Bitcoin, the first and most decentralized cryptocurrency, currently holds a market cap of $1.1 trillion. However, unlike ETH, where users can earn passive income through various DeFi projects (e.g., staking, liquidity providing), most BTC remains idle due to the lack of smart contract programmability. Meanwhile, many smaller PoS chains are experiencing high inflation in their tokens to incentivize staking, which could threaten their long-term development. Bitcoin staking could tap into Bitcoin holders’ resources, providing security for these PoS chains.
There are two basic approaches to staking Bitcoin:
- Bridge BTC to PoS chain
- BTC is bridged to a PoS chain for a wrapped BTC, which is automatically slashed if there is a violation, maintaining the chain’s integrity. However, bridging carries risks, as it requires sending BTC to a centralized custodian, undermining trustless staking. Stakers may not be able to retrieve their BTC, even if they behave honestly. Additionally, most major bridges have been hacked, according to CryptoGo.
- Staking on the Bitcoin chain
- Alternatively, BTC can be locked on the Bitcoin chain. If a violation occurs on the PoS chain, evidence is sent from the customer chain to the provider chain. The challenge lies in using Bitcoin’s scripting language, as there are no smart contracts on the Bitcoin chain.
BabylonChain offers a solution on top of the second approach, addressing the lack of smart contracts through a combination of cryptography, consensus protocol innovations, and optimized use of Bitcoin’s scripting language.
Similar to PoS in Ethereum, if a person stakes BTC and validates the PoS chain honestly, the BTC is returned, and a reward is granted. However, if a safety violation occurs, the staked BTC is slashed. Specifically, the staker’s private key is leaked, allowing anyone to send the violator’s BTC to a burn address as punishment. Under Babylon’s BTC staking protocol, as long as 2/3 of the BTC stake is honest, the chain remains live. Unlike other cross-chain staking protocols like Ethereum Restaking, Bitcoin staking reduces over-leverage risk. In Ethereum Restaking, ETH is staked on both the provider and consumer chains. In BTC staking, since PoW does not support staking, there is less exposure for the staker.
In brief, it’s great to see Bitcoin develop additional capabilities beyond being a store of value, as it increases utility for Bitcoin, enhances security for PoS chains, and addresses the high inflation issues faced by smaller PoS chains.
Reference:
BabylonChain. (2023, July 13). Bitcoin Staking Litepaper. Retrieved from https://docs.babylonchain.io/assets/files/btc_staking_litepaper-32bfea0c243773f0bfac63e148387aef.pdf