BTC is the most secure and decentralized asset in the world, and Babylon has unlocked $1.2 trillion worth of Bitcoin through BTC staking to share security. With the explosive growth of Ethereum re-staking and the development of the BTC ecosystem, Babylon will continue to grow.
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If this model of shared security is ideal for ETH, why not do the same for an even more desirable and secure asset: Bitcoin? Babylon is now sharing over $1.2 trillion in security value with other networks to earn BTC staking rewards.
Babylon Team
Babylon received $18 million in financing from top investors.
Babylo advisors are Sreeram Kannan and Zaki. David Tse is a professor and director of the Tse Engineering Lab at Stanford University. The lab published a research report in 2021 pointing out the Ethereum PoS vulnerability.
How Babylon Works
Babylon is a secure aggregation layer between any PoS chain and Bitcoin, supporting BTC staking. The staked BTC is still stored on the Bitcoin network, and Babylon uses their internal protocol to convert the staked assets and entrust the security of Bitcoin to other networks.
In exchange, BTC stakers can earn yield on the native token of the consumer blockchain. This provides idle BTC holders with the ability to keep their assets upside while earning yield on another asset.
The architecture of Babylon is shown in the figure below:
Babylon uses a time-locked self-custodial vault where BTC holders stake their assets on the Bitcoin blockchain for a certain period of time. Assets can only be retrieved using the BTC holder’s private key.
Babylon’s timestamp protocol allows PoS blockchains to publish arbitrary data and communicate with the Bitcoin network, and retrieve timestamps that can be used to synchronize networks that gain security through BTC staking on the Bitcoin blockchain.
The blockchain publishes the hash of any "important" transaction (such as staking, unstaking, double spending, censored transactions, etc.) to the Bitcoin network through Babylon, which aggregates the hashes of all blockchains that have chosen this service.
But if Bitcoin Script is so limited, how can slashing be done? Babylon’s clever design requires BTC stakers to use their private keys to lock, unlock, and slash their stakes. This is useful considering that the main attack against blockchains is the double-spend attack.
If a BTC staker’s private key is used to sign a block twice at the same time, the private key is compromised and the BTC is sent to a burn address. This is done via extractable one-time signatures (EOTS), which are backed by Bitcoin via Schnorr signatures.
Why Cosmos and IBC? Babylon can aggregate and communicate messages and arbitrary data between Bitcoin and other blockchains via IBC. By default, IBC-compatible chains can send important transactions and timestamp data from one chain to another.
Using IBC, Babylon can aggregate checkpoints of important transactions from any IBC-compatible chain and store them on the Bitcoin network using cryptographic techniques. Integration is as simple as opening an IBC connection with Babylon and having validators run some lightweight modules.
How does PoW improve PoS security?
PoS security is more subjective and depends on consensus among validators through social consensus in the event of an attack, and security does not change unless the number of stakers changes.
PoW security is more objective and will grow over time as hash power accumulates. As more and more blocks are mined, transactions become more and more secure.
How much attention did Babylon get?
On the testnet, Babylon has over 100,000 BTC stakers and has reached at least 45 partnerships, second only to EigenLayer’s 13+AVSs, which is impressive. These partnerships come from Cosmos chains, decentralized AI projects, Bitcoin rollups, and more.
Potential impact of Babylon
I will cover the following points:
(1) According to DefiLlama, the current one-sided Bitcoin yield market size exceeds $10 billion, of which $4 billion is active yield, with yields typically ranging from 0.01% to 1.25%, and requiring trust in certain versions of bridged BTC or wrapped BTC. Babylon offers self-custodial BTC staking, which has a lower degree of trust assumptions than the above options, and the staking yields on PoS blockchains range from 2.36% to 17%, with higher yields, in many cases 50 times higher than ordinary BTC yields.
(2) Babylon also has a competitive advantage because BTC’s interest rate premium is lower than ETH and almost all other crypto assets, and consumer chains using BTC as a security asset can pay less distribution (operating costs) for the same economic security.
(3) Ethereum currently has over $104 billion staked, less than 30% of its current circulating supply, supporting a vibrant LST economy with over $54 billion in TVL. There are also systems like EigenLayer with a TVL of nearly $14 billion.
Ethereum currently supports a TVL of $10 billion in the LRT ecosystem. BTC is valued at over $1.2 trillion, and less than 10% of its circulating supply currently needs to be staked through Babylon to compete with the Ethereum staking ecosystem.
(4) If PoS chains use Bitcoin for economic security because of the existing demand and value of holding Bitcoin, their security budgets will be lower. Some chains spend more than $40 million per year on their own economic security.
The money saved can be used to grow their network’s users and applications, making their applications and tokens more valuable.
(5) Babylon provides practical Bitcoin expansion solutions: As the demand for Bitcoin usage increases, Bitcoin and its adjacent L2, sidechain and bridge ecosystems are showing rapid growth. However, many expansion solutions are limited in the functionality they can provide without upgrading the network or without a decentralized third party.
Babylon is able to leverage and extend the utility of Bitcoin without requiring network upgrades or decentralized third parties, while still maintaining the momentum of the Bitcoin ecosystem.
(6) Ethereum and Cosmos are moving towards similar solutions, solving the same problems but in different directions.
Ethereum already has a security center and is the most decentralized and economically secure PoS blockchain. To scale, Ethereum relies on rollups that share security with Ethereum. The problem with this ecosystem is interoperability and composability between isolated rollups.
Cosmos approaches this problem from the opposite angle. The ecosystem already has a fixed interoperability framework (IBC) and a framework for scaling through application chains (CosmosSDK). However, the problem is the lack of a valuable security center that can be shared on a large scale.
Babylon shares Bitcoin’s economic security with the Cosmos ecosystem through IBC, potentially enabling it to truly compete with the Ethereum ecosystem.
Some potential challenges facing Babylon
The first is the number of BTC holders who have turned into stakers. A large portion of BTC holders hold idle BTC, with 25% of the BTC supply idle for more than 5 years and 67% idle for more than 1 year.
Another challenge is that IBC is a necessary prerequisite for Bitcoin staking or timestamping protocols. This limits Babylon's TAM to 91 Cosmos Zones. However, projects like Picasso and Landslide Network are expanding IBC to other chains.
in conclusion
Babylon is working to achieve what EienLayer has accomplished, but with a higher market cap of BTC security instead of ETH security. Unlocking new primitives for Bitcoin staking, making it easier for other chains to gain economic security and Bitcoin security, and providing yield on idle BTC are factors that could catalyze Bitcoin's current trajectory. With EigenLayer sharing Ethereum's $427 billion of security and a potential valuation of $3 billion to $15 billion, it's safe to say that after sharing Bitcoin's $1.4 trillion of security, Babylon will be a force to be reckoned with.
