In-depth analysis: Bitcoin Staking and Restaking project overview and future trends

Original author: CryptoMemento

Original translation: Vernacular Blockchain

The crypto bear market is taking another turn.

It’s a perfect time to write about Bitcoin. With news coming out about many restaking protocols, there’s a lot to discuss.

In today’s article, we will walk you through the shift in Bitcoin’s positioning in the Bitcoin Staking/Restaking track, the uses of Bitcoin Liquid Staking, active participants, and future trend forecasts.

Abstract: Bitcoin is about stability and security at its core, but with hot topics like Ordinals, Bitcoin NFTs, and Inscriptions, the Bitcoin community is experiencing a Bitcoin Renaissance, with entrepreneurs trying to build Bitcoin layers and ecosystems. Bitcoin is a permissionless protocol that anyone can build on, including those who want to build a Bitcoin-driven financial system and credit system. Bitcoin staking and restaking may follow a similar path, with major projects (such as Babylon) constantly building the foundation of orthodoxy while numerous liquid restaking protocols compete and define their roles, ultimately expanding boundaries and forming a networked ecosystem. Currently, the restaking track includes projects such as Babylon, Lorenzo, Pell Network, OrangeLayer Protocol, Chakra, Bedrock, and Lombard, and dozens more are expected to join the field. This track is still on the verge of a major breakthrough. At present, Babylon is temporarily ahead of the local restaking industry, but it is still worth paying attention to new players with technological innovation and iteration. The important goal of these projects is to find the path with the lowest incentive cost, establish an effective incentive and transmission mechanism, obtain sufficient TVL (total locked volume), and finally form a flywheel effect.

1. The starting point of leverage: making BTC more capital efficient

Before discussing the Bitcoin Staking and Restaking tracks, I would like to outline the evolution of Bitcoin’s positioning and identity since its inception:

• 2008-2017: Peer-to-peer electronic cash system, emphasizing its payment function, but Bitcoins performance (TPS) limits the scalability of this function. Based on this, the Lightning Network (LN) made significant explorations in Bitcoin payments, but ultimately failed.

• 2017-2023: Digital gold, as a holding asset and anti-inflation tool, provides currency pricing similar to the US dollar, and its main function is value storage/value medium.

• 2023 to present: The rise of Bitcoin Renaissance and the construction of Bitcoin trends, accelerating the exploration of Bitcoin performance limitations (scalability, smart contract programmability), and attempting to build the Bitcoin layer and Bitcoin economy.

• 2024 to present: Bitcoin is considered a financial asset by traditional financial institutions, and BTC spot ETFs involve more investors. Bitcoin is stable and secure at its core, focusing on a single purpose, but things are always changing.

Fast forward to 2023 and 2024, when assets such as Ordinals, Bitcoin NFTs, Memes, Inscriptions, and Runes begin to rise wildly. Investors who enjoy the soaring prices of these assets propose a new Bitcoin, transforming Bitcoin from a medium of value to a culture. Based on the consistency of the Bitcoin spirit (although somewhat far-fetched), they try to provide a pricing framework to re-evaluate the value of Bitcoin and naturally create demand for credit and income for Bitcoin holders.

Adhering to the principle of existence is reasonable, it is unrealistic to expect Bitcoin income products to disappear. Therefore, we no longer judge Bitcoin maximalists or Bitcoin fundamentalist culture, because Bitcoin is a permissionless protocol that anyone can build on top of, including those who want to build a Bitcoin-driven financial system - which inevitably introduces credit and leverage.

At this stage, the narrative of this track can basically be returned to making BTC more capital efficient. According to Mikhil Pandey, co-founder and chief strategy officer of Persistence Labs, the obstacles to making Bitcoin more capital efficient can be roughly embodied as the following factors:

• Lack of sustainable revenue opportunities

• Friction of “moving” BTC for risk-averse holders

• Lack of institutional-friendly income products

• Unknown security risks of moving BTC off the Bitcoin network

• Opposition from some OG Bitcoin holders

It is undeniable that the track to obtain more diversified returns based on Bitcoin is still in the early stages of exploration, especially after the collapse of centralized institutions such as Celsius, BlockFi and FTX in 2022, centralized income platforms/projects of crypto assets need to rebuild more trust during market expansion.

2. Understand Bitcoin Staking/Restaking Protocol

To understand Bitcoin Staking, you first need to understand how Staking is generated and where the rewards come from.

The biggest feature of Bitcoin, Ethereum, and Solana blockchains is that they build a trustless network. Miners and nodes around the world update the entire network state (data, transactions, balances, etc.) based on certain consensus rules and maintain consistency. Among them, the PoW network relies on computing power (mining), while the PoS chain requires blockchain validators to stake tokens before proposing or voting on blocks. This allows the PoS protocol to hold violators accountable and confiscate their staked tokens as punishment. Of course, honest participants will receive block rewards, and this mechanism is designed to maintain and achieve network consistency.

In our previous Bitcoin Biweekly Report, we mentioned that Bitcoin Staking is the second largest unified track in the Bitcoin ecosystem after Bitcoin L2, and the primary market and entrepreneurs have a relatively unified consensus on this. The logic is as follows: Due to the lack of external economic incentives, the security of many emerging PoS chains (new projects are always emerging, mostly PoS chains) is limited by the scale of the on-chain economy and there are control risks. Bitcoin Staking and Restaking protocols provide security for PoS networks by introducing Bitcoin, the most consensus asset.

We can get some information about this track from the Ethereum ecosystem project EigenLayer and its ecosystem projects.

EigenLayer is an Ethereum-based Restaking protocol that allows staked ETH on the Ethereum network to enhance network security through Restaking. By leveraging the staked ETH on Ethereum, it supports the secure operation of other blockchain protocols and applications, a process called Restaking. Restaking allows Ethereum validators to use some or all of their staked ETH to support other active verification services (AVS) such as bridge protocols, sequencers, and oracles. Typically, these services require their own staking and verification mechanisms to ensure network security, but through EigenLayers heavy staking capabilities, they can obtain Ethereum-level security without attracting a lot of capital themselves.

EigenLayer has the following characteristics:

Establish a new security sharing model: Allow different blockchain protocols to share Ethereums security infrastructure without having to build a large validator network, significantly reducing the startup cost of new blockchain protocols. In addition, heavy staking increases the entire networks resistance to attacks, because attacking any protected protocol requires overcoming the additional security from heavy staking.

Improve the capital efficiency of ETH: The same ETH can serve multiple networks at the same time. Users can enjoy the original staking rewards while getting additional rewards by participating in other AVS protocols.

Lower the participation threshold: Through the heavy staking mechanism, small stakers can also participate in the network security of Ethereum. Stakers do not need to reach the full staking threshold of 32 ETH; individual stakers can participate through Liquid Staking Token (LST).

Increased decentralization: By staking small amounts, the entire network can reduce its reliance on large stakers.

3. Types and characteristics of heavy pledge

Currently, EigenLayer supports two Restaking methods: Native Restaking and Liquid Restaking.

Native Restaking involves Ethereum PoS node validators connecting their staked ETH in the network to EigenLayer to participate in the AVS validation process.

Liquid Restaking allows the circulation of pledge certificates issued by LSP (Liquid Staking Protocol), which represent the right to the original pledged ETH and can be used freely in various decentralized finance (DeFi) protocols without affecting the pledgers pledge status and reward collection on Ethereum. In addition, Liquid StakingToken (LST) can generate additional income in DeFi protocols or be sold on the market without waiting for a long pledge period, thereby earning EigenLayer platform points and other benefits.

In contrast, native Restaking does not involve intermediate tokens, reducing the risks caused by token volatility or mismanagement, but liquid restaking has better liquidity and shorter asset unlocking and transfer time.

Currently, the EigenLayer ecosystem has begun to support multiple AVS and integrate with several well-known DeFi protocols and other blockchain services. It allows the use of different types of staking proofs (such as LST and native ETH) to support these services and improve capital utilization efficiency.

At present, Bitcoin Staking and Restaking may follow a similar path, with mainstream projects (such as Babylon) constantly building an orthodox foundation, while numerous liquid restaking protocols compete and define their roles, ultimately expanding boundaries and forming a networked ecosystem.

4. Bitcoin Restaking Ecosystem Mapping

After reviewing most projects in this space, we can identify several common narratives they use to justify their existence and convince the market of their fit. Here are some familiar phrases, but be wary:

Bitcoin is the most secure blockchain in existence, and no asset has a stronger trust foundation than Bitcoin.

Unlocking Bitcoin’s economic potential, making $1.5 trillion worth of Bitcoin liquid and providing holders with sustainable yield opportunities.

By inheriting Bitcoin’s trustless foundation, we build the BTC financial system by relying on Bitcoin’s original security to earn returns or make BTC more capital efficient.

We bridge the gap between PoW and PoS blockchain systems, leveraging the security of Bitcoin.

Bitcoin-collateralized derivative assets have huge market potential, including the construction of collateralized stablecoins, borrowing and derivative revolving loans, structured products, liquidity management agreements, yield management or interest rate swap agreements, and governance management agreements.

To gain a deeper understanding of the current heavy staking track, we reviewed several projects and provided a brief introduction and review.

1) Babylon

Babylon is an infrastructure/general middleware for Bitcoin security sharing. The team has developed two security sharing mechanisms: the Bitcoin Timestamp Protocol and the Bitcoin Staking Protocol, which share Bitcoin security with PoS chains or Layer 2 in a trustless and self-custodial manner, thereby obtaining corresponding security returns while significantly reducing their own inflation.

Current development stage: Bitcoin staking testnet-4 is now online.

Brief comment: Currently, most heavy pledge protocols choose Babylon as the starting point for project momentum, hoping to use more asset-layer protocols as agents to build more diversified asset sources and cost sharing. Of course, these projects also need Babylon as a source of income.

2) Lorenzo

Based on Babylon, Lorenzo allows Bitcoin holders to convert BTC to stBTC, participate in Bitcoin staking and receive rewards without locking up funds. At the same time, Lorenzo divides Liquid Restaking Token (LRT) into Liquid Principal Token (LPT) and Yield Accumulation Token (YAT), and plans to build interest rate swaps, loan agreements, structured BTC income products and stablecoins in the future. The project focuses on building an efficient Bitcoin liquidity allocation market and liquidity assetization.

Current development stage: Beta mainnet is online.

Current data: Invite only, Beta mainnet has 1000 BTC deposited.

Brief comments: One of the participants, the biggest highlight of marketing is the participation of BN.

3) Pell Network

Pell Network is an active verification service (AVS) network built on the heavy staking protocol in the Bitcoin ecosystem. Its goal is to aggregate BTC and its LSD liquidity assets scattered on various Layer 2s into a unified Pell network ledger, thereby creating a decentralized AVS ecosystem service network.

Current total locked value (TVL): $172 million

4) OrangeLayer Protocol

OrangeLayer is a Bitcoin staking infrastructure that aims to bring Bitcoins cryptoeconomic security into the Ethereum ecosystem and provide a wider range of Bitcoin Protection Services (BPS). Unlike protocols that rely on ETH or BTC as security guarantees (such as EigenLayer and Babylon), OrangeLayer supports the conversion of all forms of Bitcoin (native, wrapped or anchored) into yield-generating assets.

Current development stage: testnet stage, planned to launch the mainnet in the third quarter of 2024.

5) Chakra

Chakra is a Bitcoin re-staking protocol driven by zero knowledge (ZK). The team proposed the concept of SCS (Settlement Consumer Service) to integrate Bitcoin re-staking into the PoS system. The project plans to integrate with Babylon.

Current development stage: Testnet is online.

Current total locked value (TVL): 257.64 BTC

6) Bedrock

Bedrock is a liquidity re-staking protocol developed by RockX. It currently supports uniETH, uniIOTX and uniBTC as the underlying assets for re-staking operations, enabling holders to gain more benefits through ecosystem integration.

Current total locked value (TVL): $141.55 million

7) Lombard

Lombard is a Bitcoin staking protocol. When users stake Bitcoin through Babylon, Lombard will use LBTC Token to release the liquidity and yield representation of the staked Bitcoin, thereby unlocking liquidity. Lombard plans to integrate LBTC into Ethereums DeFi protocol later this year.

Current development stage: internal testing stage.

5. Summary

Something interesting is happening in the Bitcoin space.

I am personally excited about how these building blocks will converge. Below are some of my summaries and outlooks on the current state of Bitcoin staking and re-staking. Of course, given the significant changes in the industry, these views may need to be continuously iterated and adjusted.

Credit can provide a more complex and efficient economic structure, but the current market is still dominated by a small number of large Bitcoin holders who make up the majority of TVL. The market lacks vitality and needs further education.

It must be noted that the entire track is still in a stage of rapid dynamic change, and the market positioning and solutions of leading projects are also constantly updated.

At present, Babylon is leading the upstream of the local heavy pledge industry chain by leveraging its technology accumulation (Bitcoin timestamp and Bitcoin pledge protocol to deal with long-range attacks and high inflation and security issues of new projects) and institutional endorsement. It should be noted that Babylons stability, security and efficiency indicators need time to be verified, and the Restaking protocol is highly dependent on Babylon. We will continue to pay attention to new players with technological innovation and iteration.

Most of the protocols entering this track are positioned to provide Liquid Restaking, providing services directly to suppliers in a flexible and efficient manner. The market is still in the stage of structural adjustment, and there is no leader with absolute bargaining power yet. It is expected that dozens of projects will be launched in this field in the future.

Although the market appeal of switching from PoW to PoS is large enough, there is still a considerable gap between the two ecosystems, and service providers such as EigenLayer have established a strong user mentality. It remains to be seen whether the Bitcoin ecosystem heavy pledge protocol can capture the existing market.

Judging from past experience, Active Validation Services (AVS) are expected to enter the roadmap planning of many protocols. Their most direct differentiation method is to provide exclusive AVS access to heavy stakers, whether through subsidies or customized cooperation agreements. They will gradually build competitive advantages, and some projects may even establish network effects.

Compared with the Ethereum staking track, the Bitcoin track is still in the pre-explosion stage. From the perspective of quantity and quality, the Bitcoin ecosystem still needs a certain amount of technology and time accumulation, and cultivates more demand for new chain security microservices.

At this stage, the important goal of the track project is to find the lowest-cost incentive path, establish an effective incentive and transmission mechanism, obtain sufficient TVL, and ultimately create a positive flywheel effect.

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