Babylon mainnet launched nearly a month ago, market response not as expected: Where does the future of BTCFi lie?

It has been nearly a month since the decentralized protocol Babylon mainnet went live, but the response from the BTCFi market has not been as enthusiastic as expected. What problems were exposed during the first phase of staking in Babylon? Is the logic of its sustainable interest valid? Has the market expectation for Babylon been overestimated? Here is a in-depth analysis by independent researcher Haotian.

Innovation and Challenges of Babylon

Core Innovation: Self-Custody Model and Secure Consensus Service

Haotian stated that the innovation of Babylon lies in adopting a self-custody model, allowing users to lock BTC assets in the form of script contracts on the Bitcoin mainnet, while outputting "secure consensus services" on multiple BTC layer2 to gain benefits from other extension chains. In this model, users can maintain full control of BTC in a self-custodial manner without the need for a third-party custodial platform.

However, currently, this innovation is only established in the "self-custody" aspect. While Babylon's cryptographic algorithm architecture does provide the possibility for users to generate additional income while holding BTC, the latter part of "converting secure consensus into service and generating income" remains an immature concept that needs to meet multiple prerequisites.

Three Prerequisites: Users, Liquidity, Service Demand

Haotian believes that to achieve "converting secure consensus into service and generating income," three conditions must be met:

1. A large number of users and validation nodes: There must be a large number of users and validation nodes with significant voting power to stake BTC within the Babylon protocol.

2. Strong liquidity and LST asset aggregation: It requires aggregating a large amount of LST assets to form strong liquidity to support the ecosystem's users and Total Value Locked (TVL).

3. Procurement demand for new layer2 PoS chains: There is a need for a large number of new PoS chains to procure Babylon's secure consensus services and provide sustainable returns.

Issues Exposed in the First Phase of Staking

Issue 1: High Transaction Fee Loss

Haotian mentioned that in the initial phase, Babylon only opened up staking for 1,000 BTC, which was an experimental launch phase, yet it already exposed the problem of high transaction fees. The transaction costs during the staking process skyrocketed, including FOMO effects, fees for unlocking and withdrawing after staking, significantly increasing the participants' costs. For example, in the first staking phase, participants needed to conduct a large number of transactions within a limited time, leading to a substantial increase in mining fees. It is understood that the proportion of mining fees even exceeded 5%.

Issue 2: Liquidity Risk of Wrapped BTC Versions

The Babylon protocol does not directly provide a 1:1 circulating Wrapped BTC. Currently, the Wrapped BTC within the ecosystem is provided by nodes participating in staking. These nodes, such as Solv Protocol, Bedrock DeFi, etc., the liquidity between the staked native BTC and their aggregated Wrapped BTC versions is not completely matched, indicating that liquidity risk still exists and needs to rely on the reputation of each aggregation platform to maintain.

The Future of Babylon: How to Achieve Sustainable Returns with Shared Security?

Challenges and Strategies for Sustainable Returns

Can Babylon's "shared security" service generate sustainable returns? Haotian believes that relying solely on Babylon's market incentives is insufficient; other forces are needed to strengthen the demand pool for PoS chains. Currently, Babylon's security services in PoS chains are not mature, lacking commercialized service outputs. Market expectations for Babylon focus on staking voting, liquidity aggregation, and competition, primarily through expanding the ecosystem market to share profits, a model that entails significant uncertainty.

Comparison Case: Modular Secure Consensus of Goat Network

Unlike Babylon, Goat Network provides modular component services for layer2 chains through ZK technology, including zkVM execution layer, shared communication layer, and decentralized Sequencer, etc. Goat Network not only locks user BTC and generates a 1:1 Wrapped BTC but also enriches the possibilities of interest through decentralized mining and revenue design. This model provides a more robust technical secure consensus for PoS chains, with better replicability.

Market Expectations: Overestimated or Misunderstood?

The innovation of Babylon lies in rapidly aggregating liquidity in the BTC market and forming an ecosystem effect, with the core being the scale and efficiency of its liquidity capital. However, to expand the scale effect of PoS chains and realize the commercialization of secure consensus, it still needs to be combined with ZK technology and modular services. Whether Babylon is overestimated or misunderstood remains to be further tested by the market.