Why Bitcoin Needs Staking: What is the Babylon Project?
On August 22, the first Bitcoin staking protocol, Babylon, will launch. This project aims to introduce staking to Bitcoin, an unprecedented move since Bitcoin's Proof-of-Work algorithm has traditionally excluded it from staking mechanisms, which are specific to Proof-of-Stake networks like Ethereum or Solana.
Earlier this year, Babylon raised $70 million in funding led by Paradigm. The project is spearheaded by Stanford professor David Tse, known for his work in information theory. In December 2023, Polychain Capital and Hack VC co-led an $18 million funding round, according to TheBlock.
Bloomberg journalist Muyao Shen commented on the unusual nature of the Babylon project for Bitcoin, noting that if Babylon's concept gains traction, Bitcoin staking could become as commonplace as staking for other cryptocurrencies.
What is Staking?
Staking is the process where cryptocurrency holders lock their tokens in a network to support its operations, earning rewards in return, similar to earning interest on a savings account. This system is foundational for most blockchains, but Bitcoin has traditionally been excluded due to its Proof-of-Work algorithm, resulting in minimal staking activity in the world's largest cryptocurrency network.
Bitcoin sent to support Babylon will act as an additional security layer in Proof-of-Stake networks.
Babylon is already backed by over 200 providers, including crypto companies like Allnodes, Figment, and Galaxy Digital. These providers will validate transactions to maintain the protocol, similar to validators in Ethereum-like ecosystems, according to Coindesk.
Essentially, Babylon offers a mechanism to transfer Bitcoin's economic value into Proof-of-Stake networks while allowing users to retain control over their assets without intermediaries.
The Babylon protocol will roll out in phases, initially capped at a total deposit limit of 1,000 BTC. Additionally, limits on Bitcoin deposits for staking per address will range from 0.005 BTC to 0.05 BTC ($0.3k–3k).
This approach aims to prevent dominance by a small number of large players and create fairer entry conditions, as noted in Babylon's blog.
As the protocol evolves and its security is confirmed, limits will be expanded. No details have been provided about potential returns for participants.
New Trends in Bitcoin
Staking is not the only new direction in Bitcoin's ecosystem. Following April's halving, which significantly reduced miner revenues, developers are exploring technical solutions to unlock new capabilities for the blockchain.
While Bitcoin was once viewed primarily as "digital gold" for long-term value appreciation, there is now a noticeable trend towards developing new functional opportunities within the Bitcoin network.
Staking and Beyond: Who Benefits from DeFi Projects on Bitcoin
This shift is reflected in the activities of cryptocurrency investment firms, which focused on Bitcoin ecosystems in Q2 2024. Investments in Bitcoin Layer 2 (L2) solutions surged by 174% from Q1, reaching $94.6 million.
Investors are excited about the potential for more use cases within Bitcoin’s transaction blocks, which could attract models like DeFi or NFT. Analysts also observed that there are at least 65 projects identifying themselves as Layer 2 solutions based on Bitcoin.
