As Bitcoin (BTC) undergoes another halving, the excitement surrounding its potential has reached unprecedented levels. The BTC ecosystem is evolving rapidly, with Layer 2, staking and restaking projects emerging. This raises essential questions: Why does Bitcoin need its own staking and restaking? What justifies its necessity? What new opportunities will arise for entrepreneurs and investors post-halving? How large is the BTC staking market? Is it a long-term opportunity or a short-term trend?

On the evening of May 22, Cobo, in collaboration with TechFlow, Babylon, Lorenzo Protocol, and FBTC, hosted an X Spaces session titled "Unveiling the Post Halving BTC Landscape" to explore these topics in depth.

Event Highlights:

Participants included notable thought leaders from key sectors of the BTC ecosystem:

• Discus Fish, Co-founder and CEO of Cobo & Co-founder of F2Pool.

• Xinshu Dong, CSO of Babylon, the first decentralized trustless Bitcoin staking protocol.

• Matt Ye, Founder and CEO of Lorenzo Protocol, offering BTC restaking tokenization and financial derivatives solutions.

• Zuki, a core contributor at FBTC.

As seasoned participants in the BTC ecosystem, all four guests unanimously agreed on the abundant opportunities available in the short, medium, and long term. How can these opportunities be seized, and the growing demand within the BTC ecosystem be met? Each guest shared insights based on their expertise and product offerings, discussing breakthroughs and opportunities in BTC entrepreneurship while providing an optimistic outlook on its future potential.

Key Takeaways:

1. Impact of Bitcoin Halving:

• The halving primarily affects the supply side, significantly reducing miners' income, especially for those using older mining machines, forcing them to upgrade equipment and optimize electricity costs. Despite the impact on small miners, the decline in the overall network hash rate is expected to be limited due to the strong risk resilience of large mining companies and traditional financial capital.

2. Future Mining Returns:

• Mining returns will gradually decrease, ultimately converging to zero. Future returns will come from investing in L2, DeFi, and CeFi projects, offering yield to BTC holders, a trend expected to significantly develop within the BTC ecosystem.

3. Two Sources of Miner Revenue:

• Future miner revenue will derive from newly issued BTC and transaction fees, with the latter depending on the activity level within the BTC ecosystem. Innovative staking projects can stimulate ecosystem development, boost on-chain activities and transactions, enhance network security, and ultimately increase miner transaction fee income.

4. PoS Security and BTC Staking Legitimacy:

• Proof of Stake (PoS) lacks external economic incentives, with its security limited by the scale of the on-chain economy, posing control risks. BTC staking and restaking protocols introduce substantial external BTC assets to secure PoS networks, addressing inherent flaws in PoS.

5. Market Size of BTC Staking:

• Discus Fish predicts that BTC staking will be a multi-billion-dollar market, comparable to early-stage PoW mining, meeting the demand for secure infrastructure by high-performance application chains in the future.

6. Focus Areas for the BTC Ecosystem:

• Matt, CEO of Lorenzo Protocol, highlighted four key areas for the future of the BTC ecosystem: architectural innovation, L2 development pathways, efficient asset circulation, and security assurance.

7. Opportunities for Ecosystem Builders and Entrepreneurs:

• In the short term, focus on solving network congestion issues and meeting demand overflow. In the medium term, provide yield for BTC holders. In the long term, aim for ecosystem development following script language upgrades.

8. Babylon and EigenLayer:

• As the EigenLayer of the Bitcoin ecosystem, Babylon's solution addresses objective violation issues, while EigenLayer deals with subjective attacks.

What impact will the recent Bitcoin halving have on various participants in the ecosystem, including miners, individuals, and project developers. What significant changes will occur in this ecosystem?

Discus Fish: The Bitcoin halving primarily affects the supply side, impacting various participants to some extent:

For miners: The halving will significantly reduce miners' income, especially for those using older-generation mining machines (e.g., S19 Pro, M21), pushing their marginal costs beyond their revenue and forcing them to shut down or relocate to regions with lower electricity costs. This will drive miners to upgrade their machines and optimize electricity costs. However, the overall network hash rate decline will likely be limited due to the strong risk resilience of large public mining companies and traditional financial capital entering the space.

For individual investors: The impact is mainly psychological and emotional. Investors may expect a new market trend within a few months after the halving. However, this year's market trends are uncertain due to multiple factors, including macroeconomic conditions and the launch of Bitcoin ETFs.

Xinshu: This Bitcoin halving is relatively stable, with the market becoming more professional and institutional as more entities enter. People are starting to consider other uses and sustainable income sources for Bitcoin beyond holding and mining, not just relying on inflation subsidies. As the leader in the cryptocurrency industry, can Bitcoin further extend its influence to a broader crypto community?

Babylon's initial aim is to extend Bitcoin's security to other PoS chains. Currently, PoS chains maintain their native token staking through high inflation, partly because low APY is not attractive for long-term holders.

Babylon establishes an open market, allowing idle Bitcoin to participate in staking and provide security for other chains. Compared to small public chains with high APY expectations, Bitcoin stakers have relatively lower APY expectations. This provides an opportunity for PoS chains to introduce Bitcoin as collateral, increasing yield for Bitcoin holders while significantly reducing their own inflation.

In the long run, more importantly, Bitcoin may gain more use cases and income scenarios, attracting more participants, not just relying on mining profits. Projects like Babylon will bring new application scenarios to Bitcoin, making the entire ecosystem more diverse.

Matt: The Bitcoin halving every four years is a fixed trend, with mining returns gradually decreasing, ultimately converging to zero. At that point, the true returns for holding Bitcoin will come from investing in L2, DeFi products, and CeFi products. Empowering these businesses, expanding the boundaries of the Bitcoin ecosystem, and bringing new revenue, will undoubtedly become major trends.

Many Bitcoin holders and project developers are jointly driving this trend. For example, Babylon invests scarce Bitcoin on the demand side, providing security guarantees for PoS chains or L2, allowing investors to profit. If Bitcoin ultimately becomes an investment asset or currency, it will inevitably require efficient liquidity distribution markets and asset tokenization.

How do miners view staking, and what impact does it have on their overall income and network security?

Discus Fish: From the miners' perspective, staking is beneficial for the development of the Bitcoin ecosystem.

First, Bitcoin itself does not require staking, but holders and miners are interested in the yield that staking can provide. As a hard currency, Bitcoin has long struggled to generate native yield, but staking can allow BTC holders to earn token rewards from new projects.

Second, future miner income will come from two sources: newly issued Bitcoin and transaction fees. The latter depends on the activity level of the Bitcoin network ecosystem. More innovative staking projects can stimulate ecosystem development, and increase on-chain activities and transactions, thereby enhancing the network security of Bitcoin.

Therefore, both miners and BTC holders hope for more staking and restaking protocols to emerge. The more prosperous the Bitcoin ecosystem becomes, the more revenue they can earn.

How large is the BTC staking market? Is it a long-term opportunity or a short-term trend?

Discus Fish: The core issue with PoS is the lack of external economic incentives, with the security of its underlying assets depending on the scale of the on-chain native assets. Ultimately, its security is limited by the overall scale of the on-chain economy. In a bear market, controlling network nodes could lead to the entire chain's assets being controlled.

Bitcoin staking and restaking protocols introduce large external assets that are not tied to the chain, providing security guarantees for PoS networks. As the scale of Bitcoin assets exceeds one trillion dollars, the continuous injection of external economic incentives into PoS networks significantly enhances their security. This innovation addresses the inherent flaw of PoS's lack of externality, making it a promising solution that is already being implemented and has great growth potential.

I believe BTC staking is at least a multi-billion-dollar market, comparable to the early stages of PoW mining. With the development of modular systems, numerous high-performance application chains requiring secure infrastructure will emerge in the future, and Bitcoin staking protocols can meet this demand.

In 2024, I am focusing on the restaking sector, including upstream and downstream related assets and projects. At the company level, we are also investing significant human and material resources to fully embrace this innovative opportunity.

For ecosystem builders and entrepreneurs, how can they seize the opportunities presented by the BTC narratives? What key areas are worth engaging in?

Discus Fish: Over the past six months, the Bitcoin ecosystem has seen signs of innovation driven by bottom-up developments such as inscriptions and runes, attracting many new users. This influx of new users has led to network congestion, pushing us to explore Layer 2 solutions to provide better services.

For ecosystem builders and entrepreneurs, there are three stages to seize the opportunities presented by the BTC narratives:

• Short-term: Address the current network congestion by providing better services and solutions to meet the demand overflow.

• Medium to long-term: Many Bitcoin holders seek native asset yield. Entrepreneurs can think about how to provide stable, low-risk returns for BTC holders, potentially exploring applications in CeDeFi and restaking.

• Long-term: If Bitcoin's scripting language can be upgraded (e.g., OP Code, OP_CAT), it could enable the development of large-scale decentralized applications under trustless and permissionless conditions.

In summary, the short-term focus is on network services, the medium-term on yield for holders, and the long-term on ecosystem applications post-network upgrades. All three stages present significant opportunities.

Matt: Overall, the Bitcoin ecosystem faces several key challenges:

• Architectural Innovation: Bitcoin's architecture may need updates to support truly decentralized on-chain settlements. Improvements such as advancing OP Code can enable more advanced functions, marking a milestone for all DeFi projects and BTC Layer 2 solutions.

• L2 Development Path: Will a single dominant Layer 2 emerge, or will various interoperable Layer 2s connect through common protocol standards? Efficient circulation of Bitcoin assets is crucial, requiring effective matching markets and on-chain financial derivatives markets.

• Security: Providing higher security at the infrastructure layer and offering financial security guarantees for investors is critical. Insurance-related products on DeFi infrastructure can keep risks within acceptable limits.

In summary, architectural innovation, L2 development pathways, efficient asset circulation, and security are the key challenges facing the Bitcoin ecosystem.

What is the original intention of Babylon? Why does BTC need staking? What is the biggest difference between BTC staking and Ethereum staking or restaking (such as EigenLayer)?

Xinshu: The original intention behind the Babylon protocol was to enable Bitcoin to participate in a broader decentralized ecosystem, providing security guarantees for other PoS chains or Layer 2 networks. By staking BTC assets, Babylon can offer these networks a reliable and inexhaustible collateral pool, thereby enhancing their security. This differs from Ethereum's staking/restaking mechanisms in several key ways:

• Purpose: Ethereum staking secures its own chain, whereas Babylon provides collateral for other chains or networks.

• Implementation: Ethereum aggregates staking into on-chain smart contracts, while Bitcoin staking with Babylon involves each user independently locking their BTC in UTXO scripts, making it more decentralized.

Babylon leverages Bitcoin's UTXO model to create an innovative decentralized and distributed staking architecture, fundamentally different from Ethereum's contract pool staking model. This is a core technological innovation.

The rationale behind restaking lies in using locked cryptocurrency as collateral to penalize malicious behavior, thereby ensuring network security. Traditional methods involve staking native tokens, but these have issues such as limited total supply and high inflation incentives. Babylon incorporates Bitcoin, the most secure blockchain asset, into the staking system, expanding the staking landscape.

Why did Lorenzo choose the BTC restaking sector? How large is this sector, and what opportunities does it present?

Matt: Lorenzo chose to enter the BTC restaking sector because we see significant potential in it. The total circulation of the US dollar is about $24 trillion, and the bond market is around $50 trillion. In comparison, Bitcoin's total market value is $1.4 trillion, which is about 6% of the US dollar's circulation. Based on this calculation, the theoretical market size for BTC restaking could reach $30 trillion, presenting enormous potential.

Essentially, BTC restaking involves lending out Bitcoin liquidity, locking a portion as collateral to provide security, and then reclaiming the principal and interest at maturity. It is a risk-free lending activity similar to purchasing government bonds.

Lorenzo is addressing the first step of securitizing the principal and lending activities. By creating two types of asset standards, STBTC (principal) and yield tokens (interest), we can unify liquidity and develop a more diverse financial derivatives market based on yield tokens, such as options and futures. Additionally, lending releases a large amount of Bitcoin liquidity that can be used in DeFi lending protocols, stablecoins, and exchanges. The asset standards can also collaborate with other restaking projects, providing additional collateral through STBTC.

What role does FBTC play in the BTC DeFi ecosystem?

Zuki: FBTC is a 1:1 pegged Bitcoin asset that acts as a bridge between the native Bitcoin asset pool and DeFi/infrastructure projects within the Bitcoin DeFi ecosystem. As a channel, FBTC ensures security, allowing users to independently choose services and yield scenarios. Unlike WBTC, FBTC explores new mechanisms to improve Bitcoin utilization efficiency, providing ecosystem incentives that offer returns for holding and trading FBTC. The goal is to migrate the Ethereum yield model to Bitcoin, fostering more innovation.

How is the penalty mechanism for Babylon protocol designed if a node slashes, potentially exposing its private key and risking the wallet's funds? Is this user-friendly for retail investors?

Xinshu: The penalty mechanism for Babylon BTC staking is designed so that if a node signs two different blocks at the same block height (double signing), the node's private key will be exposed. Once the private key is exposed, anyone can complete the missing penalty transaction signature to execute the penalty. It is important to note:

• Only the node's private key is exposed, not the staker's private key.

• The node's private key is only used for block signing and does not store other assets, so even if a penalty occurs, it will not affect other assets controlled by that private key.

• Not all Bitcoin staked on the node will be penalized in the event of double signing; there are adjustable local penalty parameters.

• Penalty transactions require three signatures, typically pre-signed by two parties, with the node not signing initially. If the node misbehaves and its private key is exposed, anyone can use the private key to complete the signature and broadcast the transaction.

• The reason a node's private key is exposed during double signing is that digital signatures require using a different nonce (random number) each time. If the same nonce is used to sign two different messages, it compromises the signature's privacy. Babylon mandates that nodes must use a predefined nonce for the same block height, and reusing it will result in the exposure of the private key.

Will the existing actively validated services (AVS) based on EigenLayer migrate to Babylon? Will there be new projects in the Babylon ecosystem? What form will these projects take?

Xinshu: Babylon addresses the problem of double signing or "equivocation," where a node signs two different blocks at the same block height. This is an attack that can lead to a fork and is considered an objective safety violation. Double signing must be performed by a node because only nodes control the private key. Babylon's key focus is on resolving this type of objective security threat, which can occur in blockchains with multiple nodes and valuable data (such as the Cosmos chain) or in single-sequence Layer 2 networks.

EigenLayer, on the other hand, deals with subjective attacks (inter-subjective slashing), which require social consensus to judge. This is significantly different from Babylon's focus on objective safety violations. Some community projects that stake BTC on Babylon, generating liquid staking tokens, can achieve subjective slashing functions.

From a technical perspective, the AVS situations these projects face are similar to those handled by EigenLayer. However, these projects are more focused on AVS related to the Bitcoin ecosystem and its applications.

Final Thoughts

The BTC ecosystem holds significant opportunities across various stages—short-term network service improvements, medium-term yield solutions for holders, and long-term post-upgrade ecosystem applications. Architectural innovation, efficient asset circulation, and enhanced security are critical challenges. Babylon’s decentralized staking solutions aim to enhance BTC’s utility and security, driving the ecosystem forward.

As a trusted global leader in digital asset custody and wallet solutions, Cobo has launched the industry’s first Babylon Staking API for quick integration into the Babylon ecosystem, offering BTC yield opportunities. We invite entrepreneurs in the BTC staking ecosystem to connect with us. Cobo provides robust ecosystem fund support and a variety of convenient development tools to help you succeed.