BTCFi: Can a spark ignite a prairie fire?

Original author: Chilla

Original compilation: Block unicorn

Preface

Decentralized finance (DeFi) on Bitcoin is no longer just a theory. Despite some setbacks, the momentum around unlocking Bitcoin's potential beyond being digital gold is growing.

But to be honest: no one really cares. This is understandable. Because until recently, things have been a bit chaotic.

While Ethereum built a massive DeFi economy, Bitcoin sat on the sidelines, with more than $1.5 trillion in liquidity locked in cold wallets. The absence of DeFi smart contracts, the lack of decentralized encapsulation/bridging (wBTC), and Bitcoin's status as digital gold limit the growth around this orange money ecosystem. But the situation is changing.

With a batch of new protocols launched on and around Bitcoin, we are seeing the foundation of a truly BTC native DeFi stack. Projects like Babylon, Lombard, SatLayer, and Solv Protocol are leading in terms of technology and total value locked (TVL), each addressing different parts of the DeFi Lego.

Babylon: The Staking Layer of Bitcoin

Babylon can be likened to Ethereum's Beacon Chain, but designed specifically for Bitcoin. It is a native Bitcoin staking protocol with a TVL of over $5 billion, making it a pioneer among similar protocols.

The special feature of Babylon is that it allows users to directly stake BTC on the Bitcoin mainnet without the need for bridging or wrapping. The coins remain in place and are stored in a non-custodial manner.

But Babylon is not just about staking for the sake of staking. Its main innovation is extending the security of Bitcoin to other blockchains, whether they are EVM chains, Rollups, or application chains.

Bitcoin holders can now help secure the network by locking up their coins and earn rewards from the chain they are protecting.

Lombard: The liquidity staking of Bitcoin

It is the Lido of Bitcoin. Babylon is responsible for staking; Lombard makes it composable.

Therefore, Lombard has a Bitcoin-related TVL of $1.9 billion, built on Babylon. It allows users to stake BTC through Babylon and earn LBTC, which is a liquid staking token representing the staked position.

In fact, as we mentioned earlier, the BTC staked through Babylon is still locked in the BTC network. Therefore, without validating the consensus mechanisms of other networks, they are "useless." They cannot be used for DeFi. This is precisely where Lombard comes in. Now, users can obtain liquid staked BTC (LBTC) and start trading, lending, mining, and all other similar activities.

Lombard earns rewards by delegating BTC to Babylon validators, who in turn secure external networks and earn rewards, as mentioned earlier. These rewards are shared with holders of LBTC. In simple terms, the more chains validated by Babylon, the higher the earnings for the stakers.

Lombard is active in multiple ecosystems such as Sonic, Sui, and Base, collaborating with protocols like Aave, Pendle, Ether.Fi, and Corn, showcasing its composability. It also played a significant role in the Boyco Berachain liquidity activities, helping to kickstart early TVL.

SatLayer: EigenLayer of Bitcoin

As the title suggests, SatLayer can be imagined as an Eigen Layer built on top of Babylon.

Despite having the lowest TVL in the list at only $340 million, it introduces a new re-staking model. Babylon locks BTC to protect external networks at the consensus layer, while SatLayer allows users to re-stake LBTC to secure the application layer.

This opens the door to revenue markets obtained directly from protected applications, such as an oracle paying restakers to ensure data integrity, or a Rollup paying restakers to ensure transaction validity, or a bridge paying to avoid slashing or fraud.

SatLayer supports re-staking on EVM and Sui networks.

Do you see the full picture now?

• Babylon serves as the base layer, providing consensus for the network;
• Lombard, as a liquidity staking, unlocks the locked Babylon BTC;
• SatLayer provides re-staking, offering economic security guarantees for the application layer.

Are the similarities with Ethereum, Lido, and Eigen Layer beginning to emerge?

However, it is important to note that Lombard and SatLayer currently rely on Babylon, while the reverse is not true.

SatLayer does not necessarily rely on Lombard, although given its decentralized nature, Lombard is currently the only solution it utilizes.

Solv Protocol: BTC Reserve and DeFi Treasury

The Solv protocol has a TVL of 524.27 million USD in the BTC ecosystem, utilizing different methods.

Similar to Lombard, it provides liquidity staking for BTC but does not rely on Babylon, focusing instead on building its own Bitcoin reserve strategy and other DeFi products.

In fact, the SolvBTC token is a liquidity representation of its BTC reserve strategy, where users deposit a wrapped version of BTC, and then Solv converts most of it into native BTC through institutional channels and stores it via centralized custody.

Although Solv does not rely on Babylon, it benefits from Babylon-related assets such as LBTC. In turn, it provides greater composability thanks to its DeFi treasury.

Conclusion

DeFi on Bitcoin is no longer just a pipe dream. With the emergence of new protocols and the increase in liquidity, we may be witnessing a new era of decentralized yield on Bitcoin.

This is no longer just about wrapping BTC on Ethereum, but unlocking native BTC DeFi.

As more projects like Botanix launch EVM-compatible Bitcoin blockchains, the composability and potential value of these layers may soar. Billions of idle BTC may soon become active collateral, helping to validate the network, secure applications, and generate real yields.

Institutional investors are flocking to Bitcoin, attracted by its returns.