The following is a guest post by Vincent Maliepaard, Marketing Director at IntoTheBlock.
When you first hear about Bitcoin staking, you might think it's a no-brainer, given Bitcoin's Proof-of-Work (PoW) mechanism. But Bitcoin staking is real, with thousands of addresses participating to generate profits from their assets. Here's what you need to know.
About Bitcoin Staking
Staking traditionally refers to the process whereby cryptocurrency holders lock up funds to participate in network operations such as validating transactions on a Proof-of-Stake (PoS) blockchain. However, Bitcoin operates on a PoW consensus mechanism that does not natively support staking. This dynamic changed with the introduction of Bitcoin staking through platforms offering Bitcoin-based Liquid Staking Tokens (LST). These platforms allow BTC holders to indirectly participate in staking activities.
EigenLayer, Babylon, AVS
In Ethereum, the concept of “restaking” was introduced in 2023. Unique LayerIt gained significant momentum and reached total locked value (TVL) by mid-2024. Over $20 billion in JuneTypically, staking ETH ensures the security of the Ethereum network and rewards those who stake, EigenLayer expands on this concept by allowing users to “restake” ETH to secure additional services and earn additional rewards.
Initially coined as Active Validated Services (AVS) at Eigenlayer, these applications are referred to by different terms depending on the (re)staking platform involved: AVS are applications or services that can be secured with restaked ETH, and the concept has now been extended to the Bitcoin blockchain and BTC-pegged tokens. Babylon is leading this effort, building an architecture that allows applications to leverage Bitcoin’s cryptoeconomic security, while on the Ethereum side, Symbiotic and, soon, Eigenlayer are restaking protocols that accept tokens such as Wrapped Bitcoin (WBTC) as collateral, supporting applications looking to leverage these assets for added security.
Understanding Bitcoin Staking
In Bitcoin staking, users deposit BTC into a staking protocol and receive Liquid Staking Tokens (LSTs) in return. These LSTs represent their staked BTC but often offer enhanced liquidity and other features, allowing participants to take part in DeFi activities without sacrificing staking rewards.
Currently, the most popular Bitcoin LST is LBTC. The Lombard ProtocolThe mechanism is explained in detail as follows:
How LBTC is created: To create LBTC, users send their BTC to a special address linked to the Babylon protocol. This action creates an LBTC on Ethereum that acts as a placeholder for the Bitcoin they sent. Where the BTC goes: The actual BTC sent is stored securely within the Babylon protocol contract. Currently, this BTC is not being used or accessed, but it remains safely stored. Rewarding depositors: While the BTC is held in reserve, depositors are rewarded with points from both the Babylon and Lombard systems as an incentive for participation. Future plans: Eventually, the goal is to use the BTC held in the Babylon contract to secure the broader ecosystem. This includes allowing various apps and chains to use this BTC to secure their networks while still maintaining their connection to the main Bitcoin network.
The leading protocol for Bitcoin staking
Several protocols have emerged as pioneers in the Bitcoin staking space.
Lombard Staked BTC (LBTC): As the leader in this market, LBTC has seen a significant increase in market cap. It now has over 3,000 members and assets of $300 million.UniBTC: UnitBTC secured a significant number of holders early on. LBTC surpassed it but is still in second place with around 1000 holders. Swell BTC (SWBTC): SWBTC started strong and looked likely to overtake uniBTC. However, growth has slowed and it is now in third place with around 440 holders.
Is Bitcoin Staking the Future of Bitcoin Yields?
Bitcoin staking is off to a strong start, with thousands of holders already earning points across major protocols. Staked Bitcoin represents 3.75% of all wrapped BitcoinThis indicates that there is still plenty of room for growth in the coming months.
While the concept is promising, its long-term success will depend on whether the economics of staking make sense beyond the initial points rewards. The key will be the development of services built on these protocols. If a robust ecosystem of services develops, Bitcoin staking could become one of the most attractive revenue opportunities for Bitcoin holders.
