Are Babylon's market expectations overestimated?

Author: haotian

It has been nearly a month since the @babylonlabs_io mainnet was launched, but the expected BTCFi market response was not as enthusiastic as expected. So, what problems were exposed during the first phase of Babylon's pledge process? Is Babylon's sustainable interest-bearing narrative logic established? Is Babylon's market expected impact overestimated? Next, let me share my views:

1) Babylon's innovative core is to adopt the Self-Costodian self-custody method, allowing users' BTC assets to be locked in the Bitcoin mainnet in the form of script contracts, while being able to output "security consensus services" on many BTC layer2s and then obtain rich benefits provided by other extension chains.

At this stage, only the first half of this sentence is true. Indeed, Babylon's sophisticated and complex cryptographic algorithm architecture allows users to realize the possibility of additional income while holding BTC in self-custody. Other CeDeFi or Wrapped forms that allow native BTC to break through the constraints of the original chain require a third-party custody platform, which Babylon does not need. If the wallet supports it, users can see that the BTC they pledged to the Babylon protocol is still displayed in their balance.

The second half of this sentence can only be regarded as an immature "pie" at present. Because in order to transform Babylon's security consensus into services and generate revenue, the following prerequisites are required:

First: There must be a large number of users, including Validators nodes with a large proportion of voting rights, who will pledge BTC to Babylon and deploy it in the Bitcoin mainnet protocol;

Second: A large number of LST assets must be aggregated and strong liquidity must be generated to form the basis for the growth of ecological users, TVL, etc.

Third: There must be a large number of new layer2 POS chains "purchasing" the security consensus services provided by Babylon and providing sustainable Yield income;

2) At present, the Babylon protocol has only opened the first phase of limited pledge of 1,000 BTC, which can only be regarded as an experimental launch stage, but it has exposed many problems, which makes it challenging to meet the above three prerequisites at the same time. For example:

1. The pledge process and the interaction with the Babylon protocol will generate a high "transaction fee loss".

Including: the loss of the overall transaction fee of the network caused by the Fomo effect of the pledge network, and the corresponding handling fees generated by the subsequent protocol Unbond, Withdraw and other operations.

Take the first phase of pledge War as an example: if it is limited that each transaction can only deposit 0.005 BTC, and only the transactions within the first 5 blocks are valid. Assuming that an institutional Validator wants to deposit 100 BTC, it needs to initiate 20,000 transactions on the chain within 1 hour, and confirm them earlier than other competitors' transactions. This is bound to cause a short-term surge in network transaction fees, greatly increasing the cost of pledgers. It is understood that the mining fee ratio exceeds 5%. (For reference only, the specific data is subject to official)

2. The native BTC deposited by Babylon and the Wrapped version of BTC that can be circulated in its ecosystem are not limited to 1:1.

Since Babylon does not have a Wrapped version of BTC in direct circulation, the Wrapped version of BTC circulating in the Babylon ecosystem is provided by some nodes participating in the pledge, including: @SolvProtocol, @Bedrock_DeFi, @LorenzoProtocol, @Pumpbtcxyz, @Lombard_Finance, etc. These institutional Validators pledge a number of BTC in Babylon, but the actual liquidity of the Wrapped version of BTC they aggregate is far greater than the amount of BTC they have pledged (in fact, the scale of LST liquidity needs to be expanded).

This means that although the Babylon protocol can ensure the security of native BTC assets pledged on the Bitcoin mainnet, Babylon cannot guarantee the liquidity risk and absolute trust of various Wrapped versions of BTC circulating on the aggregation platform. It still depends on these aggregation platforms to do a series of credibility endorsements such as public audits and contract transparency.

In other words, if Babylon is compared to Lido, after users deposit ETH, there will be no corresponding stETH for circulation, and the actual liquidity is provided by aggregation platforms such as Solv Protocol (SolvBTC.BBN) and BedRock (uniBTC). Babylon is like a central bank with partial reserves, which will only suppress a little reserve to constrain its liquidity providers (local bank roles). The overall security can only be guaranteed by the unified cooperation of the central and local governments.

The above two issues determine that Babylon only plays a "security reinforcement" role in this BTCFi wave. The real good show still depends on Solv Protocol, BedRock, Lorenzo, PumpBTC and other aggregated liquidity platforms.

The key is that the market sentiment that is too Fomo at the beginning will seriously increase the entry "cost" of these participants, which will undoubtedly increase the "exit" pressure on subsequent Yield interest.

Just as the development of the Eigenlayer AVS service market is related to the lifeblood of the Restaking track, the progress of the commercialization of Babylon's security consensus service output has also become a market answer that Babylon must submit.

3) So, how can Babylon's "shared security" service paradigm generate sustainable Yield income? In my opinion, it is not enough to rely solely on the market for Babylon social security consensus incentive evolution. Another force is needed to expand the POS chain demand pool.

In other words, Babylon's narrative logic of maintaining the upstream and downstream economic chain is not solid, and there is great uncertainty on the "purchasing side".

Assuming that a newly constructed POS chain wants to access the Babylon ecosystem, Babylon must first generate AVS services from the complete node Validators network. For example, Eigenlayer has established the AVS-as-a-service narrative and provides a series of services including decentralized sequencers, oracles, and ZK coprocessors.

At this stage, perhaps it is just because the mainnet protocol was launched too early, Babylon does not have mature commercial services. The market's expectations for Babylon seem to be only to actively participate in the competition for pledge voting rights, then aggregate liquidity to engage in the Point War, and finally share the spillover dividends by expanding the overall Babylon liquidity market cake. This may be feasible, but relying on stacking market expectations to promote ecological development will be too "passive". Is there an "active" BTCFi interest-bearing plan?

Taking the ZK general architecture application chain @GOATRollup as an example, the @ProjectZKM team built a general layer2 framework based on the underlying ZK technology, including: the underlying zkVM general execution layer, the Entangled Rollup Network shared interactive communication layer, the decentralized Sequencer shared layer, etc., and finally uses universal component services to provide layer2 with a Native cross-chain without a cross-chain bridge, and a unified liquidity interactive operation center.

Compared to Babylon, Goat locks the user's native BTC in the Bitcoin mainnet and then provides 1:1 Wrap version of BTC (goatBTC), and through the decentralized Sequencer native mining income (yBTC), and introduced Pendle debt-interest separation and other designs to enrich the possibility of interest.

It can be considered that Goat Network is similar to the "Rollup as a Service" service provider in the Ethereum layer2 system. It can output a general modular paradigm to expand the scale of the BTC layer2 POS chain, and provide a set of sustainable BTC income economic models to ensure the feasibility of its narrative.

The above.

It is not difficult to see that the greatest value of Babylon's innovative cryptographic security paradigm lies in the rapid aggregation of the previously dispersed BTC market liquidity and the formation of ecological development potential. The core liquidity capital scale and efficiency are the underlying logic supporting its narrative.

To expand the scale effect of the POS chain and increase the commercial output of security consensus services, we still have to rely on zk technology as a complement and promote modular shared Sequencer, Interoperability, DA and other component services.

As for whether Babylon is overestimated or mis-expected? I believe the above views can inspire everyone.