example, we can restake them in symbiotic, karak or ether.fi to earn a further yield.
Ether.fi
An example of liquid staking and restaking is eBTC offered by EtherFi, which integrates with Lombard and Babylon for Bitcoin staking. Through partnerships like Symbiotic, EtherFi allows users to restake eBTC for additional rewards while still earning staking yields. The eBTC token remains liquid and can be utilized in DeFi protocols, offering flexibility while combining both staking and restaking opportunities.
Other restaking platforms include Swell’s swbtc, eigenlayer and karak.
pStake
pSTAKE is focused on liquid staking for Bitcoin, where users can stake BTC and receive a liquid staked token (such as yBTC) in return. This allows them to earn rewards via Babylon’s security-sharing protocol while keeping liquidity. It enables users to utilize their staked Bitcoin in decentralized finance (DeFi) without locking it up fully, providing yield opportunities while securing PoS chains
Fractal
Fractal Bitcoin is a Bitcoin sidechain aimed at improving Bitcoin’s scalability while retaining its core proof-of-work (PoW) consensus. It introduces Cadence Mining, a mechanism that alternates between independent block mining and merged mining with Bitcoin to enhance security and efficiency. Fractal also supports BRC-20 tokens, enabling token creation and trading, similar to Ethereum’s ERC-20 standard. Additionally, it re-enables the OP_CAT opcode, providing limited smart contract capabilities. The network focuses on faster transactions and reduced fees.
Bitcoin Layer2
Bitcoin Layer 2 solutions, such as the Lightning Network, Stacks, and Liquid Network, aim to enhance Bitcoin’s scalability, speed, and functionality. They enable faster and cheaper transactions by moving processes off-chain while still benefiting from Bitcoin’s security. These solutions also allow for new use cases, like smart contracts and decentralized finance (DeFi), making Bitcoin more versatile.
Some of the newer Bitcoin L2s are B2, CoreDAO, CoreDAO, BOB, merlin, fuel.
Bitcoin native bridges
A key development in Bitcoin’s cross-chain space is the introduction of decentralized native Bitcoin bridges. Symbiosis recently launched a decentralized bridge that allows users to transfer and swap Bitcoin between different blockchains. Unlike traditional wrapped Bitcoin solutions, Symbiosis’ bridge uses native Bitcoin rather than tokenized representations. This provides a more seamless and decentralized process for users to move Bitcoin across ecosystems.
The bridge leverages smart contracts and a non-custodial architecture, enhancing security while maintaining decentralization. It also supports low-cost swaps and bridging for small amounts of Bitcoin. This addresses challenges like high fees and slow transaction times. This native bridge can also integrate with protocols that restake Bitcoin for additional yield, making it a versatile tool for decentralized finance.
Other bridges in the ecosystem provide similar services, with varying degrees of decentralization. For instance, projects like ThorChain have long offered decentralized swapping for Bitcoin, but Symbiosis distinguishes itself by supporting a broader range of chains and focusing on the native asset rather than wrapped tokens. These innovations mark a significant shift towards making Bitcoin more compatible with DeFi and other blockchain applications.