Bitcoin Staking: A New Frontier in Cryptocurrency Yield

When you first hear about Bitcoin staking, you might assume there's a mistake, given Bitcoin's Proof of Work (PoW) mechanism.

Bitcoin Staking: A Deep Dive into the Latest Crypto Trend [Guest Post]

When you first hear about Bitcoin staking, you might assume there’s a mistake, given Bitcoin’s Proof of Work (PoW) mechanism. However, Bitcoin staking is indeed a reality, with thousands of addresses participating and generating returns on their assets. Here’s what you need to know.

Bitcoin Staking Explained

Staking traditionally refers to the process where holders of a cryptocurrency lock up their funds to participate in network operations, such as transaction validation on Proof of Stake (PoS) blockchains. Bitcoin, however, operates on a PoW consensus mechanism, which does not natively support staking.

This dynamic has changed with the introduction of Bitcoin staking through platforms offering Bitcoin-based Liquid Staking Tokens (LSTs). These platforms enable BTC holders to engage in staking activities indirectly.

EigenLayer, Babylon, and AVS’s

On Ethereum, the concept of “restaking” was introduced in 2023 with EigenLayer, which gained significant traction by mid-2024, reaching a total value locked (TVL) of over $20 billion in June. Normally, staking ETH helps secure the Ethereum network, rewarding stakers in return. EigenLayer extends this concept by allowing users to “restake” their ETH to secure additional services, earning extra rewards.

Initially coined as Active Validated Services (AVS) on Eigenlayer, these applications are known by different terms depending on their associated (re)staking platform. AVSs are applications or services that can be secured with restaked ETH. This concept is now being extended to the Bitcoin blockchain and BTC-pegged tokens. Babylon is leading this effort, building an architecture that allows applications to leverage Bitcoin’s crypto-economic security. Meanwhile, on the Ethereum side, Symbiotic and soon EigenLayer are restaking protocols accepting tokens such as Wrapped Bitcoin (WBTC) as collateral to support applications that seek to use these assets for enhanced security.

Understanding Bitcoin Staking

In Bitcoin staking, users deposit their BTC into a staking protocol and receive Liquid Staking Tokens (LSTs) in return. These LSTs represent the staked BTC but often offer enhanced liquidity and other functionalities. This allows participants to engage in DeFi activities without sacrificing staking rewards.

Currently, the most popular Bitcoin LST is LBTC, originating from the Lombard protocol. Here’s a breakdown of how it works:

Users can stake their BTC via protocols such as Lido or RocketPool, minting synthetic derivatives pegged to the staked BTC. These derivatives are known as Liquid Staking Tokens (LSTs).

LSTs are designed to be more liquid than the original staked asset, enabling users to participate in DeFi activities such as lending or trading while earning staking rewards.

Bitcoin LSTs, such as LBTC, are typically pegged 1:1 to the original staked BTC and can be used in various DeFi applications.

Leading Protocols in Bitcoin Staking

Several protocols have emerged as frontrunners in the Bitcoin staking arena:

Lombard is a Bitcoin-native liquid staking protocol that has onboarded over 20,000 users and generated over $100 million in revenue. It offers a unique architecture that enables users to stake their BTC and mint a synthetic derivative, known as an LBTC token, which represents the staked BTC. Notably, Lombard ステーキ (?, suteki) is a decentralized application that allows users to visualize and track their Bitcoin staking activity.

StakeWise is another prominent protocol that provides a non-custodial Bitcoin staking service, enabling users to stake their BTC and obtain a wstBTC token in return. This wstBTC token is pegged to the staked BTC at a ratio of 1:1 and can be used in various DeFi applications.

Hooked Protocol is a recently launched protocol that offers a unique approach to Bitcoin staking, allowing users to mint "Hooked BTC" (hBTC) tokens. These tokens are pegged to the staked BTC and can be used to generate additional yield on other protocols.

Is Bitcoin Staking the Future of Bitcoin yield?

Bitcoin staking has seen a strong start, with thousands of holders already earning points through leading protocols. Currently, staked Bitcoin represents 3.75% of all wrapped Bitcoin, indicating there is still plenty of room for growth in the coming months.

The concept is promising, but its long-term success will depend on whether the economics of staking make sense beyond the initial point rewards. The key factor will be the development of services built on top of these protocols. If a robust ecosystem of services develops, Bitcoin staking could become one of the most attractive yield opportunities for Bitcoin holders.

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