(Proof of TVL) report directly addresses the opacity in the BTCFi space, calling for the establishment of higher standards for asset transparency verification, while proposing open-source TVL verification tools to provide strong support for the transparency of the Bitcoin ecosystem.
Written by: Alex Tang
In the Bitcoin ecosystem, total locked value (TVL) is a core metric for measuring the scale and security of BTCFi (Bitcoin finance) projects. However, as BTCFi expands, controversies surrounding the authenticity of TVL data have intensified. False statistics, double counting, and fabricated lockups are eroding user trust, posing severe challenges to the transparency and credibility of the Bitcoin ecosystem.
In response to this phenomenon, Nubit, along with leading Bitcoin ecosystem projects like Nebra, Bitcoin Layers, and Alpen Labs, released the (Proof of TVL) report on January 5, 2025, directly addressing the opacity in the BTCFi space and calling for the establishment of higher standards for asset transparency verification, while proposing open-source TVL verification tools to provide strong support for the transparency of the Bitcoin ecosystem.
The following is the original report:
Special thanks to Bitcoin Layers and Alpen Labs for reviewing this article and providing valuable feedback.
The evolution of BTCFi and liquid staking tokens (LSTs)
Bitcoin has long been the cornerstone of the digital asset ecosystem.
However, for many years, its use has been primarily limited to being a medium of value storage and exchange. It wasn't until 2023 that protocols like Babylon introduced the concept of Bitcoin staking, allowing users to lock their BTC in a self-custodial manner and participate in Proof-of-Stake consensus mechanisms for rewards.
This innovation opens a new era for Bitcoin, now often praised as BTCFi. This movement gives Bitcoin unprecedented capabilities. Henceforth, Bitcoin is no longer just a passive asset but can actively participate in the decentralized finance (DeFi) ecosystem.
To enhance the usability and liquidity of staked Bitcoin, a wave of liquid staking tokens (LSTs) has emerged. These protocols act as custodians, allowing users to stake their BTC and receive tokenized certificates in return. These LSTs can be freely used for DeFi applications, including lending, trading, yield farming, and more. This model allows Bitcoin stakers to have the best of both worlds: earning staking rewards while participating in a wide range of DeFi opportunities.
These LST protocols have rapidly gained user acceptance, with the total locked value (TVL) reported by related protocols reaching billions of dollars. TVL is often regarded as an important metric for measuring user activity and protocol success.
However, we want to raise a critical question for the industry: How reliable are the TVL data reported by Bitcoin LST protocols?
Specifically, should assets that the protocol cannot actually control or slash be counted towards TVL?
If TVL data is exaggerated, it could give users and investors a false sense of security. Inflated TVL data may obscure the true liquidity and risk profile of the protocol, leading all parties to make poor decisions and potentially suffer losses.
Why is it difficult to track the TVL of Bitcoin liquid staking protocols?
In the context of Bitcoin staking, the unique UTXO model of Bitcoin adds complexity, making the data regarding TVL (total locked value) difficult to interpret accurately. This complexity undermines trust in Bitcoin liquid staking protocols (LSTs) and raises concerns about the sustainability of the entire BTCFi ecosystem.
Let's closely analyze the reasons.
Bitcoin uses the UTXO model (unspent transaction outputs), where each transaction creates independent 'Bitcoin units' with specific usage conditions. For example:
A certain UTXO may require a private key signature to be utilized.
More complex UTXOs may include multisig requirements or timelocks.
Unlike Ethereum's account model, Bitcoin's UTXO model does not aggregate balances, making tracking and locking funds more complex—though not entirely impossible. Therefore, the TVL data of LST protocols is often reported by the protocols themselves. To verify these reported data, we need to start from a simple question:
How should the TVL of Bitcoin liquid staking protocols be calculated?
The goal of Bitcoin staking protocols is to provide economic security for application layer protocols (such as Rollups, Data Availability Layers (DAs), etc.). From this perspective, this economic security is only valid if the staked Bitcoin is custodially held by the staking protocol and is slashable. Therefore, one thing is clear:
Non-staked protocol custodial or non-slashable BTC should not be counted towards TVL.
How is the TVL of duplicate staking in Bitcoin faked?
Many Bitcoin liquid staking protocols, in pursuit of high TVL (total locked value), have made agreements with large holders (whales) at all costs, attempting to artificially inflate their TVL numbers by 'brushing data.'
Here’s how they operate:
Whale staking: Large Bitcoin holders (whales) are incentivized to transfer their BTC to an address jointly controlled by whales and the protocol to participate in the name of 'staking.'
Whale control remains unchanged: After staking, whales still retain ultimate control over the UTXO (unspent transaction outputs). The protocol cannot enforce redemption or impose penalties (including slashing penalties), meaning these funds were never truly at risk.
False inclusion in TVL: The protocol counts these UTXOs towards its TVL, even though these funds are not truly locked, and whales can withdraw or reuse these funds at any time.
The reality is:
Users (whales) retain complete control over the funds: Whales can spend these BTC at any time or stake them into other protocols.
Pseudo-staking without slashing penalties: This 'staking' process has no mandatory slashing conditions, rendering it essentially meaningless.
The core meaning of staking lies in ensuring network security by incentivizing good behavior and punishing malicious actions. Slashing penalties ensure that participants face actual financial loss risks when they do not comply with protocol rules or engage in dishonest behavior. Without this mechanism, staking becomes a farce of 'staking for the sake of staking,' devoid of practical utility.
Ask yourself: What is the true meaning of staking? It is not to exaggerate TVL data or make symbolic gestures, but to ensure the security of the protocol through slashing mechanisms.
This brings to mind the painful lessons from FTX. In the FTX collapse, the gap between the reported numbers (receipt tokens) and the actual reserves (redeemable assets) ultimately led to a complete breakdown of user trust. If a protocol exaggerates its TVL data, can you really believe it won't misuse your reserves behind the scenes? A protocol that distorts facts on such a fundamental issue as reserves is likely to have deviated from the trustless principles that Bitcoin represents.
This inflated TVL data raises larger questions: Are the Bitcoins reported as 'staked' really locked? Or is this merely a false metric aimed at attracting attention and inflating numbers?
The risks of false TVL
In theory, liquid staking tokens (LSTs) are designed to represent Bitcoin staked in protocols like Babylon, allowing holders to earn staking rewards while maintaining asset liquidity. This mechanism is premised on the fact that each LST is fully backed by real Bitcoin reserves at a 1:1 ratio.
However, some staking arrangements that pursue high TVL data may undermine these commitments. If some staked BTC is still fully controlled by the original holders while the protocol simultaneously reports it as fully locked, this directly threatens the fundamental assumptions on which LSTs exist. The result may be:
The actual locked collateral is lower than the reported amount.
The staking model cannot provide the expected security guarantees.
There is a significant gap between the reported TVL and the actual amount of BTC that is truly participating in staking.
Ultimately, these actions question whether LSTs are truly backed by verifiable reserves and raise doubts about the economic security that these tokens can provide, such as:
Lack of guarantees for 1:1 backing. Since the protocol counts Bitcoin that is not truly locked or staked as 'staked,' it does not guarantee that the assets supporting LSTs actually exist or are under the protocol's control. Users holding these tokens can only rely on the protocol's unilateral statements. Moreover, if these assets do not exist, users will face real financial loss risks when redeeming the underlying assets.
Unverifiable staking rewards. Staking rewards should come from a genuine contribution to network security or Proof-of-Stake consensus. However, when the underlying Bitcoin is not truly participating in staking, where do these rewards come from? Are they sustainable?
This poses a systemic risk to the entire BTCFi ecosystem. As trust diminishes, liquidity may quickly evaporate, threatening not just a single protocol but potentially impacting the stability of the entire Bitcoin staking-based BTCFi ecosystem.
What happens when Bitcoin staking protocols become indistinguishable from centralized entities? In this scenario, users cannot audit reserves and can only choose to trust the operator's statements. This situation severely threatens the credibility of BTCFi.
The current situation poses an existential threat to the credibility of BTCFi. To avoid repeating the mistakes of centralized systems and false TVL, we must address the root of the problem: the lack of a trustless and verifiable mechanism for proving reserves and staking activities.
This is precisely the key to Proof of TVL (PoTVL). Only by establishing a scientific, transparent, and cryptography-based reserve verification standard can we rebuild trust in Bitcoin LSTs and ensure the long-term sustainability of the ecosystem.
Fundamental solution: Transparent calculation of TVL
In the context of Bitcoin staking, Taproot addresses play a key role in implementing staking lock scripts (such as Babylon). These lock scripts define clear rules for the staking, tracking, and eventual withdrawal of BTC. Babylon is a typical example as it directly links staking behavior with verifiable protocol-level rules on the Bitcoin UTXO model.
When stakers participate in the staking protocol, they construct special transactions to send BTC to the Taproot address designated by the protocol. These transactions typically include the following:
Staking output: A UTXO used to send BTC to the Taproot address for staking.
Ownership verification output: A second UTXO containing the public keys of the staker and the protocol. These public keys prove the ownership of the staked BTC.
Taking Babylon's staking protocol standards as an example:
This specification requires stakers (or LST protocols) to construct transactions as follows:
The first UTXO sends BTC to a Taproot address bound to Babylon's staking lock script.
The second UTXO contains the public keys of the staker and Babylon to ensure ownership verification.
This design ensures that staking behavior can be fully traced on-chain while having clear proof of ownership and transparent rules.
Case study: Lombard Finance
To demonstrate the application of this method in practice, we used the open-source tool Proof of TVL to verify Lombard Finance.
Here is the complete verification process:
Identify user deposit wallets. Start from the wallets where users deposit BTC to Lombard. These wallets represent the initial capital flow into the system.
Track transactions to staking wallets. Track BTC from deposit wallets to the staking wallets controlled by Lombard. Identify all staking transactions according to Babylon's staking standards.
Verify ownership. Use Babylon's protocol rules to confirm that the staking transactions include the required public keys for ownership verification. Ensure that transactions comply with staking lock scripts.
Calculate real TVL. Aggregate the amount of BTC outputs in verified staking transactions to calculate on-chain collateral. Compare the collateral to the total supply of LBTC to calculate the staking ratio.
Through the steps above, we calculate Lombard's LST TVL as follows:
On-chain collateral in BTC: 16,580.9220 (15,028.3565 BTC / 90.64% staked)
Total supply of LBTC: 16,386.4157 (101.19% over-collateralized)
Latest verification time: January 4, 2025, 7:30 PM Pacific Time
Status: Secure (101.19% over-collateralized)
Verification details:
90.64% staked. Of the 16,580.9220 BTC in on-chain collateral, 15,028.3565 BTC is actively staked according to Babylon standards.
101.19% over-collateralized. The total supply of LBTC is 16,386.41, while the on-chain collateral is 16,599 BTC.
Complete on-chain transparency. Each staking transaction can be directly traced back to the deposit address of the Lombard protocol, and ownership verification complies with staking rules.
The verification process was completed on January 4, 2025, at 7:30 PM Pacific Time (at the time of writing), and the data is fully reproducible without human intervention. Using our open-source tool Proof of TVL, anyone can independently verify LBTC's TVL data in real-time.
This is true transparency.
While this solution provides high transparency, it has a key flaw: it relies on the trust that the protocol can accurately calculate and report TVL.
So, is there a way to eliminate this dependency and allow anyone to confidently verify the results independently? Zero-knowledge proofs (ZKPs) offer a potential solution path.
Using zero-knowledge proofs for TVL verification
One major advantage of zero-knowledge proofs (ZKPs) lies in their cryptographic trust mechanism while keeping verification costs extremely low, allowing users to directly verify zero-knowledge proofs on client devices like mobile phones or browsers. This greatly reduces the friction and trust assumptions for TVL verification. Now, users don't even need to trust a third party running the TVL verification protocol.
The zero-knowledge proofs used to verify LST TVL are specifically expressed as follows:
BTC from LSTs on Babylon + Reserve proof from LST wallets ≥ Total supply of LSTs
BTC from LSTs on Babylon
According to Babylon's transaction standards: For a transaction to be considered a valid staking transaction, the following conditions must be met:
Transactions need to have Taproot outputs, with key spending paths disabled, and submitted to a script tree consisting of the following three scripts: timelock script, unbonding script, slashing script. This output is called staking_output, and its value is referred to as staking_amount.
Transactions need to include an OP_RETURN output containing the following: global_parameters.tag, version, staker_pk (staker public key), finality_provider_pk (finality provider public key), staking_time (staking time).
To verify the BTC in LSTs on Babylon, we first need to check the validity of the staking transaction. For example, verify whether the Taproot output and OP_RETURN contain the same public key.
Reserve proof from LST wallets
We can adopt standard reserve proof protocols, such as the reserve proof protocol proposed by Vitalik Buterin: https://vitalik.eth.limo/general/2022/11/19/proof_of_solvency.html. Additionally, Shumo et al. proposed a slightly improved version. The only technical detail is that we need to replace the signature algorithm used in Ethereum with the one used in Bitcoin. For example, while both Bitcoin and Ethereum use ECDSA, Bitcoin opts for SHA instead of Keccak as the secure hash algorithm.
Total supply of LSTs. This is a public input provided by users.
TVL verification through zero-knowledge proofs effectively minimizes counterparty risk while lowering the threshold for any user verification results.
The future path of BTCFi
Bitcoin has long represented trust, decentralization, and transparency. However, with the proliferation of false TVL data in the Bitcoin staking space, these core principles are at risk of being eroded.
The solution is already very clear: TVL verification through zero-knowledge proofs provides a clear path to achieving true accountability.
By eliminating reliance on trust and allowing reserves to be verified by anyone, we can rebuild user confidence in Bitcoin LSTs and ensure that BTCFi thrives on a 'real' basis.
Ongoing participation
We believe in the power of collective progress. Here are ways you can help drive this process forward:
Provide more TVL verification analysis: Help expand the applicability of tools and contribute transparent analysis to other BTCFi protocols. Transparency is a collective effort for the entire ecosystem.
Contribute PR: Improve tools or suggest new feature ideas (e.g., implementation of zk-proofs).
Establish industry standards: Work with us to create publicly verifiable BTCFi transparency standards.
Spread the word: Share this article to raise awareness of the need for trustless TVL verification.
