Written in front:

This is an unconventional research report about @babylon_chain, and also a milk article and warning about BTC restaking. This article was written on the 12th day after the Bitcoin halving, the XXth day after the Bitcoin Restaking track broke out, and the XXXth day after the Bitcoin Restaking bubble burst.

Without further ado, let me state the conclusion first. The BTC restaking track represented by Babylon will create a huge bubble in the Bitcoin ecosystem. This Restaking revolution originating from the Bitcoin ecosystem will have an influence no less than that of Inscription.

I would like to use this article to commemorate the feelings of many friends who, like me, want to take advantage of the Bitcoin Restaking boom.

1. Causes of Bubble

1) BTC’s transformation from a store of value to an interest-bearing asset

Since the birth of Bitcoin, BTC has been regarded as digital gold for value storage. It is difficult for BTC holders to obtain excess returns such as Defi, and BTC has become an idle sediment asset on the chain.

According to Deflama data, interest-bearing Bitcoin is currently scattered across 87 chains, 412 protocols, and 574 liquidity pools. Without exception, all interest-bearing Bitcoin has left the original Bitcoin chain, and there are some degree of trust assumptions in the form of packaging and bridging BTC (such as the most widely used WBTC, which requires trust in a single entity, and the sidechain/L2 BTC, which requires trust in a multi-signature committee, etc.);

According to data provided by Messari researcher @NikhilChatu, the current scale of interest-bearing BTC exceeds $10 billion, of which $4 billion is earning income, with a yield of between 0.01% and 1.25%. Interest-bearing BTC achieved through custody solutions all have more or less trust assumptions.

2) The awakening of non-custodial Bitcoin solutions

The centralized custody risk has become an insurmountable mountain on the road to Bitcoin interest-earning, and the non-custodial Bitcoin pledge solution has become a shortcut to cross the mountain. Non-custodial Bitcoin, also known as the self-custodial Bitcoin solution, in short, means that BTC realizes asset interest and appreciation under the premise of "not leaving the original Bitcoin chain, not encapsulating, not crossing chains, not being custodial, and not adding any trust assumptions."

Currently, the only protocol that implements non-custodial Bitcoin on the mainnet is @Coredao_Org, and Babylon (another non-custodial Bitcoin staking solution) is in the testnet stage and has not yet been launched on the mainnet.

At this point, BTC can generate interest on its assets in a trustless and more secure way, whether through BTC staking mining or through re-staking to provide security services for PoS sub-chains.

@eigenlayer, the leading protocol focusing on Ethereum Restaking scenarios, has a TVL of $15 billion, accounting for 5% of Ethereum's circulating market value; Bitcoin has a market value of more than $1 trillion, and unlocking 1.5% of its liquidity can leverage $15 billion. The non-custodial Bitcoin Restaking track is currently blank, like a baby in swaddling clothes, and Babylon, which is positioned in this track, has a unique advantage.

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But at the same time, a bubble crisis regarding BTC restaking is quietly brewing.

The next chapter will talk about why to embrace the bubble. As for why it is considered a bubble and why the bubble will burst, it will be discussed in the last chapter of the full text.

2. Why embrace when you know the bubble has burst?

1) Narrative Drive

The main theme of the narrative of this bull market cycle is the Bitcoin ecosystem, from the narrative of new Bitcoin assets (Ordinals BRC20, Atomicals ARC20, RGB++, Runes, etc.) to the explosion of various Bitcoin second-layers (Merlin, Bouncebit, etc.), which have brought users fascinating narratives such as new Bitcoin assets and Bitcoin smart contract scenarios. Babylon and CoreDAO have brought the narrative of non-custodial Bitcoin staking/restaking to the leeks, clearly telling the leeks that our technology can be used for staking/restaking without transferring the control of your BTC on the Bitcoin chain, making Bitcoin an interest-bearing asset. This seed symbolizing love and freedom (enjoying the security and decentralization/trustlessness of the Bitcoin mainnet) has begun to take root in the hearts of the leeks. The narrative of non-custodial Bitcoin is attractive enough, just waiting for a round of spring rain irrigation from the rotation of Bitcoin sectors.

CoreDAO has launched non-custodial BTC staking on the mainnet. Here, I will use CoreDAO to briefly explain the implementation principles of non-custodial BTC staking.

Non-custodial BTC is also called self-custody or native staking. BTC is not encapsulated, does not cross chains, and does not add any trust assumptions. It is only on the Bitcoin chain and relies only on the Bitcoin native scripting language.

The core of the implementation of non-custodial BTC staking technology is the application of CLTV time lock.

CLVT: OP_CHECKLOCKTIMEVERIFY (CLTV) A timelock is a specific opcode in the Bitcoin scripting language that allows conditions to be created based on time or block height, and bitcoins cannot be spent from a transaction output until these conditions are met.

The specific implementation process is as follows:

The user sends Bitcoin from one address to another time-locked address (the receiving address is derived from the user's primary wallet private key, and the user has control over the address assets). In addition, the transaction needs to include an op_return output, which contains the following two parts of information:

1) The staker wishes to delegate Bitcoin to the address of the CoreDAO chain validator;

2) The address where the staker wishes to receive CORE token rewards.

After the time lock expires, the user can spend the UTXO using the corresponding redemption script.

At this point, BTC native staking is complete. Users cannot spend Bitcoin until the staking period ends. BTC participates in the consensus of the CoreDAO chain through native staking, providing BTC with an opportunity to earn CORE token rewards in exchange for their contribution to the CoreDAO chain consensus.

The implementation mechanism of Babylon's non-custodial BTC is similar to CoreDAO, which uses time lock technology to set spending conditions and slash conditions for BTC. When users implement the "BTC staking" operation on the Bitcoin mainnet, they actually entrust BTC to Babylon's validator node through time lock technology to provide consensus for the Babylon chain to obtain consensus rewards. If the validator node acts maliciously, since the slash condition of BTC UTXO has been set before, the non-custodial BTC will be sent to a destruction address.

Babylon's "upgraded" function based on CoreDAO is to propose the concept of BTC restaking. If non-custodial BTC staking can provide services for Babylon's consensus, then this consensus service can also be extended to any PoS chain that integrates Babylon. In short, the act of entrusting BTC to other PoS chains to provide consensus services and obtain consensus rewards through Babylon as an intermediary is called Babylon's BTC restaking.

Babylon acts as the middle layer between the Bitcoin network and other PoS chains that integrate Babylon, aggregating important transactions that occur on the PoS chain (such as staking, unstaking, double spending, review transactions, etc.) and publishing them to Bitcoin through timestamps network. Based on the timestamp service, the time for unplacing the PoS chain consensus assets will be significantly shortened (from weeks to hours).

According to the information provided by Messari, Babylon has currently cooperated with 45+ projects, including @cosmoshub, @injective, @SeiNetwork and many other popular Cosmos ecological chains; AI & DePin chains; Bitcoin L2 chains, etc. This means that through the BTC restaking service provided by Babylon, users' BTC assets on the Bitcoin chain can work at several jobs at the same time (provide consensus services for multiple PoS chains) and receive multiple salaries (consensus incentives from different PoS chains) without leaving the original Bitcoin chain, being non-custodial and trustless.

2) Demand-driven

The Bitcoin ecosystem has been the persistent narrative of this bull market cycle. From the competition for new assets in the Bitcoin ecosystem to the battle of hundreds of chains in Bitcoin L2, it is hard to say that it is driven by actual demand. It is more driven by the hype demand for hot spots and concepts.

The non-custodial BTC restaking track represented by Babylon is closer to a narrative driven by actual demand. BTC has always been considered as a value reserve in the crypto world, but there is no asset interest-earning scheme widely recognized by the market. The reason can be attributed to the fact that there is currently no sufficiently decentralized, trustless, and secure solution to achieve BTC defi income.

When the more decentralized and more secure Bitcoin self-custody solution provided by Babylon is verified by the market to be stable and feasible, and can obtain stable BTC restaking income, we can make an optimistic assumption that we have reason to believe that large investors are willing to use the idle BTC in cold wallets to "earn money", and the behavior of large investors can also drive the FOMO of small investors.

3) Institutional drive

After talking about narrative-driven and demand-driven, let’s take a look at Babylon’s financing situation.

In December 2023, Babylon announced the completion of a round of financing of US$18 million led by Polychain Capital and Hack VC, with participation from Framework Ventures, ABCDE Capital, IOSG Ventures, Polygon Ventures and OKX Ventures; in February 2024, Binance Labs announced the completion of a round of financing for Babylon, but the specific amount is unknown.

From the financing of Binance Labs for the BTC restaking track, it can be seen that Babylon is a very important part of Binance's entry into the Bitcoin ecosystem. Binance Labs has successively announced the financing of Babylon, @Stake_Stone, @bounce_bit and other projects. Binance undoubtedly sees the huge potential of this specific track of the Bitcoin ecosystem.

3. Without exception, the bubble will burst

The BTC restaking track represented by Babylon is leading the direction of the Bitcoin ecosystem narrative. Driven by multiple factors, the bubble will be blown bigger and bigger, and the liquidity of a huge amount of Bitcoin deposited assets will be unlocked. But the bubble will eventually burst when the market sentiment is at its highest, and the big players will make a lot of money, and the leeks will wake up from their dreams.

1) Risk superposition under the nesting doll mechanism

As mentioned above, BTC restaking through Babylon can provide consensus services for multiple PoS chains and obtain multiple consensus rewards. However, risks and benefits are proportional. For every additional benefit, there will be an additional slash risk. Under the multiple nested slash mechanism, the risk will be infinitely magnified.

2) From demand-driven to sluggish demand, a negative economic flywheel is created

The demand for BTC restaking comes from the fact that BTC holders can obtain considerable restaking income in a safer way. In the downward cycle, when the price of the consumer chain consensus incentive token falls, the restaking income will drop sharply, and a trade-off point will appear at this time.

If the potential slashing risk is greater than the potential restaking benefits, there will be a wave of BTC unstaking, the trust crisis will spread, large investors will flee, and retail investors will follow. Demand will tend to be sluggish, and a negative economic flywheel will be created.

postscript

Finally, from an emotional perspective, let's assume that Babylon's life cycle also follows Buffett's wise saying: "I am greedy when others are fearful, and I am fearful when others are greedy." At least now, it is far from the time when others are greedy.

BTC restaking will create an unprecedented Bitcoin ecosystem bubble, but before the bubble bursts, please welcome and embrace it.

The content of this article is purely fictional and any similarity is purely coincidental.

The full text is over.

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Written on the 12th day after Bitcoin’s fourth halving.