Author: Haotian
It has been nearly a month since the launch of the @babylonlabs_io mainnet, but the expected market response for BTCFi has not been as enthusiastic as anticipated. So, what problems were exposed during the first phase of Babylon's staking process? Does Babylon's narrative logic for sustainable interest generation hold up? Has the market expectation impact of Babylon been overestimated? Next, let me share my thoughts:
1) The innovative core of Babylon adopts a Self-Custodian approach, allowing users' BTC assets to be locked in the Bitcoin mainnet in the form of script contracts, while being able to output "secure consensus services" on numerous BTC layer2 networks to obtain rich returns provided by other expansion chains.
At present, only the first half of this statement holds true. Indeed, Babylon's sophisticated cryptographic algorithm architecture enables the possibility for users to hold BTC in a self-custodial manner while generating additional income. Other CeDeFi or Wrapped forms that allow native BTC to break free from the original chain's constraints require a third-party custodian platform, which Babylon does not need. If the wallet supports it, users can see that the BTC staked in the Babylon protocol still appears in their balance.
As for the latter half of this statement, it can currently be considered an immature "promise." This is because in order to transform Babylon's secure consensus into a service and generate income, the following prerequisites are needed:
Firstly, there needs to be a large number of users, including Validators nodes with a large proportion of voting power, staking BTC in the protocol deployed by Babylon within the Bitcoin mainnet.
Secondly, there needs to be a aggregation of a large amount of LST assets and the generation of strong liquidity to form a solid foundation for the ecosystem, including users and TVL.
Thirdly, there needs to be a large number of new layer2 POS chains "purchasing" the secure consensus services provided by Babylon and offering sustainable Yield returns.
2) Currently, the Babylon protocol has only opened a limited staking of the first 1,000 BTC in the first phase, which can only be considered an experimental launch phase, but it has exposed many problems, making it challenging to meet all three of the aforementioned prerequisites. For example:
- The staking process and interaction with the Babylon protocol will result in high "transaction fee losses."
This includes: the overall network transaction fee surge caused by the Fomo effect of the staking network, as well as the corresponding fees generated by subsequent protocol operations such as Unbond and Withdraw.
Taking the first phase staking War as an example: if each transaction is limited to depositing only 0.005 BTC and only the first 5 blocks' transactions are valid, if a single institutional Validator wants to deposit 100 BTC, they would need to initiate 20,000 transactions on the chain within 1 hour and confirm them earlier than other competitors. This will inevitably lead to a short-term surge in network transaction fees, greatly increasing the cost for stakers, with the miner fee ratio exceeding 5% (for reference only, specific data subject to official sources).
- The original BTC deposited in Babylon and its ecosystem's circulating Wrapped version of BTC are not strictly 1:1.
Since Babylon does not have a directly circulating Wrapped version of BTC, the Wrapped version of BTC circulating within the Babylon ecosystem is provided by some participating staking nodes, including: @SolvProtocol, @BedrockDeFi, @LorenzoProtocol, @Pumpbtcxyz, @LombardFinance, and others. These institutional Validators stake a certain amount of BTC in Babylon, but the actual liquidity of the aggregated Wrapped version of BTC far exceeds the amount of BTC they have staked (in fact, the scale of LST liquidity also needs to be expanded).
This means that while the Babylon protocol can ensure the security of native BTC assets staked on the Bitcoin mainnet, the liquidity risk and absolute trust of various Wrapped version BTC circulating on the aggregation platform cannot be guaranteed by Babylon. It still relies on these aggregation platforms to undergo public audits, contract transparency, and a series of credibility endorsements.
In other words, if Babylon is likened to Lido, after users deposit ETH, there will not be a corresponding stETH for circulation. The actual liquidity is provided by aggregation platforms such as Solv Protocol (SolvBTC.BBN) and BedRock (uniBTC). Babylon then plays a role similar to a partially reserved central bank, only constraining the liquidity suppliers (local banks) to a certain extent, and the overall security depends on the unified efforts of the central and local entities.
The above two issues determine that in this wave of BTCFi, Babylon only plays a role of "security reinforcement" on the stage, and the real performance still depends on aggregation liquidity platforms such as Solv Protocol, BedRock, Lorenzo, PumpBTC, etc.
The key is that the overly Fomo-driven market sentiment at the beginning will significantly raise the "entry cost" for these participants, undoubtedly strengthening the "exit" pressure for subsequent Yield generation.
Just as the development dynamics of the Eigenlayer AVS service market are related to the Restaking track's lifeline, the commercialization progress of Babylon's secure consensus service output has also become the market answer that Babylon must provide.
3) So, how can Babylon's "shared security" service paradigm generate sustainable Yield returns? In my opinion, relying solely on the evolution of the market incentivized by Babylon's social secure consensus is not enough; another force is needed to strengthen the demand pool for POS chains.
In other words, Babylon's narrative logic for maintaining the upstream and downstream economic chain is not solid, and there is great uncertainty on the procurement side.
Suppose a newly built POS chain wants to join the Babylon ecosystem. Babylon must first establish a complete node Validators network to provide AVS services, such as Eigenlayer establishing a narrative for AVS services on the mainnet, providing a series of services including decentralized Sequencer, oracle, ZK coprocessor, etc.
At present, perhaps due to the premature launch of the mainnet protocol, Babylon does not have mature commercialized services. It seems that the market's expectations for Babylon only involve actively participating in staking voting rights competition, then engaging in a battle for aggregated liquidity points, and ultimately relying on expanding the overall Babylon liquidity market to share the spillover dividends. This approach may be feasible, but relying on stacking market expectations to drive ecosystem development may be too "passive." Is there an "active" BTCFi interest-bearing solution?
Yes, as I mentioned in a previous article, Babylon fundamentally provides a "secure" batch replication paradigm for BTC layer2 by constraining the construction of "social secure consensus" through an economic model. It also requires a paradigm of various chain-based modular components built on ZK technology to strengthen the "technical secure consensus" replication paradigm for BTC layer2.
Taking the ZK general architecture application chain @GOATRollup as an example, the @ProjectZKM team has built a general layer2 framework based on ZK technology, including a universal zkVM execution layer, an Entangled Rollup Network for shared interactive communication, a decentralized Sequencer shared layer, etc., ultimately providing native cross-chain without bridging, unified liquidity, and interactive operation center services through generalized components to serve layer2.
Compared to Babylon, Goat Network locks the user's native BTC on the Bitcoin mainnet, then provides a 1:1 Wrapped version of BTC (goatBTC), and generates native mining income (yBTC) through the decentralized Sequencer, and introduces designs such as Pendle's interest separation to enrich the possibilities for income.
It can be said that Goat Network is similar to the "Rollup as a Service" service provider in the Ethereum layer2 system, which can output a generalized modular paradigm to expand the scale of BTC layer2 POS chains and provide a sustainable BTC income economic model to ensure the feasibility of its narrative.
It is not difficult to see that the greatest value of Babylon's innovative cryptographic security paradigm lies in quickly aggregating the previously dispersed BTC market liquidity and forming the potential for ecosystem development. The core capital scale and efficiency of liquidity are the underlying logic that supports its narrative.
To expand the scale effect of POS chains and increase the commercialized output of secure consensus services, it still relies on zk technology to complement it, to promote modular shared Sequencer, Interoperability, DA, and other component services.
As for whether Babylon is overvalued or has been misjudged, I believe the above viewpoints can provide some enlightenment.
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