Babylon does not have a "soft underbelly," but the BTC layer2 market cannot rely solely on Babylon.

Author: Haotian

How to view the subsequent market impact of @babylonlabs_io after the mainnet goes live? Undoubtedly, it will trigger a wave of Staking craze in the Bitcoin ecosystem, similar to the impact Eigenlayer had on Ethereum, ushering in the arrival of BTCFi Summer.

So, how does Babylon work? What are the differences compared to Eigenlayer? What are the potential highlights of the Babylon ecosystem? Where are Babylon's weaknesses? Next, let's talk about my understanding:

Thorough understanding of Babylon

In simple terms: Babylon achieves a secure, cross-chain, and non-custodial Native Staking solution for BTC layer2 and other POS chains by building complex UTXO script contracts on the Bitcoin mainnet. How does it work?

The traditional approach to achieving the effect of staking assets on a POW chain to produce yield on a POS chain relies on third-party asset custody and the circulation of wrapped 1:1 assets on a new POS chain (e.g., WBTC). The trust crisis caused by WBTC some time ago exposed the biggest shortcoming of this approach.

Babylon has built a system for remote staking using the Bitcoin chain, locking BTC on the Bitcoin mainnet through complex cryptographic algorithms and script language design of Covenant, and then using the Babylon Chain built on the Cosmos SDK to remotely manage and schedule assets to achieve subsequent functions:

1) The staking, unbonding, withdrawal, and other actions defined by the script contract must be verified, penalized, and controlled by Validators on the Babylon Chain according to the rules defined by the script (e.g., EOTS signature scheme, multi-signature consensus in the final round), allowing the Validators of the Babylon Chain to safely and decentralizedly manage the assets locked on the Bitcoin mainnet.

2) Babylon abstracts the verification and coordination capabilities of Validators into a capability that can provide secure consensus to other POS chains, in the form of "security as a service," for other modular and compatible POS chains.

As a result, other POS chains will generate corresponding yield to allow the staked BTC assets of Babylon to generate income. In theory, the greater the demand for this security service on POS chains, the greater the potential for income from Babylon's staking.

Babylon VS Eigenlayer

1) The Babylon protocol is a connector between the BTC mainnet and other POS chains, aiming to match the native asset scarcity of BTC POW chains with the lack of yield in other POS chains and the lack of decentralized BTC custody services, allowing BTC assets to access other POS chains in a native way and generate expected income. Therefore, Babylon primarily serves the assets of the invincible consensus of BTC, providing a technical framework and potential for income.

Eigenlayer packages the verification service capabilities of Ethereum Validators as a commodity. On the one hand, Ethereum layer2 or other modular POS chains can access the powerful validation capabilities of Ethereum Validators, and on the other hand, the yield generated by these POS chains can enhance the original income capabilities of Ethereum nodes. Therefore, Eigenlayer aims to commercialize the physical validation service capabilities of Ethereum Validators to enhance the original income capabilities of Ethereum.

2) From a business logic perspective, the "security as a service" of Babylon and the "AVS as a Service" of Eigenlayer are essentially the same, but the subtle difference is that the demand provided by Babylon is more rigid. If other POS chains do not integrate with Babylon in terms of custody, they will be criticized as "centralized."

In contrast, Eigenlayer amplifies the leverage mechanism of Ethereum's original Staking income. Although it can stimulate the prosperity of Restaking platforms in the short term, there will be a game between the income from exporting secure consensus and LRT points. If the real commercial income cannot match the speed of leveraging on the LRT platform, the utility of Staking income will be counterproductive.

Potential highlights of the Babylon ecosystem?

The launch of Babylon will definitely stimulate the sluggish BTC layer2 market in two main ways:

1) It can allow many projects that originally combined CeFi forms to undergo a technical "upgrade," eliminating the criticized centralization issues and making it easier for the slogan of asset income to gain market trust.

2) It can bring direct commercial vitality to many BTC layer2 POS chains. On the one hand, BTC income will accelerate the accumulation speed of TVL for some POS chains, further continuing the TVL points war. On the other hand, apart from BTC income, there will also be diverse gameplay such as LSD, LRT platform + DeFi combination income.

The potential subsidy war between Babylon+ and various platforms will also bring sustained heat to the BTCFi track, which can rival the Restaking craze brought by Eigenlayer in the beginning.

@SolvProtocol, with its positioning as a decentralized Bitcoin reserve center, Solv has seized the current situation of excessive decentralization of BTC assets, rapidly accumulating nearly 20,000 BTC. After the launch of Babylon, SolvBTC.BBN will see expected growth;

@Bedrock_DeFi, incubated in the BNBChain ecosystem and supported by OKX Ventures, as one of the leading projects in the Babylon ecosystem, both the recent minting achievements of UniBTC and the expected income from Babylon points are quite strong;

@LorenzoProtocol, which has introduced the concept of liquidity staking, allowing users to participate in staking and earn rewards without locking funds. Its feature of separating principal tokens LPT+ and accumulating income tokens YAT in a manner similar to Pendle is quite impressive;

In addition, there are many platforms including @BSquaredNetwork, @Lombard_Finance, @ChakraChain, @BotanixLabs, etc., which will showcase their strength in this wave of Babylon ecosystem craze.

Babylon's "soft underbelly"?

Undoubtedly, the launch of Babylon brings more positive impacts to the BTC ecosystem, but it is not without its "soft underbelly."

Objectively speaking, the secure consensus provided by Babylon depends on its Cosmos SDK chain, and is not directly controlled and scheduled by a series of complex derivative projects based on the script programs on the BTC main chain, which naturally limits it to the "asset management" category.

Therefore, there can be many "Blast income-like derivative projects" based on Babylon, but it is quite difficult to grow top-tier layer2 "comprehensive chains" such as Starkent and Arbitrum for BTC layer2 chains that rely on Babylon to provide secure consensus. The logic is also quite simple: if a BTC layer2 chain relies on Babylon to provide secure consensus, it is equivalent to castrating the sovereignty of that layer2 chain, which is not conducive to the subsequent construction of a complex ecosystem. I have analyzed in detail in a pinned long article, and there are many more technically underlying frameworks that can make up for this issue.

1) The zkVM universal protocol framework, developed by @ProjectZKM, leverages the "trustworthy" nature of zk technology in cross-chain interoperable operations. With zk technology, they have built @GOATRollup, achieving ZK Bridgeless cross-chain and Entangled Rollup Network interactive communication layer, essentially constructing a set of Cosmos IBC cross-chain communication components using ZK technology to boost the prosperity of the BTC ecosystem. This is a more universal underlying native technology solution for BTC, suitable for most sovereign BTC layer2 chain applications;

2) The UTXO Stack structure framework, an extension of the BTC layer2 solution by the @NervosNetwork CKB team based on RGB++, allows BTC and its derivative assets to be circulated on the CKB chain through isomorphic binding, effectively reconstructing a BTC execution VM environment to support the required programmable complex features;

In addition, there are also offerings such as the MoveVM global state high-level language execution architecture provided by @RoochNetwork, and the AVM virtual machine framework by @atomicalsxyz, which can all become the driving force for the development of the BTC layer2 market.

If Babylon can trigger the first wave of BTCFi income craze, and more projects with solid technical foundations and good innovation can take on the second wave of enthusiasm, this is the bustling scene of the BTC layer2 market that I am looking forward to.

In conclusion, Babylon does not have a "soft underbelly," but the BTC layer2 market cannot rely solely on Babylon. Please firmly believe that the BTC ecosystem will definitely have its own Summer coming.

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