Participated in an online discussion about a BTC staking protocol under development.

According to the introduction, the protocol is based on the implementation principle of UTXO, and uses technologies such as OP_RETURN re-marking, check lock time verification (OP_CLTV) and partially signed BTC transactions (PSBT) to achieve local staking of BTC assets to realize the asset issuance of protocol tokens.

After listening to the introduction, I sorted out my own views and found the aspects that are easier to understand:

1. Security: This is local staking. Although assets are constrained by staking for a certain period of time, the control of assets remains in the hands of users.

2. Adaptability: Since it is based on UTXO, pledged assets can be applied to all UTXO-based asset protocols, such as interoperability and asset pledge with Ordinals, ARC20, RUNES, RGB++ and other protocol assets.

Judging from the functions introduced, the main method is to issue protocol tokens through staking, and the protocol can become a Lanchpad for other assets.

Here are some comments:

1. Asset relevance: There is actually no direct correlation between the pledged assets and the assets to be issued. It seems that the issuance of protocol tokens is achieved by pledging assets such as BTC, but the protocol tokens have nothing to do with the pledged assets. This is the same as pledging various assets on Merlin SEAL for $Merl distribution.

2. Means and purpose: Staking is a means, and the purpose is to gather various asset communities to enhance the consensus of issuing assets. Once you participate in staking, your butt will determine your head, making it easier to reach a consensus.

3. What does TVL indicate? Pledged TVL can reflect the strength of consensus to a certain extent. In this sense, the parties to the agreement have the motivation to take various marketing measures to expand the types of pledged assets and increase TVL; the more types of pledged assets and the higher the TVL, the stronger the consensus. This requires the operation and resource integration capabilities of the parties to the agreement.

But in essence, TVL neither reflects the market value of tokens nor forms token liquidity, and cannot reflect or form the true value of tokens.

4. Fairness and decentralization: The distribution of protocol tokens through staking seems fair and decentralized, but the result of token distribution may not be reasonable and decentralized. Financial strength determines the number of tokens obtained, so a few people may obtain a large number of tokens, exacerbating token concentration.

5. Programmable and combinable DeFi capabilities: Since it is local staking and the assets issued are also based on UTXO, both the pledged assets and the protocol assets lack programmability and scalability, making it difficult to expand and combine DeFi capabilities. How can tokens be empowered? At present, it is unknown what the protocol parties consider in this regard.

6. Deviation between asset issuance, liquidity and token value: For this crypto cycle, BTC ecosystem issuance is an important narrative, but at present, after the issuance of assets such as BRC2O, ARC2O, RUNES, people are increasingly aware that an innovative category of assets will bring a wave of enthusiasm, but how to have continuous liquidity to give tokens long-term consensus and value is a daunting challenge.

This problem has not been solved. In fact, overall, the marginal benefits of asset issuance are diminishing, which means that everyone's enthusiasm for chasing newly issued assets will quickly fade. For example, RUNES-type assets, although long-awaited, were only popular for two or three days after they were launched.

7. Returns for pledgers: In terms of returns, the pledge method of this protocol, although it is also local pledge of high-quality assets such as BTC, is different from Babylon’s staking of BTC. In Babylon, BTC enhances the security of various POS chains, so that it can continue to obtain continuous returns provided by the POS chain.

The protocol pledges BTC to realize the issuance of protocol tokens, and the pledgers can get protocol tokens in return. However, this is just a distribution method, and the assets pledged have no direct relationship with the protocol tokens, and the protocol tokens are not empowered by BTC.

In other words, the returns to stakers are actually full of uncertainty. In the short term, it is related to the income from staking mining, and in the medium and long term, it depends on whether the protocol tokens have other continuous empowerment methods such as consensus, liquidity, and value capture.

If not, then the ability to activate idle BTC is limited, and the ability to attract other BTC ecosystem assets will also be limited.

In other words, if the protocol mechanism cannot be opened up to form automatic vitality, it will have to be completed through off-chain operations, which becomes a "hard labor" job.

But then again, since the parties to the agreement mainly introduced the narrative of "staking mining" during the discussion, the above analysis is also based on this, and the analysis may be one-sided or incorrect.

Maybe someone has more in-depth and comprehensive considerations, let’s talk about it later, and just make a record here.