Compiled by: Cobo
After the halving, Bitcoin is about to break new highs again. At the same time, the BTC ecosystem continues to develop comprehensively, and projects such as Layer2 and (Re)Staking continue to emerge. Why does Bitcoin need its own (re)staking, and what is the legitimacy of its existence? For entrepreneurs and investors, what new opportunities will there be after the BTC halving? How big is the market size of BTC staking? Is this a long-term opportunity or a short-term hot spot?
On the evening of May 22, Cobo and DeepChao, together with Babylon, Lorenzo Protocol, and FBTC, launched a Space on X titled "New Economic Script after BTC Halving", and entered into an in-depth discussion on this topic.
Cobo has compiled the core ideas of each guest speaker and shared them with Cobo users and readers.
Participants in this event included many players and participants representing the BTC ecosystem, including Shenyu, the co-founder and CEO of Cobo and a veteran BTC miner; Xinshu Dong, CSO of Babylon, the first decentralized trustless Bitcoin staking protocol; Matt, Founder & CEO of Lorenzo Protocol, a BTC restaking tokenization and financial derivatives solution; and Zuki, a core contributor to FBTC.
As participants and long-termists of the BTC ecosystem, the four guests agreed that the BTC ecosystem has many opportunities in the short, medium and long term. So how to capture these opportunities and meet the overflowing needs of the BTC ecosystem? The guests discussed the breakthroughs and opportunities of the BTC entrepreneurial track from their own backgrounds and products, and made optimistic prospects for future potential and opportunities.
Here are the key takeaways:
The Bitcoin halving is affected by multiple factors, and the future market is uncertain. The halving mainly affects the supply side, resulting in a sharp drop in miners' income, which has a huge impact on miners using old mining machines. Miners will be forced to speed up the update of mining machines, optimize electricity costs, shut down or move to low-electricity areas. However, due to the strong risk resistance of large miners and traditional capital, the decline in the computing power of the entire network is limited.
The income from Bitcoin mining will gradually decrease and eventually converge to zero. In the future, the real return of Bitcoin will come from using it as an investment asset and investing in ecological projects such as L2, DeFi, and CeFi. Coin holders will gain benefits from it, which will become an important development trend of the Bitcoin ecosystem.
Miners' future income comes from two parts: newly issued bitcoins and transaction fees, the latter of which depends on the activity of the Bitcoin ecosystem. More interesting staking projects can stimulate the development of the ecosystem, bring more on-chain activities and transactions, improve network security, and increase miners' transaction fee income.
PoS lacks external economic incentives, and its security is limited by the size of the on-chain economy, which poses a risk of being controlled. Bitcoin staking and restaking protocols introduce external large Bitcoin assets to provide security for the PoS network, solving its inherent defects. This is the legitimacy of Bitcoin (re)staking.
Shenyu, co-founder and CEO of Cobo, predicts that Bitcoin staking will be a market worth tens of billions of dollars, comparable to the early days of PoW mining, and can meet the needs of a large number of high-performance application chains that require secure infrastructure in the future.
Lorenzo Protocol CEO Matt: There are four major areas that the Bitcoin ecosystem needs to focus on in the future: architectural innovation, L2 development path selection, efficient asset circulation, and security assurance.
For ecosystem builders and entrepreneurs, in the short term, they can focus on solving the congestion problem in the BTC network and taking on the overflow demand. In the medium term, they can focus on the income demand of holders. In the long term, they can aim at the development prospects of the ecosystem after the potential script language upgrade. It is worth noting whether there will be more application scenarios closely centered on Bitcoin in the future? Will there be better tools to help use Bitcoin? And are there novel programming models to break through its non-Turing completeness?
As the EigenLayer of the Bitcoin ecosystem, Babylon's solution targets objective violations, while EigenLayer responds to subjective attacks.
What impact will the recent Bitcoin halving have on various participants in the ecosystem, including miners, individuals, and project parties, and what important changes will occur in this ecosystem?
Shenyu: Bitcoin halving mainly affects the supply side, which will have a certain impact on various participants:
For miners: The halving has led to a sharp drop in miners' income, which has a huge impact on miners using old-generation mining machines (such as S19 Pro, M21, etc.). The marginal cost is not enough to cover the cost, and they are forced to shut down or move to areas with low electricity costs, which has prompted miners to accelerate the upgrading of mining machines and optimize electricity costs. However, due to the entry of large listed miners with strong risk resistance and traditional financial capital, the decline in the computing power of the entire network is limited.
For individual investors: For individual investors, the main impact is psychological and emotional. It is expected that the market may usher in a new trend within a few months after the halving. However, this year, due to multiple factors such as the macro economy and Bitcoin ETF, the market trend is uncertain.
Xinshu: This Bitcoin halving was relatively smooth. With the entry of institutions, the entire market is becoming more professional and institutional. People are beginning to wonder whether Bitcoin can have other uses and sustainable returns besides holding and mining, rather than just relying on inflation subsidies. As the leader of the cryptocurrency industry, can Bitcoin further radiate to a wider crypto community?
Babylon’s first attempt is to extend the security of Bitcoin to other PoS chains. Currently, PoS chains maintain their currency pledges through high inflation, one of the reasons being that low APY makes it difficult for holders to hold coins for a long time.
Babylon provides security for other chains by establishing an open market for idle Bitcoin to participate in staking. Compared with small public chains that expect high APY, Bitcoin stakers have relatively low APY expectations. This provides an opportunity for PoS chains to introduce Bitcoin as collateral, which can increase returns for Bitcoin holders while significantly reducing their own inflation.
In the long run, what is more important is that Bitcoin may have more uses and profit scenarios, attracting more participants, and not just relying on mining for profit. Ecological projects such as Babylon will bring new application scenarios to Bitcoin, making the entire ecosystem more diverse.
Matt: Bitcoin's halving every four years is a fixed trend, and mining revenue will gradually decrease and eventually converge to zero. By then, the real return of holding Bitcoin will come from investing it in L2, DeFi products, CeFi products, etc. Enabling these businesses, broadening the boundaries of the Bitcoin ecosystem, and bringing new revenue will surely become a major trend.
Many Bitcoin holders and project owners are jointly promoting this trend. For example, Babylon invests scarce Bitcoin on the demand side to provide security for PoS chains or L2, from which investors can profit. If Bitcoin eventually becomes an investment asset or currency, it will inevitably require an efficient liquidity allocation market and liquidity assetization.
How do miners view staking, and what impact does it have on the overall miner income and network security?
Shenyu: From the perspective of miners, staking is beneficial to the development of the Bitcoin ecosystem.
First of all, Bitcoin itself does not require staking, but holders and miners hope to obtain the benefits brought by staking. As a hard currency, Bitcoin has long been difficult to obtain native benefits, while staking allows BTC holders to obtain token rewards from new projects.
Secondly, miners’ future income comes from two parts: newly issued bitcoins and transaction fees. The latter depends on the activity of the Bitcoin network ecosystem. More interesting staking projects can stimulate the development of the ecosystem, bring more on-chain activities and transactions, and thus improve the security of Bitcoin’s network.
Therefore, as miners and BTC holders, we all hope that more staking and restaking protocols will emerge. The more prosperous the Bitcoin ecosystem is, the more benefits we can get.
What is the market size of staking? Is this a long-term opportunity or a short-term hot topic?
Shenyu: The core problem of PoS is the lack of external economic incentives. The security of its underlying assets depends on the scale of native assets on the chain, and the ultimate security is limited by the total scale of the on-chain economy. In a bear market, controlling network nodes may lead to the control of the entire chain assets.
The Bitcoin staking and restaking protocols introduce large external assets that are not related to the chain, providing security for the PoS network. As the scale of Bitcoin assets exceeds one trillion US dollars, the PoS network continues to inject external economic incentives, greatly improving security. This innovation solves the inherent defect of PoS's lack of externalities, which is eye-catching and has already begun to be implemented, with huge development potential.
I think BTC staking is at least a market of tens of billions of dollars, which is comparable to the early days of PoW mining. With the development of modularization, a large number of high-performance application chains that require secure infrastructure will emerge in the future, and the Bitcoin staking protocol can meet their needs.
In 2024, I focused on the layout of relevant assets and targets in the upstream and downstream of the restaking track. At the company level, we also invested a lot of human and material resources to fully embrace this innovative opportunity.
For ecosystem builders, entrepreneurs and other builders, how can they seize the opportunity of this BTC narrative wave? What other key areas are worth participating in?
Shenyu: In the past six months, the Bitcoin ecosystem has shown signs of innovation, which stems from the bottom-up innovation of inscriptions and runes over the past year, attracting a large number of new users. The demand of new users has led to network congestion, and the overflow of demand has forced us to start exploring second-layer solutions that provide better services.
For ecosystem builders and entrepreneurs, there are three main stages to seize the opportunity of the BTC narrative wave:
Short term: In the face of current network congestion, provide better services and solutions to meet the current overflow demand.
Mid- to long-term: A large number of Bitcoin holders hope to obtain returns on their native assets. So entrepreneurs can think about how to bring stable, low-risk returns to BTC holders. Perhaps they can look at track applications such as CeDeFi and restaking, which are mid- to long-term opportunities.
Long term: If the scripting language of the Bitcoin network can be upgraded (such as OP Code, OP_CAT, etc.), it will be possible to develop truly large-scale ecological applications without trust or permission. This is a long-term prospect and an opportunity for the entire ecosystem.
In general, there are major windows of opportunity in all three stages: focusing on network services in the short term, focusing on holder returns in the medium term, and aiming at ecological applications after network upgrades in the long term.
Matt: In general, the Bitcoin ecosystem faces several key challenges:
Architectural innovation: The Bitcoin architecture may need some updates to support truly decentralized on-chain settlement, such as promoting improvements such as OP Code to achieve more advanced functions. This will be a major breakthrough and a milestone for all DeFi projects and BTC L2.
L2 development path: Will there be a universal L2, or will various interoperable L2s be connected through common protocol standards? In any case, the efficient circulation of Bitcoin assets is crucial, requiring efficient matching markets, on-chain financial derivatives markets, etc.
Security: It is crucial to provide higher security at the infrastructure layer and provide financial security for investors. Insurance-related products can be provided on the DeFi infrastructure to control risks within an acceptable range.
In short, architectural innovation, L2 development path selection, efficient asset circulation and security are the key challenges facing the Bitcoin ecosystem.
What is the original intention of Babylon? Why does BTC need staking? What is the biggest difference between staking or restaking in Ethereum (such as EigenLayer)?
Xinshu: The original intention of the design of the Babylon protocol is to enable Bitcoin to participate in a wider decentralized ecosystem and provide security for other PoS chains or second-layer networks. By staking BTC assets, Babylon can provide these networks with a reliable and "inexhaustible" pool of collateral assets, thereby enhancing their security. This is different from Ethereum's staking/restaking mechanism:
Different purposes: Ethereum is for the security of its own chain, while Babylon provides collateral for other chains/networks;
The implementation methods are different: Ethereum aggregates the smart contracts on the chain, while each Bitcoin user independently pledges and locks it in the UTXO script, which is more decentralized.
Babylon uses the Bitcoin UTXO model to implement an innovative decentralized and distributed staking architecture, which is fundamentally different from the Ethereum contract pool staking model. This is a core technological innovation.
The rationale of restaking is that by locking cryptocurrencies as collateral, malicious behavior can be punished, thereby ensuring network security. The traditional approach is to pledge native tokens, but there are problems such as a small total amount of tokens and high inflation incentives. Babylon incorporates Bitcoin, the safest blockchain asset, into the pledge system, expanding the pledge scenario.
Lorenzo: Why did you choose the BTC restaking track? How big is this track? What are the opportunities?
Matt: The reason why Lorenzo chose to lay out the entire track is that he is very optimistic about BTC restaking. The total circulation of US dollars is about 2.4 trillion, and the debt market is about 50 trillion; and the total market value of Bitcoin is 1.4 trillion, which is about 60% of the circulation of US dollars. Based on this calculation, the market size of BTC restaking can theoretically reach 30 trillion US dollars, which has huge room for imagination.
In essence, BTC restaking is to lend Bitcoin liquidity, lock up a portion of it as collateral to provide security, and recover the principal and interest upon maturity. It is a risk-free lending behavior, similar to buying government bonds.
Lorenzo is solving the first step of securitizing principal and lending. Through two types of asset standards, STBTC (principal) and yield tokens (interest), liquidity can be unified, and a richer financial derivatives market such as options and futures can be developed based on yield tokens. At the same time, lending also releases a large amount of Bitcoin liquidity, which can cooperate with DeFi lending protocols, stablecoins, exchanges, etc. The asset standard can also cooperate with other restaking projects to provide them with additional collateral through STBTC.
What is the position of FBTC in the BTC DeFi ecosystem?
Zuki: FBTC is an asset that is 1:1 anchored to Bitcoin. It plays the role of a bridge between the native Bitcoin asset pool and DeFi/infrastructure projects in the Bitcoin DeFi ecosystem. As a channel, FBTC will ensure security and allow users to choose services and revenue scenarios independently. Unlike WBTC, FBTC will explore new mechanisms to improve the efficiency of Bitcoin utilization, provide ecological incentives, and allow multiple returns for holding and trading FBTC. It is expected to migrate the Ethereum revenue model to Bitcoin and breed more innovations.
The Babylon protocol requires signing two transactions. If the node is slashed in the second transaction, the private key may be exposed, which is equivalent to losing all the money in the wallet. How is this function designed? Is it friendly to retail investors?
Xinshu: The penalty mechanism of Babylon BTC pledge is that if a node issues two different blocks (double signature) at the same block height, the private key of the node will be exposed. Once the private key is exposed, anyone can complete the missing penalty transaction signature and execute the penalty. It should be noted that:
Only the node private key is exposed, not the staker private key.
The node private key is only used for block signature and does not store other assets. Therefore, even if a penalty occurs, it will not affect other assets controlled by the private key.
When double signing occurs, not all Bitcoin staked on the node will be confiscated. There are adjustable local slashing parameters.
The confiscation transaction requires three-party signatures, usually two parties pre-sign, and the node party does not sign for the time being. Once the node does something malicious and exposes the private key, anyone who obtains the private key can complete the signature and broadcast the transaction.
The reason why double signing of nodes exposes private keys is that digital signatures require the use of different nonce (random numbers) each time. If the same nonce is used to sign two different messages, the privacy of the signature will be destroyed. Babylon stipulates that nodes at the same height must use a predetermined nonce signature. Once repeated use leads to double signing, the private key will be exposed.
Will the existing AVS based on EigenLayer be migrated to Babylon? Will there be new projects in the Babylon ecosystem? What form will these projects take?
Xinshu: The main problem Babylon solves is issuing two different blocks at the same block height, which is called the "double signing" or "equivocation" problem. This is an attack that will cause a fork and is an objective safety violation. Double signing must be implemented by nodes because only nodes control private keys. The key problem Babylon solves is this objective security threat, which occurs either on a blockchain with multiple nodes and value data (such as the Cosmos chain) or on a second-layer network with only a single sequence.
EigenLayer deals with inter subjective slashing, which requires community consensus to judge, which is very different from the "objective security violations" that Babylon focuses on. Some community projects can achieve subjective slashing functions through staking, such as the Liquity staking token generated by staking BTC on Babylon.
From a technical perspective, the AVS situation faced by such projects is similar to that handled by EigenLayer. However, these projects focus more on the AVS form related to the Bitcoin ecosystem and applications.
