The Rise of Bitcoin
Bitcoin's ongoing adoption and maturity continues to eclipse every major asset class in YoY performance for the last 15 years. The market currently has the orange fever with increasing recognition of Bitcoin as a rules-based decentralised asset, untouched by the SEC, governments, and central bank scrutiny. This narrative has only been strengthened with the rollout of the ETFs.
Often described as 'digital gold' and 'internet money' — Bitcoin is a hybrid currency of commodity and technology. Bitcoin is now evolving further as an asset with the innovation of Bitcoin Staking. Now for the first time, Bitcoin can be used as a productive asset by capitalising on unprecedented PoS yield opportunities — improving its overall proposition for individuals, businesses, and institutional investors.
zonaris offers an institutional-grade and CO2 neutral Bitcoin Staking solution which enables you to generate yield and broaden your exposure. Let's dive in below.
A first look at Babylon: Bitcoin Staking Protocol
Let’s start by highlighting three quotes Babylon use to market their solution:
“Hold Bitcoin, Earn Altcoin Yield”
“Limitless PoS Chain Validation”
“Unlocking 21 million Bitcoin to Secure the Decentralised Economy"
Babylon offers a completely trustless approach which enables Bitcoin holders to earn secure yields from their idle Bitcoin without the need for third-party trust or transferring their Bitcoin to another chain.
Holders can lock their Bitcoin in a self-custodial manner and obtain the rights to validate PoS chains and receive yields as a return.
Babylon in the News
Renowned Van Eck researcher, Matthew Sigel forecasted a projection in his 2024 predictions titled "Remittances and Smart Contract Platforms Will Power a New Bitcoin Yield Opportunity," highlighting Babylon as a key player:
“Bitcoin holders will be given a new business opportunity in 2024 as a provider of security to Proof of Stake blockchains. Utilising projects like Cosmos-based Babylon, which will enable BTC holders to earn yield by offering non-custodial staking of PoS chains, Bitcoin holders will be able to earn yield on their Bitcoin and potentially participate in an array of other productive use cases for their BTC.”
Source: Messari - Babylon: Bitcoin Shared Security and Staking
What is the Babylon value add?
Yield: Babylon will offer Bitcoin stakers the opportunity to earn higher yields, capitalising on the substantial staking rewards available within the Cosmos ecosystem.
Trustless: Babylon operates without third-party trust, providing cryptographic proof that the staked Bitcoin is both slashable and actively staked.
Secure: Staked Bitcoins are fully protected against attacks on the underlying PoS chain.
Fast unbonding: Babylon offers shortened lock-up periods without the entry and exit queues typical of Ethereum and other PoS chains.
Two-sided marketplace: Babylon provides yield opportunities for Bitcoin holders and shared security for PoS chains.
Modularity: Babylon's protocol is flexible, capable of validating any PoS chain.
How it works — unpacking Babylon's tech
The Babylon protocol leverages advanced cryptography and the Inter-Blockchain Communication Protocol (IBC) to delegate Bitcoin's security to other networks, allowing BTC stakers to earn yields while keeping their assets on the Bitcoin mainnet.
Utilising Bitcoin's limited scripting capabilities, including the Unspent Transaction Output (UTXO) model, Babylon has introduced a concept known as Remote Staking. This feature allows Bitcoin to be locked in a self-custodial vault that can be managed — locked, staked, and unlocked — using the holder's private key. This innovation provides native staking functionality on Bitcoin without introducing centralised trust, enabling Bitcoin holders to stake their assets.
Source: Babylon one-pager - Normal path and Slashing Path
Timestamping Protocol
Babylon’s Timestamping protocol facilitates non-custodial Bitcoin staking by permitting PoS blockchains to upload data onto the Bitcoin network and access timestamps. These timestamps are crucial for safeguarding significant transactions, accelerating the unstaking process, and ensuring alignment of networks that utilise Bitcoin staking with the Bitcoin blockchain. Critical transaction hashes are collected by Babylon from participating blockchains and consolidated into a cryptographic proof, which is then recorded on Bitcoin.
Securing Any Blockchain
Currently, any blockchain protocol in the Cosmos ecosystem can take advantage of the Babylon / Bitcoin PoS validation by installing a special IBC relayer that Babylon developed. This relayer syncs the state of that blockchain with the Babylon chain and also pays for validation.
zonaris Insight
While Bitcoin itself lacks the complex capabilities of smart contracts, it does inherently support a basic scripting language. Opposite to Ethereum, which uses smart contracts, Bitcoin employs the Unspent Transaction Output (UTXO) model, where the output from one transaction serves as the input for another.
Babylon's breakthrough innovation lies in its utilisation of this scripting feature to securely lock in BTC. This process facilitates enforcement mechanisms like slashing, while ensuring that the BTC remains within the Bitcoin network and retains its non-custodial nature.
Babylon's approach cleverly leverages existing Bitcoin infrastructure to expand functionality without compromising security or ownership.
Babylon's Risks
The risks involved with Babylon’s Bitcoin staking protocol are the same as the baseline risks of validating a PoS network. If you delegate validation to a third party operator that double signs, you can be slashed. Slashing penalties for this almost never exceed 10% of your stake, depending on the network.
Your staked bitcoins remain secure as you do not need to rely on the PoS chain you are validating — it cannot access your bitcoins. Additionally, no trust is required in any smart contracts, and Babylon does not have the ability to cause loss of your bitcoins. Slashing can occur if and only if your “Babylon” validator node is involved in double signing to attack the PoS chain you are validating.
Network | Ethereum | Cosmos Hub | Polkadot | Solana | Avalanche |
Penalty | ≥3.125% | 5% | ≥0.01% | 0% | 0% |
Double signing is an extremely rare event and virtually all validator operators incorporate systems to prevent this. To date, only 0.036% of all Ethereum validators have double signed since Ethereum switched to PoS in 2020. The rates for other PoS networks are similar.
Slashing Architecture
Bitcoin Script's limited expressiveness means that simple proof of malicious activity by a staker isn't enough for Bitcoin to execute a slash. Babylon's design requires BTC stakers to use their private keys for locking, unlocking, and slashing stakes. If a staker's private key is used to sign conflicting blocks—indicative of a double-spend attack—the key is exposed, allowing the BTC to be transferred to a burn address. This exposure is facilitated through Extractable One-Time Signatures (EOTS), which are compatible with the Bitcoin blockchain via Schnorr Signatures.
How does Babylon compare to other Bitcoin solutions?
During the last bull run (2021), the topic of Bitcoin yield gained significant traction as an emerging theme. However, the predominant methods proposed involved centralised lending platforms, which ultimately faced significant setbacks with the collapse of Celsius and BlockFi. The chart below offers a comparison between these methods and alternatives such as wrapped BTC, Lightning Network, Stacks, and Babylon, providing a broader perspective on the different approaches to Bitcoin yield.
Solution | Custody | Blockchain | Yield Source | Market Risk |
|---|---|---|---|---|
Centralized lending | Celsius, BlockFi, etc. | Unknown | Unknown | Counterparty risk |
wBTC | BitGo | Ethereum | DeFi smart contracts | wBTC depeg |
sBTC | Stacks | Stacks L2 | DeFi smart contracts | sBTC depeg |
Lightning | Self-Custody | Lightning Network | Transaction fees | Premature channel closure |
Babylon | Self-Custody | Bitcoin | PoS validator rewards | None |
How does Babylon distinguish itself from EigenLayer, and why is it considered less risky?
EigenLayer, a restaking protocol on Ethereum has rapidly gained traction, recently launching its mainnet and attracting over $13 billion in Total Value Locked (TVL) by using Ethereum as a shared security asset. Babylon aims to replicate EigenLayer's success but with a significantly larger and more robust asset— Bitcoin.
Babylon operates without smart contract risk, opposite to EigenLayer with fully trustless architecture, positioning it as a potentially safer and more secure option. Babylon plans to leverage Bitcoin's $1.4 trillion market value to share security across the PoS ecosystem. This innovation arrives at a particularly exciting time, as Bitcoin gains mainstream adoption through ETFs from financial giants such as BlackRock, Fidelity, and Van Eck.
(Extract from Babylon’s Litepaper): Babylon can be viewed as an example of a cross-chain staking protocol, but there are two important differences with Cosmos mesh security and Ethereum restaking. First, in Ethereum restaking and Cosmos mesh security, the asset is already staked to secure the provider chain. In contrast, Bitcoin is secured by PoW rather than by the Bitcoin asset itself, so the Bitcoin asset is unencumbered. This reduces the over-leveraged risks that arise from restaking. Second, there are no smart contracts on Bitcoin to implement the stake slashing.
“Instead, Babylon optimises the use of the Bitcoin scripting language and use an advanced cryptographic mechanism to achieve the same goal.”
Babylon's Team
Babylon was founded by Professor David Tse from Stanford University in 2022. The team comprises Stanford researchers, experienced developers, and strategic advisors such as Sreeram Kannan (a former student of David Tse), the founder of EigenLayer.
David Tse invented the proportional-fair scheduling algorithm which reshaped cellular technology, enhancing the speed of 3G, 4G, and 5G networks worldwide. His groundbreaking work earned him two of the most prestigious awards in information sciences: the IEEE Claude E. Shannon Award and the IEEE Richard W. Hamming Medal. Notable previous recipients include pioneers like Whitfield Diffie and Martin Hellman, creators of public-key cryptography, and Andrew Viterbi, co-founder of Qualcomm and developer of CDMA technology.
David Tse's research group has collaborated with various industry blockchain projects, including the Ethereum Foundations, Protocol Labs, and Cardano. They have received over $6 million in funding in the past two years. Contributions include improving the security of the PoS Ethereum Consensus protocol launched at the Ethereum Merge.
What’s next for Babylon?
Babylon's staking protocol is currently in the testnet phase and is scheduled to transition to the mainnet following the Bitcoin halving.
zonaris’ Participation
zonaris has been participating in Babylon’s testnet from the outset and is abstracting the complexity of Babylon Bitcoin Staking with an enterprise-grade solution.
zonaris is a cutting-edge institutional staking platform known for its green, decentralised architecture that addresses the centralisation issues prevalent in Ethereum staking and other PoS networks.
We are now embarking to offer Bitcoin staking through Babylon for a range of clients, from whales to institutional investors to service providers.
Contact us to schedule a discussion about our yield-generating Bitcoin staking solutions.
Babylon in the Media
Listen to this podcast with David Tse, Founder of Babylon discussing all things Babylon.
Check out this 2-minute video featuring experts including Sreeram Kannan, EigenLayer Co-founder, discussing Babylon at the 2023 Shared Security Summit.
FAQs:
Can my Bitcoin be slashed?
Yes, similar to Ethereum staking, your Bitcoins can be slashed and is enabled through Babylon’s timestamping protocol.. However, the only scenario for slashing is an intentional action, like double signing, attacking the PoS chain. Accordingly, if you delegate validation to an external operator who double signs, you may face slashing penalties; these should typically should not exceed 10% of your stake, depending on the PoS chain(s) you choose to validate.
It’s important to note that the security of your staked bitcoins is always maintained, as you do not need to trust the PoS chain you are validating — it cannot access your staked bitcoins directly. No trust is needed in any smart contracts, and Babylon itself cannot cause you to lose your bitcoins.
What level of yield/return can be expected?
How are participants compensated — do they receive payouts in BTC or the native currency of the chain?
How is it possible for Bitcoin to remain unconverted on PoS chains and yet earn staking rewards?
Who are Babylon’s investors?
Please note: The information herein is being provided to you for general informational purposes only. It is not intended to be, nor should it be relied upon, as legal, business, or investment advice. zonaris undertakes no liability for the accuracy of the information provided nor any obligation to update this information herein.