Everything you need to know about Babylon and Bitcoin Staking

TLDR

- The basics of Bitcoin Staking
- BTC Timestamping
- Bitcoin Multi-Staking/Restaking
- Atomic Slashing
- Bitcoin Data Availability and Liquidity

What is Bitcoin staking

In a nutshell, Bitcoin staking allows $BTC holders to contribute to the security of Proof of Stake (PoS) systems, earning staking rewards in return.

Babylon's Bitcoin Staking Protocol enables $BTC to become a staking assets to secure any kind of PoS system. Meaning, any PoS chain, could utilize Bitcoin as their staking asset, to obtain maximal economic security for their protocol.

In traditional PoS systems, the only stakable asset is the native token itself, like $ETH for Ethereum or $SOL for Solana. Bitcoin staking however, allows a foreign asset like $BTC, to be staked on a PoS system to enhance its security.

What are the benefits for Bitcoin holders?

Right now Bitcoin has two major use cases:

1) Store of Value

2) Payment Method (a relative slow one though)

Babylon adds a third use case to Bitcoin's utility:

3) Staking

Bitcoin staking is bringing yield opportunities to BTC holders while mainlining full custody over their Bitcoin.

How does BTC staking work under the hood?

In order to stake BTC, the asset needs to be pledged (locked for a certain time) and potentially be slashable in the case of bad behavior. Furthermore, stakers must have the right to unbond (unstake) their Bitcoin at any time.

Therefore, the three key requirements for BTC staking are:

1) BTC locking

2) BTC slashing

3) BTC unbonding

The Babylon Network has implemented these 3 policies into their BTC Staking Protocol.

Despite the lack of smart contracts on the Bitcoin chain, Babylon figured out a sophisticated method to implement these three key features to enable Bitcoin Staking.

1) Bitcoin Locking

Bitcoin has something called a Timelock. Timelocks allow users to specify a number of blocks in which BTC cannot be transferred. Hence, Bitcoin locking is pretty straightforward.

2) Bitcoin Unbonding

In traditional Proof of Stake systems the unbonding period ranges from 2 to 4 weeks, giving the chain enough time to react to an attack and punish the attacker by slashing their stake. Leveraging the power of Bitcoin Timestamping, Babylon can reduce the unbonding period to a few days.

3) Bitcoin Slashing

Slashing is the hardest part, as there are no fraud proofs (onchain evidence) on Bitcoin that someone attacked the system. Hence, Babylon came up with the concept of revealing the private key of the locked up BTC in case of an attack, so that the "staked" BTC could be slashed (taken away) in the case of misbehavior.

Note: The staker is the only person to holds the private key. Just in case of an attack, Babylon has the cryptographic tech to mathematically reveal it and slash the attacker.

All of this is while maintaining 100% self-custody over your Bitcoin.

What happens to slashed Bitcoins?

This is up for debate, as the protocol allows you to specify any BTC address as the burn address. Slashed BTC are being sent to a burn address that can be defined by Babylon governance. Thus, slashed BTC could be sent to:

a) Satoshi Nakamoto's address

b) Babylon Foundation (to fund product development and reseach)

c) A Random address that on one controls => BTC burnt forever

Bitcoin Slashing summed up:
- Only the keys to the staked BTC get exposed in case of an attack, while the main wallet remains untouched.
- Slashed Bitcoin can only be sent to the burn address, which is determined and can be changed by governance.
- Slashing does not affect all the staked BTC, only a small fraction of it is slashed (1%-5%)

BTC never leaves the Bitcoin Blockchain

In the case of Bitcoin staking, BTC is not bridged to a PoS system, it always remains on the Bitcoin blockchain. Therefore, even if a PoS chain is fully compromised, your staked BTC stays unaffected and safe.

Multi-Staking / Restaking

At Babylon we prefer to refer to Restaking as Multi-Staking.

Multi-Staking, staking BTC to secure multiple Proof of Stake chains, is indeed possible with Babylon technology.

The main thing for it to work, is sharing the secret key of your staked BTC to multiple parties. As more external PoS chains opt into BTC staking to secure their protocol, the secret key to your staked BTC has to be shared to the validators of these opted in networks in order to be slashed in the case of an attack.

Since Multi-Staking your BTC increases your staking APR, as chains that use BTC for security have to pay staking rewards in form of their native token or stable coins to BTC stakers, the risky of being slashed increases as well.

Atomic Slashing

While staked BTC remain on the Bitcoin chain, BTC stakers delegate their voting power to finality providers (validators) on the BTC secured chain.

If these validators act maliciously, your staked BTC get slashed on the Bitcoin chain.

This is true for all folks that have delegated to a validator behaving maliciously.

This property is called Atomic Slashing. Everyone delegated to a malicious validator gets slashed the same way.

Self Stake

To prevent validators to act maliciously, they have to self-stake a certain amount of BTC to their validator. This guarantees that validators have skin in the game and acting in bad faith would not only hurt their reputation but also their own pockets.

Bitcoin Staking's impact on Crypto

Babylon's vision is the build a Bitcoin secured decentralized world.

Every Appchain, Rollup, L2, DePIN project need security, but it does not make sense that each of these projects has to accrue high economic value to secure itself. This is where Babylon comes into paly.

Babylon built a product to secure all these low to medium security chains and applications. These folks can borrow security from the biggest and most robust blockchain out there, Bitcoin.

Everyone can get Bitcoin security via Babylon.

On top of securing external PoS systems, Babylon also unlocks BTC liquidity and onboards new users to BTC secured chains.

What's next for Babylon

1) BTC staking to secure the Babylon chain is done.

2) Right now, the team is testing BTC Multi-Staking that would allow other PoS chains to borrow BTC security. The demand for this feature is overwhelming.

3) On top, the team began researching novel ideas like BTC data availability and BTC liquidity.

To finish off this blog post, I'd love to leave you with some final words of Fisher Yu, Co-Founder of Babylon.

"BTC staking, or more generally, BTC security sharing, will create a more united, healthy, and stronger decentralized world!"

Thanks for reading folks, we hope you've found this article helpful.

Disclaimer

This article is intended to educate readers about certain topics and should not be considered financial advice in any way.