The Next Hot Narrative: Can Bitcoin Staking Trigger the Next Liquidity Wave?
In recent years, Bitcoin's scalability problem has remained a core topic in the blockchain space. As Bitcoin gains wider recognition as a form of digital gold, its inherent limitations have pushed market participants to continuously search for technological pathways to improve its liquidity and scalability. From sidechains and the Lightning Network to Layer 2 scaling solutions, many attempts have emerged — yet these solutions remain in the exploratory stage
In recent years, Bitcoin's scalability problem has remained a core topic in the blockchain space. As Bitcoin gains wider recognition as a form of digital gold, its inherent limitations have pushed market participants to continuously search for technological pathways to improve its liquidity and scalability. From sidechains and the Lightning Network to Layer 2 scaling solutions, many attempts have emerged — yet these solutions are still in the exploratory phase and have not achieved broad consensus or large-scale adoption.
Meanwhile, yield-bearing staking, as a creative way to put capital to work, is gradually reshaping the financial logic of the Bitcoin ecosystem. In the staking and re-staking space in particular, users unlock asset liquidity while earning additional yield by staking Bitcoin, thereby expanding Bitcoin's utility within DeFi. Especially following the launch of the Babylon mainnet, interest in re-staking has surged to new highs, with on-chain fee wars underscoring just how fiercely competitive this space has become.
On August 22, Babylon launched the first phase of its Bitcoin staking mainnet. Data from mempool.space showed Bitcoin network transaction fees spiking above 1,000 satoshis per byte at one point — a stark contrast to the sub-5 satoshis per byte that had prevailed for an extended period. According to Babylon, the 1,000 BTC staking cap for the first phase was filled in just 6 Bitcoin blocks. Data from the Babylon staking platform showed confirmed TVL from staking at 1,000.04549438 BTC, with approximately 12,720 participants in the final staking round.
Since its mainnet launch, Babylon has not only attracted significant liquidity but also prompted market participants to re-evaluate Bitcoin's capital efficiency. Through re-staking protocols, investors can optimize their capital returns without sacrificing asset security, thereby improving overall market liquidity. This model holds enormous appeal in the current market environment — particularly as on-chain transaction fees rise — with more users gravitating toward efficient re-staking protocols.
ArkStream Capital stated clearly in its report "9 Key Sectors for Web3 to Explode in 2024" that the convergence of fundamentalism and market hot spots will unleash unprecedented energy from native technologists. Unlocking Bitcoin's liquidity is an untapped gold mine. Behind the inscriptions narrative lies a wave of BTC L2 and BTC applications, with Bitcoin's latent liquidity potential forecast to be unlocked by more than 10%, positioning BTCFi to potentially reach a market exceeding $100 billion.
This article synthesizes the latest developments and outlook in Bitcoin re-staking, analyzes the financial logic behind it, and explores possible evolutionary directions and market opportunities.
Bitcoin Liquidity Staking
As a Proof of Work (PoW) network, Bitcoin relies on miners contributing computational power to maintain network consensus. However, the rapid growth of DeFi has continuously expanded Bitcoin's use cases. Liquidity staking is an emerging mechanism designed to improve Bitcoin's capital efficiency and liquidity. It allows users to lock Bitcoin in staking contracts to participate in consensus and earn yield while maintaining asset liquidity.
A key advantage of liquidity staking lies in its broad applicability within DeFi. As Bitcoin is viewed as an asset with strong economic security, a growing number of financial applications and blockchain projects are relying on Bitcoin's economic security to reinforce their own security and credibility. Liquidity tokens generated from staking Bitcoin can be used across a variety of financial applications — including decentralized money markets, stablecoins, and insurance — thereby improving capital efficiency for those applications.
Currently, implementation approaches for Bitcoin liquidity staking can be grouped into three main categories, each with its own characteristics, benefits, and drawbacks.
Solution One: On-Chain Self-Custody Model This model creates staking contracts using Bitcoin scripts and introduces advanced cryptographic techniques such as Extractable One-Time Signatures (EOTS) and timestamping protocols to ensure the safety and finality of staked assets. The core of this approach is keeping Bitcoin on its native chain while extending its security to other chains through remote staking technology. Although theoretically the most secure and preserving Bitcoin's decentralization, this approach is complex to implement and can face difficulties managing cross-chain synchronization and responsiveness. Projects like Babylon fall into this category.
Solution Two: Centralized Custodian Model In this model, Bitcoin is transferred to a regulated custodial account, and through a series of on-chain and off-chain operations, the Bitcoin assets are mapped to other blockchains. Advantages of this approach include lower implementation complexity, faster development, and a degree of asset security derived from reliance on trusted custodians. However, this model has lower decentralization, as users must trust centralized custodians — which can raise concerns around reliability and security. BounceBit is an example of this type of solution.
Solution Three: Multi-Party Computation (MPC) and Cross-Chain Bridge Custody Model This model stores Bitcoin in multi-signature wallets, using decentralized oracle networks and cross-chain bridge technology to move Bitcoin assets to other chains and tokenize them. MPC provides a certain degree of decentralization and security, while cross-chain bridges ensure asset circulation between different chains. However, the security of cross-chain bridges themselves remains a latent risk — especially with large asset volumes. Moreover, due to the upgradeability of on-chain contracts and the presence of centralized roles, the complete security of user assets still requires further validation.
All three solutions carry their own strengths and weaknesses in implementing Bitcoin liquidity staking. The on-chain self-custody model offers the highest degree of decentralization and security but is complex to implement; the centralized custodian model benefits from simplicity and operational speed but lacks decentralization; while the MPC and cross-chain bridge model balances security and decentralization but still needs to address the inherent risks of cross-chain bridges.
Babylon
Babylon is an innovative project that uses Bitcoin's native staking mechanism to provide proof-of-stake (PoS) security guarantees for other blockchains. Through cryptographic technology, Babylon enables Bitcoin staking across multiple chains, allowing BTC holders to earn on-chain yield through staking while providing economic security support for other PoS chains.
Babylon's staking process relies on cryptography rather than bridges or third-party custodians. BTC stakers initiate staking by sending a transaction with two UTXO outputs: one UTXO is locked by a timelock script, allowing the staker to unlock the BTC with their private key after the lock period; the other UTXO output is sent to a temporary Bitcoin address that meets the standard for an "Extractable One-Time Signature (EOTS)." When stakers operate nodes on a PoS chain and uniquely validate legitimate blocks, they sign them with their EOTS private key. If the staker acts honestly, they receive validator rewards from the PoS chain; otherwise, their private key can be compromised, resulting in a slash of their staked BTC. Unlike traditional cross-chain bridge models, this project's staking mechanism is implemented through "remote staking," minimizing reliance on cross-chain bridges and reducing additional security assumptions. However, the security of staking still depends on the integrity of the Babylon protocol itself — which is not fundamentally different from traditional cross-chain bridge models.
Babylon Architecture
Babylon's protocol architecture is divided into three layers: the Bitcoin network layer, the control layer, and the data layer. The Bitcoin network layer provides timestamping services for PoS consumer chains; the control layer comprises the Babylon blockchain network, connecting the Bitcoin network and Cosmos Hub while operating a marketplace to match Bitcoin staking rights with PoS chains; the data layer consists of various PoS consumer chains that use the Babylon protocol to leverage Bitcoin's economic security.
The architectural design of the Babylon protocol is similar to EigenLayer — both act as intermediary connectors between base networks and upper layers. However, what makes Babylon distinctive is its Bitcoin-based architecture, which can provide enhanced security for other blockchains. The protocol executes staking contracts through a Bitcoin covenant emulator, supporting staking, unbonding, slashing, and other functions. Its slashing mechanism penalizes malicious signers through EOTS and protocol-specific finality gadgets, ensuring network security. Furthermore, Babylon's Bitcoin timestamping protocol can provide fast withdrawal services, enhancing BTC liquidity and offering an advantage over other staking protocols.
Chakra
Chakra is a ZK-based re-staking protocol that interweaves Bitcoin with the Ethereum BTC mainnet and ETH to establish an asset settlement hub for BTC L2, deploying ChakraBTC and ChakraETH to other BTC L2s via light-client cross-chain bridge technology. Chakra provides re-staking services for PoS chains through its Settlement Consumer Service (SCS).
Chakra uses a STARK zero-knowledge proof system to verify the security of the staking process. This mechanism allows users to verify staking events off-chain, ensuring privacy and security. At the same time, Chakra's self-custody staking model achieves this through timelock scripts and multi-signature wallets, allowing users to stake without transferring their Bitcoin assets out of their wallet — thereby avoiding the security risks associated with third-party custodians.
In May 2024, Chakra announced the completion of a new funding round with participation from StarkWare, ABCDE, Bixin Ventures, Cogitent Ventures, Trustless Labs, Web3.com Ventures, and angel investors, though the specific amount was not disclosed. As a modular settlement network, Chakra can support Bitcoin mainnet staking and integrate seamlessly with other protocols. Chakra has integrated with Babylon, enabling users to stake BTC on Chakra and smoothly relay it to the Babylon mainnet, receiving staking rewards from both Babylon and Chakra's Prana rewards. The ZK-STARK staking proofs generated by Chakra also allow users to receive liquid assets on Chakra Chain, Starknet, and other chains.
Lombard
Lombard is a re-staking protocol within the Babylon ecosystem designed to drive Bitcoin adoption in DeFi and unlock its vast economic potential through LBTC — a cross-chain liquidity token backed 1:1 by Bitcoin.
LBTC achieves liquidity and yield-bearing functionality for Bitcoin within the DeFi ecosystem through a series of steps. Users first deposit native Bitcoin through Lombard. The deposited Bitcoin is then staked within Babylon's secure staking infrastructure, with Lombard managing all staking-related costs. Once Bitcoin is successfully staked, users can mint equivalent LBTC tokens on the Ethereum network. This token maintains a 1:1 ratio with the amount of BTC the user staked and is sent to the user's pre-selected Ethereum address. Even though the Bitcoin is staked on Babylon, users can continue earning staking rewards by holding and using LBTC tokens.
In July 2024, Lombard completed a seed funding round totaling $16 million, led by Polychain Capital, with participation from Foresight Ventures, Babylon, dao5, Franklin Templeton, HTX Ventures, Mirana Ventures, Mantle EcoFund, Nomad Capital, OKX Ventures, and Robot Ventures.
Lorenzo
Lorenzo is a Bitcoin liquidity finance layer built on Babylon. Lorenzo provides a straightforward way to manage Bitcoin along with security measures such as staking insurance, node operator credit scoring, slashing prevention mechanisms, and validator governance rights. Lorenzo innovatively introduces the concept of separating principal and yield in Bitcoin staking; after staking, users receive two forms of liquidity staking tokens — a Liquid Principal Token (LPT) and a Yield Accruing Token (YAT), with stBTC as the primary LPT, pegged 1:1 to native BTC. Currently, stBTC has strong adoption across various L1/L2 ecosystems, and Lorenzo plans to launch a YAT trading market in the future to allow users to trade future staking yield.
Lorenzo Cap 1 received a pre-staking cap of just 250 BTC, achieving a staking completion rate of nearly 52% with 128.6 BTC staked in the first round of Babylon. In addition to Babylon rewards and Lorenzo points, Cap 1 users will also receive a $1.5 million YAT reward (including future token airdrops from Lorenzo).
On August 31, Lorenzo officially announced the launch of phase one of its mainnet, further expanding to BNB Chain, upgrading to open BTCB staking, and refining the YAT component — allowing users to claim YAT on BNB Chain. At the same time, the pre-staking event for Babylon Cap 2 was officially kicked off, currently accepting both native BTC and BTCB staking.
Solv Protocol
Solv Protocol is a comprehensive yield distribution and liquidity layer that tokenizes various staking yields, re-staking yields, trading strategies, and more through a decentralized asset management framework to provide liquidity across different ecosystems. Since April of this year, Solv has attracted more than 20,000 Bitcoin, with over 70% of that Bitcoin locked into Bitcoin staking to generate yield. SolvBTC is the yield-bearing solution launched by Solv Protocol, whereby mainstream wrapped Bitcoins recognized across public chains — including Bitcoin held in BTC ETFs — can be minted into SolvBTC and then deployed into various Bitcoin staking options.