Moderator: Peng SUN, Researcher at Foresight News
Guests: Blue Wharf, core contributor of StakeStone; Jeff, founder of Merlin Chain
Around March 25, StakeStone announced that it had received investments from Binance and OKX, and recently launched an airdrop activity, which was extremely popular. At the same time, StakeStone also announced a strategic partnership with the BTC Layer2 network Merlin Chain, and will release interest-bearing BTC "mSTONEBTC" and officially incorporate BTC liquidity into its full-chain liquidity distribution network. Foresight News invited Blue Wharf, a core contributor of StakeStone, and Jeff, the founder of Merlin Chain, to talk about how StakeStone will expand into the BTC ecosystem and StakeStone's airdrop plan.
Host: First, please let the guests introduce themselves and their respective projects.
Blue Wharf (StakeStone core contributor): Hello everyone, I am Blue Wharf from StakeStone. StakeStone is a full-chain liquidity distribution protocol. The main service is liquidity, including the main liquid assets in the market. Before the rise of the Bitcoin ecosystem, the main liquid asset in the market was Ethereum. Then, during the development of the Bitcoin ecosystem, we realized the potential of BTC as a new liquid asset. Based on the vision of liquidity distribution, we chose to make full compatibility and support for Bitcoin assets.
For Ethereum assets, the architecture of our entire protocol is very clear. Users hand over their liquid assets to us, and we continuously distribute them to the transition layer to obtain risk-free returns. We support many consensuses, such as PoS, Restake, AI, and RWA, etc. We are not a certain LP, ETH is one of our underlying consensus assets. When more consensus appears in the market, we will also support more consensus-based underlying assets, because consensus-based underlying assets are basically risk-free.
Of course, in addition to consensus assets, if there are further risk-free underlying assets similar to RWA in the market, our protocol can also support them. Because each underlying asset is a strategy, this strategy is pluggable, and our entire protocol architecture is to distribute liquidity to various risk-free underlying assets. Then, after the emergence of interest-bearing assets, we will distribute them to various chains and the application layers of each chain. Together, it is a set of liquidity distribution protocols based on mainstream assets.
As the Bitcoin ecosystem grew, we realized that Bitcoin had the opportunity to generate interest for the first time. It was possible for the first time to make Bitcoin an interest-bearing asset, distribute liquidity downward, and distribute it to various application layers of the ecosystem upward. At the beginning of the whole thing, in line with our vision of long-term liquidity distribution protocol, we officially announced BTC "mSTONEBTC", an interest-bearing asset for the Bitcoin ecosystem.
Jeff (Founder of Merlin Chain): Hello everyone, I am the founder of Merlin Chain. We have been developing and building a lot of protocols on the Bitcoin layer since last year, and then launched the Bitcoin expansion solution Merlin Chain this year. We mainly hope that Bitcoin assets can be minted on the first layer, with smart contracts, and have better liquidity in a very efficient and low-cost environment, while also facilitating access to more applications, such as DeFi, games, and social networking.
Since its launch in February, Merlin Chain has nearly 2 million active addresses, with nearly 40,000 BTC and a large amount of Bitcoin native assets such as ORDI on the chain. This time we also officially announced the cooperation with StakeStone, hoping to ensure the decentralization of the entire network through cooperation, and then allow Oracle on the entire network to take on more data verification and network security maintenance.
Host: What is StakeStone’s core narrative and positioning?
Blue Wharf (core contributor of StakeStone): In April last year, we had some in-depth exchanges with liquidity majors, and we found that it was difficult for these liquidity majors to use native Ethereum to provide liquidity, because native ETH has a staking income of about 4 points, and the settlement method is ETH as the settlement, and the interest is settled in ETH. At this time, if a public chain absorbs ETH liquidity, it will face a 4-point PoS opportunity cost. Don't underestimate the 4-point opportunity cost, because it is settled in Ethereum, which means that if you are a public chain token, such as Manta, it will need to use 10 points of Manta tokens to cover the 4-point opportunity cost.
If it is a project in the Manta ecosystem, it may take 20 points of annualized yield to cover the PoS cost. We think this is a huge industry contradiction and an irreconcilable contradiction. When LSDfi became a hot topic in April last year, the contradiction surfaced for the first time during the Shanghai upgrade. We think that from that time on, the history of ETH as a liquid asset will begin to change.
Because ETH is no longer the most suitable asset for capital efficiency, that means someone must stand up and create a new liquidity asset carrier. The new Ethereum asset is equivalent to a new liquidity standard that replaces the liquidity attribute of ETH, and then covers all opportunity costs, so that various public chains and others can continue to carry out necessary ecological development at a relatively low capital cost. We think this is a huge problem and opportunity in the industry, so StakeStone was born in April last year. In fact, when we first talked to many chains and many projects, everyone didn’t particularly understand this matter. It was not until later that Blast was the first to stand up and make a Layer2 with interest-bearing capabilities, exposing the biggest problem to the entire industry.
At that time, we were the only solution provider in the industry. Manta was the first to adopt this solution. Our cooperation with Manta was equivalent to us not only raising the problem, but also because Blast needed three months to have a solution, and we had already paid attention to and solved this problem 7 months ago, so our cooperation with Manta was very successful. Since then, projects have adopted new solutions to attract liquidity flows. We don’t trust any underlying assets on the chain, because the underlying assets on the chain in this industry are constantly changing. Therefore, StakeStone was designed as a multi-underlying asset compatible protocol at the beginning, but because the largest risk-free underlying asset is Ethereum now, but if it is iterated again in a few months, everyone will realize the significance and value of StakeStone as a liquidity upstream protocol.
The same logic will happen in the Bitcoin ecosystem soon. We will continue to use our protocol. It does not mean that the code will not be changed. We will still do some customized development for BTC to solve similar problems. For example, now he must have a Bitcoin carrier to help everyone solve the opportunity cost of BTC. Our positioning and vision has always been to distribute the entire liquidity asset to improve the liquidity efficiency of the entire Web3 industry.
Host: What is the strategic consideration of entering the Bitcoin ecosystem by generating interest on BTC this time? How do you cooperate with Merlin Chain?
Blue Wharf (core contributor of StakeStone): It is difficult for us to predict that the Bitcoin ecosystem will explode in the state it is in today. Our first naive idea is that in the early days of the Bitcoin ecosystem, the scale of Bitcoin as a liquidity thing is very different from that of Ethereum. Therefore, the Bitcoin ecosystem also needs an asset with greater liquidity and better quality as the corresponding settlement asset.
Therefore, when we first started the Bitcoin ecosystem, we worked with Merlin Chain to provide interest-bearing ETH. As the Bitcoin ecosystem develops, we feel that interest-bearing ETH alone is no longer sufficient to meet the needs of the Bitcoin ecosystem. This is why we want to go further and develop interest-bearing BTC. Currently, there are two solutions for interest-bearing BTC. One is similar to the solution adopted by Babylon, which is to timestamp on another chain and then find someone to issue a bill on the chain. The other is to issue the bill directly on the Bitcoin chain.
Plan 1 looks very Crypto Native because its assets are pledged on the public chain, but a big problem with this is that Layer1 itself does not have the ability to generate interest. Therefore, those who implement Plan 1 must seek the real source of interest. Since it does not have the ability to generate interest itself, it must find a chain that can generate interest. At this time, it will encounter a contradiction. I have generated interest, so why should it be distributed to a third party? This is a very sharp contradiction.
If Ethereum had not developed PoS first and then Restake, but Restake had been around from the beginning, no one would care about it. In fact, the main funding for Restake is still supported by Ethereum PoS today, and it is difficult to rely on pure AVS for support.
We think that the first thing to be solved in the Bitcoin ecosystem is the PoS problem, not the shared security problem. I have to have a security mechanism first, and then a third party can help you share security, but I can't have a third party provide all my security. So the core of the full set of security is PoS, so we think that option 2 is more important. We think we should first serve Merlin Chain, and then make PoS perfect enough, instead of building a shared security on it first, and then providing shared security for Merlin Chain.
Moderator: How does Merlin Chain work? How is it different from other Bitcoin Layer2?
Jeff (founder of Merlin Chain): Actually, before February this year, everyone had a very chaotic understanding of BTC L2. A considerable number of people thought that BTC L2 was a pseudo-concept. In fact, I believe that many people still think that BTC L2 is a pseudo-concept today, and their definition is also very chaotic. Everyone is quite confused about the entire Bitcoin expansion plan, and it is also a state of contention among a hundred schools of thought. I think all projects today are constantly exploring, and we are also very happy to see new Bitcoin expansion plans come out, whether overseas or in Asia. In fact, everyone's route is the same as what we said a month ago, and they are getting closer and closer.
So what is this route? The first is to have a decentralized consensus mechanism to ensure the security and anti-fragility of the entire network. This is one of the core reasons why we are working with StakeStone today. The second is to share the most original transaction data in a third-party form, so that everyone, all nodes and all users can participate in the maintenance of the entire data. The third is to explore the anti-fraud mechanism on the first layer of Bitcoin. For example, the pure first-layer mechanism like Babylon uses a timestamp script to make a safe and stable pledge. But when it comes to the second layer, it is actually difficult to do so, because the user's money will be consumed on the second layer, so if the money on the first layer is only locked through a script, it will actually appear double-spending on the second layer.
So today, in fact, these projects on Bitcoin Layer 2 are also exploring the future anti-fraud mechanism on Bitcoin Layer 1. So these three things are what all BTC L2 have to consider doing today. It is not enough to do any one of them well. If you do PoS purely on Bitcoin, you may be questioned that the network security of Bitcoin Layer 1 is not highly bound. However, if you want to slash on Layer 1 and do anti-fraud and Rollup on Layer 1, in fact, since the Bitcoin network itself is not a Turing-complete environment, it has no way to achieve these.
So in fact, everyone is constantly wavering between reality and ideal, and everyone will try security in various dimensions and network node mechanisms in various dimensions.
The interest-bearing BTC we are doing now is to maintain the decentralized Oracle network to maintain the security of the entire simulated network. Whether it is in the form of an agent or in the form of direct user participation, the nodes on these Merlin Chains actually need to do a lot of work, such as data compilation, including zkproof circuit compilation, uploading to the Bitcoin mainnet and verification on the Bitcoin mainnet, as well as multiple verifications between Oracles, including the final generation of Bitcoin layer 1 signatures, zkproof settlement and final certification, etc. All of these tasks need to be implemented by Oracle in our network.
These Oracles themselves need to stake a lot of BTC, because they stake BTC to maintain the security of the entire network. That is to say, if there is fraud or dishonesty, they will be slashed to compensate for the losses caused to users by this transaction. As network maintainers, they will of course also enjoy the fees of the entire network and the incentives of the network's governance tokens. Ordinary users can gain benefits by participating in this plan and then joining different nodes.
After the interest-bearing BTC is minted, it can be used again in different projects on the Merlin Chain, thereby obtaining multiple layers of financial benefits.
Host: So how does the full-chain liquidity protocol StakeStone empower the Bitcoin ecosystem?
Blue Wharf (core contributor of StakeStone): I just mentioned the entire liquidity distribution structure. First of all, we still think that liquidity should be used for PoS-related functions, because PoS functions are currently the lowest risk, the only risk-free and long-term sustainable source of income. First of all, liquidity must be distributed to the consensus layer. After minting BTC to generate interest, if the consensus layer is perfect enough, it can actually continue to distribute to Layer3, or more application layer protocols, to reduce everyone's capital costs.
The overall structure is actually the same on the BTC side. The only difference is that the entrance to liquidity has moved from the original first layer to the second layer, because the actual role and function of BTC L2 is the Ethereum first layer. Because it is difficult for the BTC first layer to execute more commands.
Jeff (founder of Merlin Chain): Bitcoin is an asset that has been ignored in the blockchain wave over the past few years. It is more considered as digital gold, but it does not have much practical use. Ethereum has actually reaped the benefits of the wave over the past four years. Of course, this does not make Ethereum's market value higher than Bitcoin, but there is no doubt that Ethereum is liked by more users, and ETH assets can also better participate in various ecosystems.
Just like I asked many American friends, when they first came into contact with Web3, they only had ETH, and even no stablecoins and BTC, because they needed to use ETH to play small pictures, so the bonus period is actually very obvious. Now we have actually seen the opportunities of the Bitcoin ecosystem, including the fact that the capital volume of Bitcoin itself is enough to cause an ecological opportunity larger than the Ethereum ecosystem.
Under this premise, the properties of Bitcoin assets themselves need to be reconsidered. In fact, when StakeStone talked to us about this, we were still very excited, because our own PoS network needs to use Bitcoin to ensure network security. Simply put, more people are involved in network maintenance. Once a transaction fails or transaction fraud occurs, these nodes need to bear the user's losses.
When interest-bearing assets appear, they can actually be used in more ecological protocols and ecological projects. Users holding Bitcoin will not just wait for it to rise, but will have more application scenarios. Whether it is participating in ecological applications, maintaining the network security of Merlin Chain, or using interest-bearing assets to participate in more projects, its financial attributes will become higher. This will actually attract more users to hold Bitcoin and attract more users to participate in the Bitcoin ecosystem. This is what I think is the core value of the full-chain liquidity protocol.
Host: How do you think interest-bearing BTC will reshape the Bitcoin ecosystem?
Blue Wharf (core contributor of StakeStone): I think there will be a lot of BTC L3 soon. For L3, the emergence of interest-bearing BTC is very important, otherwise the capital efficiency structure of interest-bearing BTC will be very low, so interest-bearing BTC is very necessary to solve the connection problem between L2 and L3, which will bring about a big structural change. From the perspective of the application of the entire chain, the emergence of interest-bearing BTC will reduce the capital cost on the chain. In today's Ethereum L2, many chains have almost no ETH, and all interest-bearing ETH has replaced Ethereum as the main asset for ecological construction.
In fact, interest-bearing BTC may also go to other chains, which is another important thing StakeStone is doing. We distribute liquidity across the entire chain, which not only means that our vertical structure distributes to the bottom layer and distributes upwards, but also includes horizontal liquidity distribution, so the entire liquidity is a full-chain structure. Interest-bearing BTC may also be like this in the future. When the mBTC asset volume is large enough, more BTC Layer3 or other networks will be connected in series to provide a full-chain liquidity distribution structure.
Jeff (founder of Merlin Chain): Everyone is talking about Bitcoin Layer2. In fact, if you look closely, you will find that various projects are actually making Bitcoin's Ethereum. Because Bitcoin itself is not Turing complete and cannot do what smart contracts can do, so in fact, our expansion of it is equivalent to making a large and comprehensive Ethereum. For Ethereum, network security is the core, which will also cause its performance to encounter bottlenecks, and then it will need a variety of chains to make up for its performance problems.
These Layer3s are actually a consensus formed based on the security of Merlin Chain. We are all working on Ethereum for Bitcoin. I think everyone will gradually understand this.
Some traditional Bitcoin financial services require an independent network environment to be implemented. For example, in traditional Bitcoin finance, the demand for lending and staking is very high. These scenarios are not so easy to run on the second layer because its ledger is a CeFi ledger, but it needs to run the DeFi model on Merlin Chain. In fact, its own fund security and funding rate issues cannot be met.
Simply put, after they decentralized the ledger, they can carry out CeFi business at low cost and high security. At the same time, because it shares liquidity with the second layer, they can actually share the DeFi demand of the actual user group on the second layer, and the demand for DeFi is much greater than that of CeFi. For example, in CeFi, the return of 2-3 points is already very high, but in DeFi, users may need to borrow 10 points or even 20 points, so it is equivalent to a CeFi chain itself and sharing DeFi liquidity. Then the actual volume of this business is not only 10 billion US dollars, which is a very large traditional Bitcoin capital volume, but of course it is still very chaotic today. In fact, I think the words Layer2 and Layer3 themselves are not accurate enough. I think the role played by Merlin Chain and the role played by our chain are actually more like Ethereum Layer 1 and Layer 2.
The asset attributes of BTC itself are relatively fixed, and everyone has very high expectations for it. Based on strong consensus, it can bring some financial possibilities and some interest-bearing possibilities. The current market value of Bitcoin is about 1.3 trillion. With such a large amount of funds, if it brings any small part of the expectation of interest rate hikes and empowerment, it will actually have a very big impact on the development of ecological applications, including the prosperity and construction of the entire network.
So I think today we are not discussing how it will reshape the Bitcoin ecosystem, but more like discussing what will happen after the possibilities are opened up.
Host: Let’s ask Wharf to introduce StakeStone’s airdrop event.
Blue Wharf (core contributor of StakeStone): We will have three parts to complete the entire airdrop plan. The first part is actually a barrier-free event for anyone to participate. In the second part, we will cooperate with many chains, and each chain has its own basic activities and ecological incentive plans. We do not launch activities, but we will enable the activities of each public chain. What we do is liquidity distribution, so the second part mainly reflects the distribution mission. Some tasks are more hardcore and have certain thresholds.
But in fact, we are facing a small difficulty that time weight is not added. Many big investors think that there is no difference between depositing on the first day and depositing on the second day, so they are all waiting, and a game dilemma arises. So we add time weight again and reorganize the rhythm. The third part is that we have a lot of communities, including mBTC, and we have cooperated with a lot of media. We will give consolation prizes to the media and reward behaviors that have interacted with StakeStone in the past. We will add time weight first, and then introduce assets like mBTC after adjustment.
There are many DeFi big players who like to stack, but in fact, the more layers you stack, the higher the yield. This is a big misunderstanding. We don’t stack, and ordinary users don’t stack too many layers. We may lock our positions until the end of May, so only stacking one layer can explain to everyone’s fund efficiency.
The most important thing about airdrops is withdrawal. Depositing money is very easy, and any protocol can do it. But withdrawing money is not. Withdrawing money is a test of the protocol's ability, and the withdrawal of money has a great impact on the rate of return. We make things that tell you very clearly when to withdraw money, but many protocols do not tell you when you can withdraw money. In the process of our cooperation with Manta, the block stampede was very serious in the first two hours of withdrawal, and two transactions appeared in the same block. Because Ethereum has a block of 12 seconds, the block stampede phenomenon is very serious. Under normal network conditions, block stampede will not occur. Block stampede will only occur when a huge TVL needs to be withdrawn in a very short time.
In order to prevent block stampedes, we need to build a queuing system. Engineers may have to stay up for 22 hours to build a temporary queuing system, and do the queuing manually. When a block is stampeded, if one person fails, his money will not be withdrawn, but he will have to pay a very expensive gas fee. If 10 people submit in the same block at the same time, 9 people fail, and all 9 people have to pay gas. Therefore, we also built a queuing system specifically for this matter.
Host: What is the future of interest-bearing Bitcoin? Will it be realized on the first layer or the second layer? In addition, can the full-chain liquidity infrastructure help Bitcoin become more liquid?
Jeff (founder of Merlin Chain): Babylon does timestamping on the first layer, but under their path, there is actually no way to do Restake. If it goes through the second layer protocol first, it will first pledge the funds to the decentralized network, and then add the timestamp. It is actually a two-way interest-bearing mechanism from the second layer to the first layer.
I personally think that interest-bearing BTC will definitely occur on the second layer, because the Bitcoin network only needs miners to mine. It is a PoW consensus, not PoS, so it does not require your Bitcoin to do anything, or you can't do anything else with Bitcoin.
The source is most likely the applications, protocols and new networks in the ecosystem. Then you provide liquidity and security to these networks, and they will give you corresponding incentives. So in fact, the source of these financial returns actually comes from the ecosystem. Today, when we talk about the Bitcoin ecosystem, this ecosystem actually refers more to the applications on the second layer.
Blue Wharf (core contributor of StakeStone): For example, one person works on the first layer, but the labor itself does not generate income, while another person works on the second layer, and his labor brings income to BTC. At this time, the person working on the first layer does not directly contribute to the creation of income, but tries to take a large part of the profit from the person who created the contribution. I think this is unacceptable.
We firmly believe that interest-bearing BTC should first be born on BTC L2. But Jeff also said something very interesting. If you stake mBTC on the second layer, the real native BTC can actually be stacked on Babylon on the first layer. In this way, you can get Babylon airdrops and the income of mBTC simulated PoS. After you get the interest-bearing BTC, you can develop applications and distribute it to get income again. We believe that the combined income structure is the most reasonable way for mBTC holders to earn income.
Host: Restaking is essentially a nesting doll game. Where do you think the risks lie?
Blue Wharf (core contributor of StakeStone): EigenLayer actually made a middleware for consensus layer liquidity distribution, and then each future AVS will run its own client. In fact, a chain will issue a PoS client for each AVS, which is equivalent to the operator running the client for iOS. EigenLayer's main innovation comes from his belief that one Ethereum can provide shared security for multiple clients, so one Ethereum has AVS1, AVS2, AVS3, etc., which is actually a collection of the benefits of AVS(N) in theory.
What are the risks? The more N levels you take on, the greater the risk of slashing. If any one of them slashes, the whole chain will slash. If there are 100 AVS, can you run all 100 AVSs? Can you use Ethereum 100 times? The service capability that can be used 100 times actually means that the operator has to run 100 clients. Then 100 iOS clients may upgrade A this week, B next week, and C and D together the week after next, so this becomes an operation and maintenance job, and the income given by each AVS is actually very low.
Host: What if a bank run occurs?
Blue Wharf (core contributor of StakeStone): Because our underlying assets can be fully restored, there is no bank run. There is only a queue problem for withdrawing money within a short period of time.
