Native BTC Staking is Coming to Bitcoin Layer-2 Networks, Babylon Says

Bitcoin staking is fast becoming a reality – once implemented it will be the exclusive right to verify share crypto networks.

Thanks to Babylon, HODLers can lock up their BTC, which will soon be used simultaneously to access and produce from multiple staking-based blockchains. While this has huge implications for the entire crypto economy, the effects will be felt most strongly in the nascent ecosystem: Bitcoin Layer-2 networks.

“Bitcoin L2s [are] It's definitely a very important part of our customer base,” Babylon founder David Tese said in an interview with Decrypt. “Bitcoin staking will be a way for L2s to get security from Bitcoin.”

In the year Since the launch of Bitcoin's Ordinals protocol in early 2023, developer activity and experiments on Bitcoin have seen a surge. In particular, after Robin Linus announced the “BitVM” accounting framework last October, new models of decentralized Bitcoin layers have come into place.

The term “Bitcoin L2” gets thrown around, but it's generally understood to be a system that builds “on top of Bitcoin.” It either complements Bitcoin, inherits its decentralization and security, or uses BTC as a currency – or some combination of the three.

Babylon corrects that perception by saying that it is owned by BTC – not just the network.

“Bitcoin L2 is a very important source of interest for us,” he said. “You want to make money from Bitcoin, [and] You want security from the world's most secure chain.

The co-founder said that he is already in discussion with a hybrid Ethereum and Bitcoin L2, to introduce Bitcoin staking to the network.

To clarify, Babylon's bitcoin staking functionality does not require a version of BTC that is “wrapped” or bridged on a separate blockchain. All owned coins are locked at Layer-1, and are fully controlled by their owners' Bitcoin private keys.

Earlier this month, Babylon launched its staking mainnet Phase 1, opening the floodgates for users to lock in BTC for future staking. Initially, the team finalized their system for Babylon to hold up to 1,000 BTC based on accumulated demand for their product.

This sparked off-chain competition and a fee war among users to see their stock deposits processed first, causing the Bitcoin network's transaction fees to be higher than the team expected.

“The 1,000 Bitcoin cap is too much for security reasons,” he said. We expect that as the cap increases, the competition in terms of gas warfare will be lower.

Compared to altcoin chains, the co-founder said, Bitcoin staking would be much easier to acquire. Unlike Ethereum, Babylon's representative staging model allows validators to handle the technical burden of running and securing the network. In addition, while Ethereum requires a sole reserve of 32 ETH ($80,800), Babylon does not impose any minimum fees other than the cost of processing the transaction. .

After that, the user's Bitcoin can generate what Babylon calls a secure product – in multiple blockchains simultaneously. The only risk involved if a validator you trust with your stake commits dishonesty is risk mitigation at the protocol level.

In theory, a protocol like Babylon could make hundreds of billions of dollars worth of currently idle BTC, solidifying its current role as a store of value.

Asked if BTC staking would pose a competitive threat to the value of altcoins that once held this function against BTC, he offered a more optimistic view. Babylon says it can instead use BTC capital to secure their networks, saving them from needing to quickly dim their native assets to secure their verification chains.

“Attracting people to buy local property to provide equity is very expensive,” he explained. “In the end, they pay a very high yield. So it is not very healthy for these projects to be tokens.

Tse predicts a future where gambling on Bitcoin will be as popular as it is on Ethereum, where 28% of the circulation supply is currently held. However, that equity capital can still be unlocked through liquid stock tokens that can access other new Bitcoin applications, such as lending, borrowing and trading.

“I think that's why it's a fundamental use case for the property, and that's why we're eager to give it to the great asset.”

Edited by Ryan Ozawa