Holding PoS (Proof of Stake) Tokens

Holding PoS (Proof of Stake) tokens in the crypto world offers a number of advantages over Bitcoin, which is based on the PoW (Proof of Work) mechanism. One of the key advantages of PoS token is the ability to stake, which is not only energy-efficient but also allows token owners to earn passive income.

Staking as a Source of Passive Income

The main advantage of PoS is that token owners can participate in the staking process, thereby supporting the network and receiving rewards for it. Owners lock their token as a stake and gain the right to add new blocks to the blockchain. For each block added, they receive a reward in the form of new token. This process not only helps secure the network but also provides a return similar to earning interest on a deposit.

Decentralization and Security

In PoS, the mechanisms for selecting a participant who will add the next block are based not on computational power but on the number of tokens and the duration of their ownership. This promotes greater decentralization, as new participants can enter the network without significant investment in specialized hardware. Moreover, the more tokens that are staked, the greater the network’s protection against attacks, as a malicious actor would need to own a significant number of tokens.

PoS assets offer a unique combination of environmental friendliness, the opportunity for passive income through staking, and enhanced security. These factors make them an attractive choice for investors, especially in the context of growing attention to sustainable development and energy efficiency in the financial industry. Unlike Bitcoin, owning PoS tokens provides broader opportunities for earning and participating in network support, making them an important element of the future of digital assets.

Babylon Chain

The evolving environment of blockchain technology shows a significant shift towards PoS systems, where Bitcoin’s reliability could play a pivotal role. Current market trends indicate a growing interest in using BTC not only as a means of savings but also as a protective asset, underscoring the growing demand for Bitcoin staking solutions.

Ethereum, the second-largest by market capitalization, has become the basis of security for networks through Eigen Layer and nearly hundreds of rollups created on its foundation. The primary factor in blockchain security is the volume of capital invested in staking. Eigen Layer uses the already reliable ETH to enhance the security of other networks and has gathered more than $14 billion in TVL. In the case of potential Bitcoin staking, we can expect a significantly larger TVL, as it is very attractive to holders. The Babylon protocol aims to implement Bitcoin staking, which could bring over $1 trillion in economic security from other networks while also generating income from staking. Babylon project has raised $26 million in funding led by Polychain, Hack VC, Breyer Capital and undisclosed round by Binance Labs.

Bitcoin Staking

Traditionally, Bitcoin, based on the PoW system, did not provide a staking mechanism. However, the Babylon protocol transforms Bitcoin into an asset suitable for staking in any PoS system. This allows Bitcoin owners to simultaneously preserve their assets and earn income for their contribution to the crypto-economic security of PoS networks.

Operation of Babylon

Staking on the Main Bitcoin Network

BTC holders lock their bitcoins for a specific period using native Bitcoin features such as Bitcoin Script and Covenants. This ensures the security of assets, as they remain on the main network and can only be returned using the owner’s private key.

Use of Cryptography and Inter-Blockchain Communication (IBC)

Babylon uses these technologies to enable interaction between the Bitcoin blockchain and other PoS networks. This allows the transfer of “staked” assets and delegates Bitcoin’s economic security to other networks in exchange for income for the BTC staker.

Remote Staking

Similar to other projects like Eigen Layer, Babylon applies the concept of remote staking, where staking and asset management occur without the need to transfer assets to other networks or store them with third parties.

Income in Tokens of Another Network

Stakers receive income in tokens of another network, which is ensured by their contribution to the security of that network. These tokens can be claimed on the consumer network, and stakers continue to own their BTC, receiving additional income.

Opportunities and Flexibility of Staking

The protocol provides opportunities such as delegating voting rights, quickly unlocking assets without third-party permission, and the ability to participate in several PoS systems simultaneously, increasing potential profits. Additionally, the protocol allows for configuring partial write-offs of staked funds in case of malicious actions, minimizing potential losses.

Security and Trust in Staking

The Babylon protocol minimizes the risks associated with transferring bitcoins to third parties. Instead of using bridges or wrapping, bitcoins are locked in a special contract on the Bitcoin blockchain network itself, eliminating the need to trust external operators or oracles. This ensures a high level of security and control for the asset owner.

Use of UTXO and Bitcoin Script

Babylon uses the Unspent Transaction Output (UTXO) model and Bitcoin Script to create staking conditions that allow holders to control and manage their funds without third-party involvement. This ensures a high level of security, as the funds never actually leave the Bitcoin blockchain.

Self-Preserving Staking

Staked bitcoins remain under the control of the owner, who can return them after the staking period using their private key. This eliminates the risk of fund loss due to malicious actions by third parties.

Slashing Mechanism without Script Involvement

Traditional slashing mechanisms, which require code execution on the blockchain (e.g., in Ethereum), are not applicable in Bitcoin due to the limited expressiveness of Bitcoin Script. Instead, Babylon uses a technique where possible attacks or fraud using the private key lead to automatic write-offs through a mechanism that allows for the detection of double key usage.

Protection Against Double-Spending Attacks

In the case of using a private key to sign conflicting transactions, funds can be automatically redirected to a burning address. This serves as a strong deterrent against abuses in the system.

Enhanced Cryptographic Methods

The use of one-time signatures with extraction capability (EOTS) and Schnorr signatures strengthens the security of locking and unlocking funds, providing additional guarantees against unauthorized use of assets.

In simpler terms, staked bitcoins remain under your control, and you do not rely on the reliability of third parties managing bridges. However, you will still need to choose trusted validators to whom you will stake your received tokens in exchange for staked Bitcoin. If the validator you choose decides to take malicious actions, this will lead to the burning of your funds. This is done so that a malicious actor with significant BTC capital cannot harm the networks whose tokens he receives. This step helps strengthen PoS blockchains by attracting new funds without the risk of possible attacks. You can choose verified validators or create your own.

The Babylon Staking System provides a unique security model for Bitcoin holders, reducing the risks associated with transferring control over their assets to third parties. This ensures reliable protection and supports the core principles of decentralization and security, which are key.

Case Studies

Individuals

Situation

Alice, a cryptocurrency enthusiast, holds a modest portfolio and is looking for ways to enhance her returns without incurring significant risks. She is interested in staking but is concerned about the complexity and potential risks involved.

Solution

By leveraging the Babylon Chain, Alice can participate in Bitcoin staking with minimal technical know-how. The protocol offers an easy management system for staking and a high level of security, allowing Alice to lock her bitcoins with ease. Here’s how it works:

Staking Process

Alice selects the Babylon platform and chooses to stake her bitcoins. The platform uses Remote Staking, which keeps her bitcoins locked on the Bitcoin mainnet in a self-custodial manner using advanced cryptographic measures.

Choosing Networks and Earning Tokens

Alice can choose which PoS networks she wants to support. Depending on her choice, she receives different network tokens as rewards. These tokens represent her staking yield from the respective networks.

Yield and Unstaking

The yield rates vary by network but are significantly higher than traditional savings, often ranging from 5% to 20%. If Alice decides to unstake, the process is straightforward, and she can initiate it anytime with her private keys to release her bitcoins.

Outcome

Alice receives a stable passive income while her bitcoins remain secure on the Bitcoin mainnet. She appreciates the flexibility to discontinue staking and retrieve her funds whenever she wishes.

Asset Management Company

Situation

An investment company managing assets worth millions of dollars is looking to diversify its portfolio and enhance yield through cryptocurrency investments.

Solution

The company decides to use the Babylon Protocol for staking a portion of its bitcoin holdings. They take advantage of Babylon’s remote staking and cryptographic security features to delegate the economic security of their bitcoins to other blockchains and earn their tokens in return.

Remote Staking Setup

The company has established a staking arrangement on Babylon that allows bitcoins to be staked directly from their cold storage, eliminating the need for third-party bridges. This method uses Bitcoin’s native script capabilities enhanced by the Babylon protocol to create secure staking contracts.

Earning Multiple Tokens

By staking their bitcoins, the company earns various tokens from multiple PoS networks connected through IBC. This diversifies their income streams and reduces reliance on the performance of a single asset.

Outcome

The company not only improves its overall investment returns but also contributes to enhancing the security of various blockchains. This approach elevates their portfolio’s value and strengthens their market reputation as an innovator in leveraging blockchain technologies for diversified asset management.

Conclusion

The Bitcoin staking protocol from Babylon not only expands the functional capabilities of Bitcoin as a tool for storing value and a means of payment but also provides its owners with a unique opportunity to earn income. This opens new horizons for the use of Bitcoin, strengthening its position in the decentralized financial world and supporting overall crypto-economic security. The prospects for Bitcoin staking look promising, especially in the context of the development of PoS blockchain ecosystems. As blockchain technologies continue to evolve and integrate into various sectors of the economy, the need for reliable and efficient security mechanisms becomes increasingly relevant. Bitcoin, with its unmatched security and liquidity, can play a key role in this process. Innovations in cryptographic technologies and staking management are expected to open new opportunities for using Bitcoin as a guarantor of blockchain security, strengthening its position as a key asset in the cryptocurrency world.

Compared to the profitability of staking ETH, the same Cosmos networks can sometimes offer more favorable conditions, and Bitcoin can quite feasibly be staked at an APR of 15%. For the prospects of attracting funds, as we noted earlier, even if less than 10% of the current circulating supply of Bitcoin is involved in staking through Babylon, it could compete with the current Ethereum staking ecosystem. Given the current market capitalization of Bitcoin of more than $1.4 trillion, potentially more than $130 billion USD could be attracted.

Compared to ETH on EigenLayer, Bitcoin has a higher market capitalization and is widely recognized as “digital gold,” making it a more attractive asset for securing economic security. On the other hand, BTC holders are clearly concerned about security issues, and Babylon needs a clear demonstration of its security and time to attract those who are not accustomed to moving their bitcoins or who have lost money on various yield offers like Celsius. A sufficiently long period of time is needed to convince skeptics of the reliability and real economic benefit to owners of large Bitcoin capitals.

Overall, Babylon offers a unique economic model that can provide significant benefits to participants, but also requires overcoming certain cultural and technical barriers to achieve widespread recognition and implementation.