BTC Staking Track: Liquidity Released from BTC

BTC has long been positioned as digital gold, recognized for its rarity, while ETH is widely used for its functionality and utility. Bitcoin's development has always been limited by on-chain performance and functionality support. Since its issuance, ETH has steadily increased its market value by relying on ecosystem development.

The earliest Bitcoin scaling solutions mainly focused on increasing block size and introducing off-chain scaling technologies like the Lightning Network. Each solution had its pros and cons, sparking extensive discussions and controversies within the Bitcoin community. Eventually, Segregated Witness and the Lightning Network became the primary scaling directions for Bitcoin, while the block size increase solution resulted in alternative coins like Bitcoin Cash through hard forks.

After the emergence of Ordinals and Rune, the powerful wealth effect attracted a large number of active on-chain users, bringing the topic of BTC scaling back into the spotlight. Despite addressing the need for asset issuance, BTC, using a non-Turing complete language, still cannot meet more extensive computational needs. After Ethereum's DeFi Summer, the community began to look forward to the possibilities of innovating by unlocking Bitcoin's liquidity.

Under these two factors, many BTC-based protocols have emerged, aiming to bring value to other ecosystems with BTC and provide long-term revenue channels for BTC holders.

BTC Staking Track

The BTC ecosystem is taking shape, with development heading in two directions: scaling and empowering. The scaling direction focuses on enhancing Bitcoin's performance through Layer 2 solutions, with main protocols like Merlin Chain, B² Network, and Bitfinity Network. Empowering involves leveraging BTC's security or liquidity to provide long-term “hibernating” BTC with yields beyond price fluctuations, with main protocols like Babylon chain, BounceBit, and Yala.

From the current development of the Bitcoin ecosystem, it is evident that Bitcoin's ecosystem development direction heavily borrows from Ethereum's successful experiences. The difference lies in the Ethereum Foundation's continuous support and guidance for its ecosystem development, while the Bitcoin community remains divided on BTC's positioning. Whether to continue as “digital gold” or to empower BTC remains undecided within the community.

Regardless of Bitcoin Layer2's development status, given BTC's current market value—exceeding $1.35 trillion and accounting for over 50% of the entire crypto market—the potential market size for BTC LSD is enormous. Since Bitcoin's ecosystem development borrows from Ethereum's development path, reviewing Ethereum's data to estimate BTC's potential DeFi scale and unlocked liquidity is of certain reference value.

Potential Market Space

After “The Merge,” Ethereum's consensus mechanism transitioned from PoW to PoS, natively supporting staking $ETH to earn network protection yields.

Currently, ETH's market value is about $381.3 billion, with a circulation of approximately 120 million tokens. The amount currently staked is 33.7 million, accounting for 28.15% of the total circulation.

Of the 33.7 million staked ETH, 29% is held by top protocol.

Based on corresponding proportions, in an ideal state, BTC's top LSD protocols would achieve about 16.1 million BTC staked, amounting to approximately $103.2 billion at the current BTC price.

Note, this is just a rough estimate. Since BTC LSD protocols are not officially supported and their security and rationality are debatable, this figure is far from ideal. More detailed projections should consider factors like protocol security, market acceptance, and staking yield rates.

Related Protocols

Currently, DeFi protocols on BTC are in their early stages. Here are some project introductions:

Babylon

Babylon is an infrastructure/universal middleware for Bitcoin security sharing. The team developed two security sharing mechanisms: the Bitcoin timestamp protocol and the Bitcoin staking protocol, to share Bitcoin's security with PoS chains or Layer 2 in a trustless and self-custodial way, earning corresponding security returns while significantly reducing their own inflation.

Lorenzo

Based on Babylon, Lorenzo allows Bitcoin holders to convert BTC to stBTC, participate in Bitcoin staking, and earn rewards without locking funds. Lorenzo divides the Liquid RestakingToken (LRT) into a Liquidity Principal Token (LPT) and a Yield Accumulation Token (YAT), planning to build interest rate swaps, lending protocols, structured BTC yield products, and stablecoins in the future. The project focuses on creating an efficient Bitcoin liquidity allocation market and liquidity tokenization.

BounceBit

BounceBit has built a BTC re-staking infrastructure, a PoS Layer 1 secured by validators staking BTC and its native token. Through a CeFi + DeFi framework, BounceBit enables BTC holders to earn yields from multiple sources. Using a dual-token system of native token BB and BTC, with full EVM compatibility, BounceBit also supports interoperability with EVM-compatible chains, integrating and merging assets like BTCB on BNB Chain and ERC-20 tokens like WBTC. This diversifies BTC use cases and enhances user participation.