Liquid staked bitcoin provides new yield option for BTC holders

When it comes to tokenizing bitcoin on other chains, no one has reached any significant scale besides BitGo’s wrapped bitcoin (wBTC). Newer approaches aim to offer a non-custodial option for using BTC off of the Bitcoin blockchain.

The Nomic DAO Foundation is adding Babylon’s bitcoin staking protocol into its decentralized non-custodial Bitcoin bridge to create stBTC, which they call a Bitcoin Liquid Staking Token (LST).

BitGo custodies bitcoin and issues the wBTC token — predominantly as an ERC-20 on Ethereum and its layer-2s. It has amassed a market cap of $10.6 billion, more than fifty times its nearest rival, per CoinGecko.

Nomic’s main goal is to make a more decentralized alternative to wBTC available in DeFi on other chains connected via IBC.

Read more: Nomic kicks off native Bitcoin bridging to Cosmos with 21 BTC

The new twist is to allow those BTC holders to passively earn a yield on their bitcoin — which is where Babylon comes in. Nomic enables the conversion of BTC to nBTC tokens, the IBC-compatible token which can be used to mint stBTC through a staking pool.

While nBTC is Cosmos-native bitcoin, stBTC is a claim on partial ownership of nBTC, which — after an unstaking period — can be withdrawn back to the Bitcoin network as native BTC.

Unlike traditional BTC yield options that lock up the asset, Nomic’s approach lets stBTC move across IBC-compatible chains to remain liquid while still earning periodic rewards for stakers, much like Lido stETH does for ether stakers.

Read more: Let’s talk Bitcoin staking: Babylon’s litepaper

One key difference is that stETH accrues value in more stETH from the native staking yield of Ethereum. Babylon’s bitcoin staking yield comes from the tokens of other chains that want to tap into bitcoin’s economic heft to help with their own security, according to Matt Bell, CEO of Turbofish, Nomic’s developer.

“In the beginning, I think it’ll just be [Babylon’s] BBN token, but then eventually, as more and more chains come online using Babylon for security, if they choose to get security from all this pool of staked bitcoin, then they’re paying out their tokens as well,” Bell told Blockworks.

For example, Nomic will use stBTC itself, to launch “a dual-stake security system,” which adds staked BTC to underpin Nomic’s chain in addition to its own token NOM, making it one of the first proof-of-stake (PoS) chains to implement such a solution. Stakers will receive rewards in both NOM and nBTC, Bell said.

“The Babylon design is really as trust minimized as you can get,” he added.

David Tse, co-founder of Babylon, has been focused on opening up yield opportunities for native BTC with less counterparty risk than options that rely on centralized intermediaries.

Read more: Digital Asset Summit Day 1: Yield is a Trojan horse for technological revolution

“This is a major step forward for Bitcoin holders that will allow them to use their staked bitcoin for DeFi, while still supporting the security of proof-of-stake systems,” Tse said.

Currently available in a testnet environment, stBTC will move on to a mainnet release alongside Babylon mainnet, a Nomic spokesperson said.

Tse previously targeted April for Babylon mainnet, depending on the outcome of security audits.

“It’s just so powerful how big the numbers are — bitcoin is at like a $1.3 trillion market cap, which is insanely huge,” Bell said. “So it’s just a no-brainer if you can unlock a few use cases for earning yield on that bitcoin — since those people are just going to be holding it anyway.”

Updated Apr. 10 at 12:20 ET: Clarifying that stBTC mainnet is linked to Babylon mainnet release.

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