Cobo: New economics script after BTC halving

After the halving, Bitcoin is about to break new highs again. At the same time, the BTC ecosystem continues to develop in an all-round way, and projects such as Layer2 and (Re)Staking continue to emerge. Why does Bitcoin need its own (re)staking, and what is the legitimacy of its existence? For entrepreneurs and investors, what new opportunities will there be after the BTC halving? How big is the market size of BTC staking? Is this a long-term opportunity or a short-term hot spot?

On the evening of May 22, Cobo and DeepChao jointly launched a theme "New Economic Script after BTC Halving" Space in X, and entered into an in-depth discussion on this topic.

Cobo has sorted out the core views of the guests and shared them with Cobo users and readers.

The participants of this event include many players and participants representing the BTC ecosystem, including Shenyu, the co-founder and CEO of Cobo and an old BTC miner; Xinshu Dong, CSO of Babylon, the first decentralized trustless Bitcoin staking protocol; Matt, Founder & CEO of Lorenzo Protocol, a BTC restaking tokenization and financial derivatives solution; and Zuki, a core contributor of FBTC.

As participants and long-term practitioners of the BTC ecosystem, the four guests unanimously agreed that there are many opportunities hidden in the BTC ecosystem, whether in the short, medium or long term. So, how to capture these opportunities and take on the overflow of the BTC ecosystem? The guests discussed the breakthroughs and opportunities of the BTC entrepreneurial track from their own backgrounds and products, and made optimistic prospects for future potential and opportunities.

The following are the key points:

• This Bitcoin halving is affected by multiple factors, and there is uncertainty in the future market. The halving mainly affects the supply side, resulting in a sharp drop in miners' income, which has a huge impact on miners using old mining machines. Miners will be forced to accelerate the update of mining machines, optimize electricity costs, and shut down or move to low-electricity areas. However, due to the strong risk resistance of large miners and traditional capital, the decline in the computing power of the entire network is limited.

• The income from Bitcoin mining will gradually decrease and eventually converge to zero. In the future, the real return of Bitcoin will come from using it as an investment asset and investing in ecological projects such as L2, DeFi, and CeFi. Coin holders will gain benefits from it, which will become an important development trend of the Bitcoin ecosystem.

• Miners' future income comes from two parts: newly issued Bitcoin and transaction fees, the latter of which depends on the activity of the Bitcoin ecosystem. More interesting staking projects can stimulate ecological development, bring more on-chain activities and transactions, improve network security, and increase miners' transaction fee income.

• PoS lacks external economic incentives, and its security is limited by the scale of the on-chain economy, which poses a risk of being controlled. Bitcoin staking and restaking protocols introduce external large Bitcoin assets to provide security for the PoS network, solving its inherent defects, which is the legitimacy of Bitcoin (re)staking.

• Cobo co-founder and CEO Shenyu predicts: Bitcoin staking will be a large market at the level of tens of billions of dollars, comparable to the early stage of PoW mining, and can meet the needs of a large number of high-performance application chains that require security infrastructure in the future.

• Lorenzo Protocol CEO Matt: Four major areas that the Bitcoin ecosystem needs to focus on in the future - architectural innovation, L2 development path selection, efficient asset circulation and security assurance.

• For ecosystem builders and entrepreneurs, in the short term, they can focus on solving the congestion problem in the BTC network and taking on the overflow demand. In the medium term, they can focus on the holders' income needs. In the long term, they can aim at the ecological development prospects after the potential script language upgrade. It is worth noting that in the future, will there be more application scenarios closely surrounding Bitcoin? Will there be better tools to help use Bitcoin? And are there novel programming models to break through its non-Turing completeness?

• As the EigenLayer of the Bitcoin ecosystem, Babylon's solution targets objective violations. In contrast, EigenLayer responds to subjective attacks.

What impact will the recent Bitcoin halving have on various participants in the ecosystem, including miners, individuals, and project parties, and what important changes will occur in this ecosystem?

Shenyu:The Bitcoin halving mainly affects the supply side, and will have a certain impact on various participants:

For miners:The halving has led to a sharp drop in miners' income, which has a huge impact on miners using the old generation of mining machines (such as S19 Pro, M21, etc.). The marginal cost is not enough to cover the cost, and they are forced to shut down or move to low-electricity areas, which promotes miners to accelerate the replacement of mining machines and optimize electricity costs. However, due to the entry of large listed miners and traditional financial capital with strong risk resistance, the decline in the computing power of the entire network is limited.

For individual investors:For individual investors, the main impact is psychological and emotional. It is expected that the market may usher in a new market within a few months after the halving. However, this year, due to multiple factors such as the macro economy and Bitcoin ETF, there is uncertainty in the market trend.

Xinshu:This Bitcoin halving is relatively stable. With the entry of institutions, the entire market is becoming more and more professional and institutional. People are beginning to think about whether Bitcoin can have other uses and sustainable returns besides holding and mining, rather than relying solely on inflation subsidies. As the leader of the cryptocurrency industry, can Bitcoin further radiate a wider crypto community?

Babylon's first attempt is to extend the security of Bitcoin to other PoS chains. Currently, PoS chains maintain their own currency pledges through high inflation. One of the reasons is that low APY makes it difficult for holders to hold for a long time.

Babylon provides security for other chains by establishing an open market to allow idle Bitcoin to participate in staking. Compared with small public chains that expect high APY, Bitcoin stakers have relatively low expectations for APY. This provides an opportunity for PoS chains to introduce Bitcoin as a stake, which can increase returns for Bitcoin holders while significantly reducing their own inflation.

In the long run, what is more important is that Bitcoin may gain more uses and revenue scenarios, attracting more participants, and not only relying on mining for profit. Ecological projects such as Babylon will bring new application scenarios to Bitcoin, making the entire ecosystem more diverse.

Matt:The halving of Bitcoin every four years is a fixed trend, and the mining revenue will gradually decrease and eventually converge to zero. By then, the real return of holding Bitcoin will come from investing it in L2, DeFi products, CeFi products, etc., empowering these businesses, broadening the boundaries of the Bitcoin ecosystem, and bringing new benefits will surely become a major trend.

Many Bitcoin holders and project parties are jointly promoting this trend. For example, Babylon invests scarce Bitcoin on the demand side to provide security for PoS chains or L2, and investors can profit from it. If Bitcoin eventually becomes an investment asset or currency, it will inevitably require an efficient liquidity allocation market and liquidity assetization.

How do miners view staking, and what impact does it have on the entire miner's income and network security?

Shenyu:From the perspective of miners, staking is beneficial to the development of the Bitcoin ecosystem.

First of all, Bitcoin itself does not need staking, but holders and miners hope to obtain the benefits brought by staking. As a hard currency, Bitcoin has long been difficult to obtain native returns, while staking allows BTC holders to obtain token rewards from new projects.

Secondly, miners' future income comes from two parts: newly issued Bitcoin and transaction fees. The latter depends on the activity of the Bitcoin network ecosystem. More interesting staking projects can stimulate ecological development, bring more on-chain activities and transactions, and thus improve Bitcoin's network security.

Therefore, as miners and BTC holders, we all hope that more staking and restaking protocols will emerge. The more prosperous the Bitcoin ecosystem is, the more benefits we can get.

How big is the market size of Staking? Is this a long-term opportunity or a short-term hot spot?

Shenyu:The core problem of PoS is the lack of external economic incentives. The security of its underlying assets depends on the scale of native assets on the chain, and the ultimate security is limited by the total scale of the on-chain economy. In a bear market, controlling network nodes may lead to the control of the entire chain assets.

The Bitcoin staking and restaking protocols introduce large external assets that are not related to the chain, providing security for the PoS network. As the scale of Bitcoin assets exceeds one trillion US dollars, the continuous injection of external economic incentives into the PoS network has greatly improved security. This innovation solves the inherent defect of PoS's lack of externalities, which is eye-catching and has begun to be implemented, with huge development potential.

I think BTC staking is at least a market of tens of billions of dollars, which is equivalent to the early stage of PoW mining. With the development of modularization, a large number of high-performance application chains that require secure infrastructure will emerge in the future, and the Bitcoin staking protocol can meet their needs.

In 2024, I focused on the layout of related assets and targets in the upstream and downstream of the restaking track. At the company level, we have also invested a lot of human and material resources to fully embrace this innovation opportunity.

For ecosystem builders, entrepreneurs and other builders, how to seize the opportunity of this BTC narrative wave? What other key areas are worth participating in?

Shenyu:In the past six months, the Bitcoin ecosystem has shown signs of innovation, which stems from more than a year of bottom-up innovations such as inscriptions and runes, attracting a large number of new users. The demand of new users has led to network congestion, and the demand has overflowed, forcing us to start exploring second-layer solutions that provide better services.

For ecosystem builders and entrepreneurs, there are three main stages to seize the opportunity of the BTC narrative wave:

• Short term:Faced with the current network congestion, provide better services and solutions to meet the current overflow needs.

• Medium and long term:A large number of Bitcoin holders hope to obtain returns on their native assets. So entrepreneurs can think about how to bring stable, low-risk returns to BTC holders. Perhaps they can look at track applications such as CeDeFi and restaking, which are medium- and long-term opportunities.

• Long term:If the scripting language of the Bitcoin network can be upgraded (such as OP Code, OP_CAT, etc.), it will be possible to develop truly large-scale ecological applications without trust and permission. This is a long-term prospect and an opportunity for the entire ecosystem.

In general, there are major windows of opportunity in these three stages: focusing on network services in the short term, focusing on holder returns in the medium term, and aiming at ecological applications after network upgrades in the long term.

Matt:In general, the Bitcoin ecosystem faces several key challenges:

• Architectural innovation:The Bitcoin architecture may need some updates to support truly decentralized on-chain settlement, such as promoting improvements such as OP Code to achieve more advanced functions. This will be a major breakthrough and a milestone for all DeFi projects and BTC L2.

• L2 development path:Will there be a one-size-fits-all L2, or will various interoperable L2s be connected through common protocol standards? In any case, the efficient circulation of Bitcoin assets is crucial, requiring efficient matching markets, on-chain financial derivatives markets, etc.

• Security:Providing higher security at the infrastructure layer and providing financial security for investors is crucial. Insurance-related products can be provided on the DeFi infrastructure to control risks within an acceptable range.

In short, architectural innovation, L2 development path selection, 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 with Ethereum's staking or restaking (such as EigenLayer)?

Xinshu:The original intention of the Babylon protocol is to enable Bitcoin to participate in a wider decentralized ecosystem and provide security for other PoS chains or second-layer networks. By staking BTC assets, Babylon can provide these networks with a credible and "inexhaustible" pool of collateral assets, thereby enhancing their security. This is different from Ethereum's staking/restaking mechanism:

• Different purposes:Ethereum is for its own chain security, while Babylon provides collateral for other chains/networks;

• Different implementation methods:Ethereum is aggregated in the on-chain smart contract, while each Bitcoin user independently stakes and locks in the UTXO script, which is more decentralized.

Babylon uses the Bitcoin UTXO model to achieve an innovative decentralized and distributed staking architecture, which is fundamentally different from the Ethereum contract pool staking model. This is a core technological innovation.

The rationality of restaking lies in that by locking cryptocurrencies as collateral, malicious behavior can be punished, thereby ensuring network security. The traditional approach is to stake native tokens, but there are problems such as a small total amount of tokens and high inflation incentives. Babylon incorporates Bitcoin, the safest blockchain asset, into the pledge system, expanding the pledge scenario.

Why did Lorenzo choose the BTC restaking track? How big is the scale of this track? What are the opportunities?

Matt:The reason why Lorenzo chose to lay out the entire track is that he is very optimistic about BTC restaking. The total circulation of the US dollar is about 2.4 trillion, and the debt market is about 50 trillion; while the total market value of Bitcoin is 1.4 trillion, which is about 60% of the circulation of the US dollar. In this way, the market size of BTC restaking can theoretically reach 30 trillion US dollars, which has huge room for imagination.

In essence, BTC restaking is to lend Bitcoin liquidity, lock a part of it as collateral to provide security, and recover the principal and interest when it expires. It is a risk-free lending behavior, similar to buying government bonds.

Lorenzo is solving the first step of securitizing principal and lending. Through two types of asset standards, STBTC (principal) and yield tokens (interest), liquidity can be unified, and a richer financial derivatives market, such as options and futures, can be developed based on yield tokens. At the same time, lending also releases a large amount of Bitcoin liquidity, which can cooperate with DeFi lending protocols, stablecoins, exchanges, etc. Asset standards can also cooperate with other restaking projects to provide them with additional collateral through STBTC.

What is the position of FBTC in the BTC DeFi ecosystem?

Zuki: FBTC is an asset that is 1:1 anchored to Bitcoin. It plays the role of a bridge connecting the native Bitcoin asset pool and DeFi/infrastructure projects in the Bitcoin DeFi ecosystem. As a channel, FBTC will ensure security and allow users to choose services and income scenarios independently. Unlike WBTC, FBTC will explore new mechanisms to improve the efficiency of Bitcoin utilization, provide ecological incentives, and allow holders and traders of FBTC to obtain multiple returns. It is expected to migrate the Ethereum revenue model to Bitcoin and breed more innovations.

The Babylon protocol requires signing two transactions. If the second transaction is used as a slash node, the private key may be exposed, which is equivalent to losing all the money in the wallet. How is this function designed? Is it friendly to retail investors?

Xinshu:The penalty mechanism for Babylon BTC pledge is that if a node issues two different blocks (double signature) at the same block height, the private key of the node will be exposed. Once the private key is exposed, anyone can complete the missing confiscation transaction signature and execute the confiscation. It should be noted that:

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

• The node private key is only used for block signatures and does not store other assets. Therefore, even if a confiscation occurs, it will not affect other assets controlled by the private key.

• When double signing occurs, not all Bitcoin stakes on the node will be confiscated. There are adjustable local confiscation parameters.

• The confiscation transaction requires three-party signatures. Usually, two parties pre-sign, and the node does not sign for the time being. Once the node exposes the private key by doing evil, anyone who obtains the private key can complete the signature and broadcast the transaction.

• The reason why the node double signature exposes the private key is that the digital signature requires a different nonce (random number) to be used each time. If the same nonce is used to sign two different messages, the privacy of the signature will be destroyed. Babylon stipulates that nodes at the same height must use a predetermined nonce signature. Once repeated use leads to double signing, the private key will be exposed.

Will the existing AVS based on EigenLayer be migrated to Babylon? Will there be new projects in the Babylon ecosystem? What form will these projects take?

Xinshu:The main problem that Babylon solves is the issuance of two different blocks at the same block height, which is called the "double signing" or "equivocation" problem. This is an attack that will cause a fork and is an objective safety violation. Double signing must be implemented by nodes because only nodes control private keys. The key problem that Babylon solves is this objective security threat, which occurs either on a blockchain with multiple nodes and value data (such as the Cosmos chain) or on a second-layer network with only a single sequence.

EigenLayer deals with inter subjective slashes, which require community consensus to judge, which is very different from the "objective safety violations" that Babylon focuses on. Some community projects can achieve subjective slashing functionality through staking, such as Liquity staking tokens generated by staking BTC on Babylon.

From a technical perspective, the AVS situation faced by such projects is similar to that handled by EigenLayer. However, these projects focus more on AVS forms related to the Bitcoin ecosystem and applications.

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