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.
Ethereum restaking technologies are becoming increasingly complex and confusing. Since it’s one of the trending narratives, let’s break it down to understand the differences between the layers and compare the technologies.
Ethereum Native Staking
The first layer is Ethereum native staking. To become a staking validator, you need 32 ETH, a dedicated computer and a strong internet connection. Unlike Proof of Work mining (bitcoin), The hardware does not have to be powerful. The security is guaranteed by the staked 32 ETH. The validator will run specific software and be penalized for downtimes and malicious behavior.
Pooled Staking
If you don’t have 32 ETH, you have the option to delegate your ETH to a trusted validator. The validator will distribute the rewards and retain a commission. Typically, you will need to manually claim your rewards. Your tokens still belong to you since they are locked in a smart contract, and only you can initiate the withdrawal. However, you will need to trust the validator on multiple levels:
You need to trust that the validator’s smart contract is free of bugs and has undergone audits.
You must ensure that the validator will not experience downtime, as your ETH is also at risk of being slashed.
It’s important to note that it usually takes a few days for your tokens to be available after unlocking them.
Liquid Staking (LST)
Liquid staking is an advanced form of pooled staking. Instead of your tokens being locked, they are sent to a common pool within the smart contract. You receive a liquid version of ETH (LST token, for example, eeth), representing your share in the pool. You can unstake at any time by sending your LST back to the smart contract and receiving your original ETH in return. There is a short unlocking period, but if you don’t want to wait, you can swap your LST for ETH on a DEX. The main advantage is that your tokens, although staked, remain liquid. You can reuse them in DEFI.
A commission of the rewards is kept by the protocol, and the rest is sent to the common pool. This means you don’t have to claim your reward and pay network fees; the rewards accrue directly in the value of your LST. Over time, the value of 1 LST becomes greater than 1 ETH. Most LSTs are available on layer 2 networks, which helps you save on network fees.
Mantle Eth: They have a new campaign going on in 3 days!
Restaking (LRT):
Restaking involves reusing the Ethereum validator infrastructure and resources to simultaneously secure new networks. Validators use custom software to secure multiple networks, earning additional yield using the same hardware and power. New decentralized blockchains seeking a stable and secure network for their proof of stake needs can utilize this service for a modest fee, as opposed to establishing their own network of validators from scratch. So we can view restaking as a shared security layer.
By restaking your ETH, you receive a token in return (Liquid restaked token – LRT) and earn additional yield from the new protocols in addition to your native Ethereum restaking. Most LST providers automatically restake your initial staked ETH, allowing you to benefit from restaking advantages. LST providers may collaborate with various restaking providers to optimize your yields.
Top LRT platforms:
EigenLayer Eigenlayer is the first restaking protocol. For now, it only supports the Ethereum mainnet and allows you to restake ETH, most established LSTs as well as its governance token EIGEN.
Symbiotic: Symbiotic is a direct competitor to Eigenlayer. It accepts different tokens as a collateral and offers networks seeking security the choice of different vaults, each vault having its own security strategy. Mellow finance partnered with Lido to create vaults on symbiotic to compete directly with Eigenlayer. If you want to participage in Symbiotic airdrop, you can check Ether.fi’s super symbiotic vault.
Karak is an emerging competitor with strong backing. It supports many chains including Layer2s and a full basket of tokens. You can use the following referal codes (absd6, Egi8A, XNC6A, PXmRT)
Mitosis
Mitosis is neither an LST nor an LRT. This may be confusing because when you deposit your LST (Etherfi eETH), you receive miweETH in return (Mitosis LST). However, Mitosis will not use your LST for restaking (security layer) purposes. Instead, Mitosis functions as a liquidity layer (Ecosystem-owned liquidity). It acts as a vault and seeks out opportunities in DEFI to maximize profits. With substantial liquidity, it can access custom deals that regular users cannot. Additionally, users can participate in governance to vote on future proposals for strategies.
Zircuit
We will talk briefly about Zircuit since it might be confused as and LRT. Zircuit in fact is a Layer2 solution (AI based) and when you restake your LST with Zircuit, it’s for the purpose of securint the Zircuit network.
Risks
Projects are evolving rapidly, with new concepts emerging daily. Protocols are teaming up to stay ahead of the curve and all this might be confusing for the average user. It’s important to consider the risks associated with each project before getting involved. The risk is very real – at the end of the day, you are giving up your ETH for some LST which is nothing but an ERC20 “pegged” to ETH based mostly on trust. While you can unstake and receive your original ETH back, there’s a possibility of a smart contract bug locking your deposit or the value of LST decreasing on the secondary market for various reasons. So if you use your LST in DEFI you might be at risk of liquidation. A lot can go wrong, so conducting thorough research is crucial.
So you missed ZKsync’s airdrop although you made sure to check all the boxes. You bridged from Ethereum’s main net, kept a minimum balance of .005 ETH, interacted with many protocols. You ensured to use paymaster, paid some network fees and got nothing. Without getting too technical, the main criteria for ZKSync was Time Weighted Average Balance. In short what mattered the most is how much you bridged and how long you kept it there. Sounds easy, but who would have guessed! Bridging an extra 100$ and keeping it a a liquidity pool could have made all the difference. Most farmers are discouraged and want to quit crypto farming altogether. This is one of the risks of farming, we put a lot of effort and money with no guarantees in return. Each project is free to choose how to manage its airdrop and we must be ready for everything.
Our option is to find the next project which might have a better distribution and is more promising. Let’s have a look at the upcoming opportunities that are in line.
Zksync ecosystem
Before removing your liquidity from zksync, double check if you have some points in in the ecosystem’s dapps. It might be worth continuing to farm these projects as some of them like Syncswap promised to distribute part (or all) of their ZK token allocation back to their communities.
Zyfi has an active campaign where you can earn points by doing basic activities, like swapping using paymaster and. You can also earn points by interacting with different protocols. It’s easy to track your progress, however there’s no leaderboard so it’s hard to estimate how you’re doing compared to others. Make sure not to push a lot of “spam” transactions and do your own research before using such protocols, the risks are not negligible.
You can also check KZ. KZ is a meme coin that rewards all farmers of zksync that did not qualify for the airdrop. While it’s hard to assess its future value, you can at least see if you qualify for some points already. It is also backed by major players.
Scroll & Linea
Scroll and Linea both have active campaigns that are competing directly with each others. Their goal is to attract the most liquidity to their ecosystem. On Linea, you can earn liquidity experience points LXPL by depositing selected assets on specific platforms. It’s not clear how the LXPL compares with LXP, the basic experience points that you were able to earn in linea park. You can track your progress and compare your metrics with others on a dashboard provided by Openblock. As of today, you can still farm Linea. However, you should be aware that LXPL points will decrease as the campaign advances and it will end when the TVL reaches 3b.
Scroll has a similar program where you earn “sessions” if you provide specific assets. You can track your sessions here. For now, you can earn sessions just by holding assets. Later on, you can earn sessions by providing liquidity and it will be retroactive. It’s important to note that you do not earn sessions anymore for transactions fees, so pushing transactions will not earn you points.
While both projects are comparable to zksync, make sure it’s not too late before jumping in.
Taiko
Taiko’s initial airdrop was somewhat similar to Zksync. A lot of farmers were excluded although they made sure to transact on all the test nets (there were many!) and participated in Galxe quests. However, only the top 300k wallets received an airdrop.
At first, Taiko dismissed the Galxe quests as being simply for educational purposes. However for season 2, they decided to give users retroactive points retroactively for previous Galxe quests. Season 2 is much more structured that season 1 where you had to use many Testnets, never sure how many transactions you should push. In season 2 you can track your points, check the leaderboard and claim your Galxe points.
If you decide to remove your assets from Zksync to Taiko, you can optimize each transaction to qualify for many airdrops at the same time. By using a combination of 0xastra and orbitrer.finance, you can earn points on 0xastra, orbitrer, taiko and KZ depending on the route.
0xastra is a new GameFi experience powered by Orbitrer. You can earn points and complete quests interactively by bridging assets. If you ever used orbitrer, you can claim points on 0xastra retroactively, so it’s a good idea to check them out.
As usual, always do an extensive research before using any projects.
In this article, we will go over the concepts of liquidity layer and explore what differentiates Elixir.
Price discovery in liquidity pools
Decentralized exchanges use an automated market maker (AMM) model to facilitate trades. Instead of relying on order books, users trade against liquidity pools that contain reserves of various tokens. These pools are automated by smart contracts, adjusting token prices based on supply and demand.
For pools with low liquidity, this can be problematic since a large trade can affect the supply and demand metric of that specific pool, while the price of that token remains stable on the overall market. This phenomenon is known as “slippage”. Slippage occurs when a trade is executed for a larger size than the liquidity available in the pool. In such cases, the price of the token can deviate from the market price as the trade absorbs the available liquidity in the pool. So a token price can vary from a pool to another and it creates arbitrage opportunities. Traders monitor different pool and can buy low on a platform and sell high on another, which will stabilize the price across the platforms.
Prevention mechanisms
Decentralized exchanges such as Uniswap implement a constant product market maker mechanism. This ensures that the tokens pair quantities in a liquidity pool stays consistent. Consequently, when the price of one token rises from increased demand, its pool quantity decreases while the other token’s quantity rises. This regulates the price automatically. Other mechanisms include offering incentives for providing liquidity, multiple pools for the same pairs and advanced trading features like limit orders.
While these methods assist in reducing the impact of slippage to a certain degree, decentralized exchanges still face some challenges in offering liquidity and price stability compared to centralized exchanges. Traders and liquidity providers must assess these aspects before engaging in trading and providing liquidity on DEXes.
Aggregation Platforms
Various platforms like 1inch consolidate liquidity from multiple DEXes and liquidity pools, enabling traders to tap into increased liquidity and potentially reduce slippage by dividing orders among various providers.
While these platforms helps users automatically find the best prices the basic problem remains low liquidity.
Elixir liquidity layer
Elixir is a DeFi protocol that specializes in offering an infrastructure for liquidity provision and management. What differentiates Elixir from other liquidity layers such as Uniswap is its dynamic liquidity provision model. Elixir focuses on efficiency and optimization. The protocol dynamically adjusts rewards based on market conditions and liquidity needs, incentivizing liquidity provision where it’s most needed. By dynamically adjusting rewards and liquidity allocations, the protocol aims to maximize liquidity utilization and improve overall market efficiency. Elixir is natively integrated with many leading decentralized exchanges and orderbook exchanges.
Currently, Elixir have an airdrop program where you earn potions for providing liquidity. You can provide liquidity on ethereum mainnet or on arbitrum/SUI by using their native integration with dexes.
Here’s the documentation, make sure to understand all the risks included in supplying liquidity as many layers of smart contracts are involved.
The first generation of defi applications allows users to swap various tokens without the need for traditional intermediaries like exchanges. It enables users to trade tokens directly from their cryptocurrency wallets through smart contracts. Users can become liquidity providers by depositing pairs of tokens into liquidity pools. In return, they earn fees from trades.
This is an efficient way for users to earn a yield on assets they already own, however there’s the risk of impermanent loss. If a token price drops significantly , the liquidity provider ends up holding the asset with the least value. Most of the defi protocols now lets the users specify the price ranges they are comfortable with. If these prices are exceeded, the user exits the pool automatically. While this helps protect from impermanent loss, it takes more management and monitoring. When a users exits the pool automatically, he stops earning yields. The users have a choice to enter managed pools where a 3rd party would rebalance and manage the pool for a small fee.
Pool managing tools
New tools like Aperture helps users to manage pools from different providers. It offers an “intent” infrastructure where users declare their goals and the platform executes them. It offers automatic rebalancing strategies, automatic fee compounding and much more. There is an airdrop campaign ongoing where you can earn points while interacting with the protocol. We recommend doing an extensive research before using the platform. You need to understand the smart contract risks associated and understand how the “position permit” signatures work. Here’s an example of a rebalancing.
Most DEFI platforms incentivize user for locking their assets. Most DEFI protocols allow users to borrow against their collateral, however borrowing APY can be very high and if a user lends a stable coin versus a variable asset, he’s at risk of liquidation risk, so he has to constantly check the health factor. This concept encourages users to lock their assets and discourages micro transactions.
Fluidity aims to solve this problem by allowing users to convert their assets to their “fluid” counterpart. Fluidity protocol automatically invests the native assets in DEFI apps like Compound or Solend. Assets can also be used in in yield generating strategies. When a fluid asset is converted back to the native asset, the latter is removed from the defi protocols.
To encourage transactions, fluidity distributes the rewards when a user uses fluid assets. A random factor in calculating the reward is added to incentivize users while protection mechanisms are in place to prevent transaction spamming.
Project outlook
The basic concept is good, however it might be too abstract for the average user. We can see the layers of smart contract risks is piling up since fluidity uses other protocols for yield generation. There’s also a risk of loss in defi investing strategies which might depeg the ratio of 1:1 of fluid assets. A full review of how the native assets are lent out should be done if you plan to convert a sizeable amount. You can review the full documentation.
The project is audited and for now, there’s still a lot of centralization. The centralization is mostly at the level of the defi protocol configuration, large rewards are reviewed before distribution. So the project is still very dependent on the team. This helps to stabilize the project as it moves towards decentralization.
Airdrop potential
The governance token of fluidity FLY is already issued. It is mostly used as a governance token, but it is planned to be used as a utility token. For now it can be staked and used in vaults. The FLY token was dropped in 2 “waves” and a 3rd “wave” is currently ongoing.
You can earn “loot bottles” convertible to FLY token for the next 74 days by staking FLY and you can earn a multiplier by transacting FLY and FUSDC on selected platforms like jumper.exchange
You can check their airdrop campaign and don’t forget to do your own research before jumping on board.
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