Hotcoin Research | Awakening the “Sleeping Goldmine” of BTCFi: Babylon Protocol’s Progress and Ecosystem Overview

Introduction

With DeFi’s rapid growth, Bitcoin’s role is evolving beyond just a store of value. However, due to its PoW design, Bitcoin lacks native staking capabilities, leaving vast BTC assets “dormant” in DeFi. The Babylon Protocol introduces a new paradigm: it enables BTC staking without modifying the Bitcoin mainnet, bridging, or custodians. Users can stake BTC directly from self-custody, earning rewards while enhancing the security of PoS chains. This innovation brings BTC into the PoS economy, giving it both store-of-value and yield-bearing characteristics, fueling the rise of the BTCFi ecosystem.

This report explores Babylon’s technical innovations, staking data, key ecosystem projects, and its current challenges and future outlook.

I. Innovations of the Babylon Protocol

1. Non-Custodial BTC Staking

Babylon enables native BTC staking while allowing users to retain full custody of their assets. Unlike WBTC-style bridges, Babylon utilizes time-locked and multisig Bitcoin scripts to execute staking transactions directly on the Bitcoin network. These transactions are recognized by Babylon’s PoS beacon chain, which monitors and verifies staked BTC without relying on third-party custodians.

2. Solving Native BTC Staking Limitations

Although around 27% of ETH is currently staked, BTC staking remains virtually nonexistent. Babylon addresses this through a “time-space separation” model — BTC stays on the Bitcoin network while Babylon and integrated PoS chains reference it for economic security. This is achieved using existing Bitcoin transaction mechanisms, with no need for protocol upgrades or hard forks.

3. Finality Providers and Security Layering

Babylon does not alter the Bitcoin protocol. Instead, it introduces a PoS beacon chain (built with the Cosmos SDK), where users delegate staked BTC to finality providers — validator-like entities that cannot move BTC but can leverage its economic weight to secure PoS networks and provide finality guarantees.

4. Security and Exit Mechanism

Users can unlock their staked BTC early by submitting a withdrawal transaction, which is verified by a multisig committee and subject to a 7-day unlock period. During Phase-1, no slashing penalties are enforced — even if validators misbehave, stakers’ BTC remains unaffected, helping to ease early user concerns about asset safety.

5. Multi-Chain Staking and Expansion

In Phase-3, Babylon aims to enable “one BTC, multiple chains,” allowing the same staked BTC to secure several PoS networks — referred to as Bitcoin Secured Networks (BSNs). Babylon’s PoS chain will coordinate the distribution of rewards and voting rights, following a BTC-native version of Ethereum’s EigenLayer model, but without introducing bridge-related risks.

Source: https://babylon.foundation/blogs

II. Babylon Staking Progress and Ecosystem Performance

Babylon Phase-1 achieved 57,290.61 BTC staked (~0.27% of circulating BTC) from over 135,000 addresses. It successfully mobilized dormant BTC assets, and Phase-2 will shift focus to activating Babylon’s PoS chain and connecting more BSNs to realize staking rewards and economic utility.

Source：https://babylonlabs.io/blog

1. Cap-1 (August 2024): Community-Driven Launch with 1,000 BTC Cap

• The phase was capped at 1,000 BTC, with small per-transaction limits (0.005–0.05 BTC) to encourage broad retail participation.
• The cap was reached within just 3 hours, with 20,610 transactions from 12,720 users.
• This surge triggered a 120x spike in Bitcoin transaction fees.
• LSD protocols such as Solv, Bedrock, Lorenzo, and PumpBTC played pivotal roles.
• Babylon also introduced the Babylon Points system to reward stakers based on their activity per block.

2. Cap-2 (October 2024): Institutional Participation and TVL Surge

• Cap-2 removed the total staking limit but restricted participation to a 10-block window (~90 minutes).
• The single staking limit was raised to 500 BTC to enable institutional participation.
• This phase saw 22,891 BTC staked — 22 times the Cap-1 total.
• Lombard Finance accounted for ~22,503 BTC (98% of the total), dominating the phase.
• It was supported by institutional custodians like Anchorage Digital and Hex Trust, and platforms such as Binance Web3 Wallet and OKX Earn.
• LSD protocols including Solv and Bedrock also launched pre-staking campaigns to engage users in advance.

3. Cap-3 (December 2024): Open Window & Incentive Boost

• Cap-3 lasted for around one week (1,000 blocks), with no total cap and a significantly increased individual limit of up to 5,000 BTC.
• Introduced tiered Babylon Points: 100,000/block (first 300 blocks), then 21,000/block.
• The phase attracted 109,980 addresses and 33,399 BTC in total, setting a new record for single-phase participation.
• Widely adopted by retail users.
• Partnerships with networks like Corn and community campaigns (e.g., “Staking Marathon”) significantly boosted visibility and engagement.

III. Babylon Ecosystem Landscape

Babylon has rapidly built a multi-layered ecosystem, spanning infrastructure, protocol integrations, wallet and exchange support. This robust network of partners fuels Babylon’s growth and creates synergistic momentum across the ecosystem.

1. LST Protocols

LST Protocols Liquid Staking Token (LST) protocols address BTC liquidity challenges by issuing tokens such as LBTC or uniBTC. Babylon currently collaborates with over a dozen major LST protocols, including Lombard, Bedrock, PumpBTC, Lorenzo, Solv, pSTAKE, Chakra, as well as emerging projects like Allo and Stakestone. Babylon provides the secure staking infrastructure, while these protocols onboard users offer additional incentives. For example, users staking BTC through LSD protocols receive dual rewards: Babylon Points and the respective protocol’s native tokens or points. Moreover, LSTs can be utilized in various DeFi scenarios such as lending, liquidity provision, and more — enhancing BTC’s capital efficiency.

2. Bitcoin Secured Networks (BSNs)

BSNs are blockchain networks that integrate Babylon’s BTC staking security. 25+ networks are BSN candidates for Phase-2. Key examples include:

• BOB (Build on Bitcoin): A hybrid Layer 2 combining Bitcoin and Ethereum features to create a Bitcoin-centric DeFi platform. By integrating with Babylon, BOB leverages BTC staking for finality and enhanced network security, branding itself as a Bitcoin-secured hybrid chain. It also plans to facilitate cross-chain bridging for assets like BTC and ETH.
• Corn: A novel Arbitrum-based network and the first live BSN. It combines the security of both Bitcoin and Ethereum layers. To incentivize participation, Corn launched the “Kernels” reward program, distributing points based on users’ staked BTC amounts during a promotional period.
• B² Network: A modular Bitcoin Layer 2 that incorporates Babylon’s BTC staking into its hub consensus. Utilizing data availability sampling (DAS) and ZK-Rollup technology, it aims to create a BTC-secured execution layer. Babylon staking offers economic backing for B²’s rollup validation, while enabling BTC derivatives in its DeFi ecosystem.

Babylon’s BSN strategy spans L1s, L2s, oracles, and data availability layers, advancing the concept of “BTC-as-a-Service.” With approximately 60,000 BTC in its security pool, Babylon reinforces trust and activity across integrated networks, fostering a powerful feedback loop of adoption and utility.

3. Wallet & Exchange Support

To lower the entry barrier for users, Babylon actively collaborates with leading crypto wallets and exchanges. Binance introduced native BTC staking via its Web3 wallet and launched promotional reward campaigns through Binance Earn. Similarly, OKX integrated Babylon into OKX Earn and partnered with Solv and PumpBTC for joint promotions. Babylon Phase-1 is supported by 12 Web3 wallets, including both multi-chain and Bitcoin-native wallets. For instance, ZenGo and Blocto launched Babylon staking tutorials, while Xverse engaged in discussions within the Ordinals community to integrate Babylon. These endorsements help foster user confidence and accelerate adoption.

4. Infrastructure & Service Providers

Node operators and custodians play a critical role in the Babylon ecosystem. Professional operators like Blockdaemon, InfStones, stakefish, and Figment serve as finality providers within Babylon’s network, offering staking-as-a-service to clients. Custodians like Cobo and Coincover partner with LSD protocols (e.g., PumpBTC) to manage staking on behalf of users while ensuring BTC key security. Anchorage Digital has announced Babylon staking support for U.S. institutions, enabling institutional-grade one-click staking, while Hex Trust provides regional support across Asia. These infrastructure partnerships facilitate secure, large-scale BTC staking and help Babylon’s network become more decentralized and resilient.

Together, these partnerships form a thriving Babylon ecosystem. More staking attracts more partners, and more partners drive further growth — creating a powerful virtuous cycle.

IV. Key Babylon Ecosystem Projects

A growing number of protocols are being built around Babylon BTC staking. Below are representative examples:

Source：https://dune.com/pyor_xyz/babylon-chain

1. Lombard Finance (LBTC)

Lombard is a core liquidity staking protocol within the Babylon ecosystem, aiming to build a marketplace that connects BTC stakers with PoS chain demand. Users deposit BTC into Lombard, which stakes the assets on Babylon and issues LBTC, a 1:1 ERC-20 representation of staked BTC on Ethereum. LBTC holders can earn Babylon Points while utilizing LBTC across DeFi protocols. Early adopters can participate in Lombard’s reward programs — Lux and Luminary — through which they may receive Lux, a governance/reward token expected to play a role post-mainnet launch.

2. Bedrock (uniBTC)

Bedrock, developed by long-standing node operator RockX, is a multi-asset liquid staking protocol supporting ETH, BTC, IoTeX, and more. Backed by OKX Ventures in May 2024, Bedrock focuses on institutional-grade staking services. It offers uniBTC as its BTC staking receipt token. Uniquely, Bedrock supports WBTC staking: users can stake WBTC directly on Ethereum, while Bedrock handles BTC conversion and staking via trusted custodians. Two options are available: (1) “delegated staking” where WBTC remains on Ethereum, and (2) “one-click conversion” to BTC for staking on Babylon. uniBTC can be used in DeFi applications. Bedrock also supports staking of BTCB (on BSC), FBTC (on Filecoin), and other BTC-pegged assets.

3. PumpBTC (pumpBTC)

PumpBTC is a BTC restaking protocol launched in 2024 with the mission of maximizing returns for BTC holders. Users can stake various BTC derivatives (WBTC, BTCB, FBTC) to mint 1:1 pumpBTC tokens. The real BTC is staked to Babylon via partners like Cobo and Coincover. pumpBTC is a yield-accruing token, with rewards reflected in its value. The protocol also features Pump Points for user engagement and a referral program, which may lead to future PUMP token airdrops.

4. Lorenzo Protocol (stBTC + YAT)

Lorenzo introduces a yield-layer for BTC staking and is backed by Binance Labs (2022). It uses a dual-token model: users receive stBTC (principal token) and YAT (yield accumulation token) upon staking BTC or BTCB. stBTC remains pegged 1:1 to the staked BTC, while YAT represents accumulated rewards. This separation allows users to trade or lend YAT for yield, while maintaining liquidity with stBTC. Babylon staking is handled by delegated agents who issue stBTC and YAT based on on-chain data.

5. Solv Protocol (SolvBTC.BBN)

Solv, a well-known decentralized asset issuance and management protocol, launched SolvBTC.BBN in July 2024 in partnership with Babylon. This allows BTC holders on Ethereum, BSC, and Arbitrum to stake via Babylon and earn Points. Users lock BTC or wrapped BTC on Solv, which stakes the assets through custodians like Ceffu (Binance’s custody arm). SolvBTC.BBN is the resulting token and can be used in the Solv ecosystem. Solv plans to expand SolvBTC into a multi-chain BTC reserve asset beyond Babylon.

6. Chakra (Prana)

Chakra is a modular BTC restaking protocol combining zero-knowledge (ZK) technology and institutional infrastructure. Backed by StarkWare and ABCDE Capital in April 2024, Chakra launched a pre-staking BTC pool before Babylon’s mainnet. Deposited BTC is held in multisig vaults co-managed with partners like Cobo. When staking opens, Chakra will delegate these funds to Babylon. Users earn Prana (a non-transferable reward point for now), representing early contributions and future yield rights. Chakra emphasizes transparency and privacy through ZK proofs and is developing its own execution layer secured by Babylon.

V. Challenges and Outlook for Babylon

Babylon made significant strides in 2024, but long-term success still hinges on overcoming several key challenges. At the same time, evolving market trends and technological advancements present valuable growth opportunities. This section explores both.

1. Key Challenges

Technical Complexity and Security: Babylon integrates Bitcoin scripting, Cosmos-based PoS chains, and cross-chain validation mechanisms — making it highly complex and security-critical. Limitations of Bitcoin’s base layer (e.g., 1MB block size, limited scripting capabilities) mean that Babylon’s staking transactions must be highly optimized to prevent network congestion or backlash from the Bitcoin community. Babylon must continuously demonstrate that its design benefits the Bitcoin network — for example, by increasing miner fee revenue or UTXO utilization. Additionally, the Babylon chain’s own security is crucial: as a finality layer, any attack or failure could compromise the integrity of connected BSNs.

Economic Model and Sustainable Incentives: During Phase-1, users received only Babylon Points, which are not yet redeemable for tangible rewards. While this may be acceptable early on, prolonged lack of returns could weaken user interest. In Phase-2 and beyond, Babylon must present a clear economic incentive model, including:

• Will Babylon issue its own token and airdrop it to Points holders?
• Can BTC stakers receive native rewards from BSNs or Babylon chain block rewards?
• How will yields and risks be allocated when the same BTC is staked across multiple chains?

Without sustainable returns, large BTC holders may hesitate to stake long-term.

Competition and Alternatives: While Babylon currently leads the BTC staking space, this advantage may not last. Competing models may emerge from Stacks, Drivechain, or even Ethereum’s EigenLayer (if it adds support for WBTC). CeFi platforms already offer BTC yield products. If a simpler, more user-friendly “BTC yield” solution appears, Babylon could face user attrition.

User Education and UX: Bitcoin holders are traditionally “HODLers.” Encouraging them to stake BTC for yield requires not only a shift in mindset but also an intuitive user experience. Even with wallet integrations, the current staking process involves UTXO management and manual fee settings — barriers for average users. Additionally, high on-chain fees may deter smaller participants. Improving UX is essential, including:

• Simplified staking UI
• Transparent reward projections
• Lower entry barriers

2. Future Outlook

Babylon Chain Launch (Babylon Genesis): The centerpiece of Phase-2 is the launch of the Babylon Chain — the first blockchain secured by native BTC locks. Built on Cosmos SDK, it will also be the first live Bitcoin Secured Network (BSN). This chain will serve as the backbone of the Babylon ecosystem — aggregating BTC staking security, delivering finality services to connected networks, and managing validator-staker interactions and reward distributions.

Token Launch and Utility: Babylon is expected to issue a native token for governance and transaction fees. Airdrops may be allocated to Phase-1 Points holders and BSN partners. The token could empower holders to vote on protocol upgrades and parameter changes, while also capturing protocol revenue (e.g., service fees from BSNs, redistributed to token stakers). Since BTC cannot be used directly for gas, Babylon may adopt its native token or a stablecoin as the gas currency. The overall economic model will need to clearly define value-sharing among stakers, validators, and BSN participants.

Multi-Chain Staking and Interconnectivity: Once the Babylon Chain is stable, the next step is enabling “one BTC, multiple chains” staking. Users will be able to stake a single BTC across multiple BSNs, with Babylon managing weight-based allocations to each network. Each BSN would recognize the respective portion as valid collateral for staking and reward issuance. This model turns BTC into a shared staking certificate — spreading economic security across chains through Babylon.

Conclusion

Babylon has solved a historical limitation of Bitcoin by introducing native, non-custodial staking mechanisms. This breakthrough enables BTC to secure PoS chains while remaining on its own network. As highlighted by HashKey Research, Babylon marks a new chapter in unlocking Bitcoin’s capital efficiency. If fully realized, Bitcoin will evolve beyond “digital gold” into “digital energy” — a foundational security asset that powers blockchain ecosystems while generating yield.

In 2025, we may witness a paradigm shift from passive BTC holding to dynamic staking, along with the rise of new BTC-based protocols built atop Babylon. As the team envisions, a true “BTC Renaissance” is underway — ushering in a new era for Bitcoin DeFi (BTCFi).

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