Behind the Renaissance of Bitcoin lies liquidity finance.
Written by: Peng Sun, Foresight News
Before we begin: The metaphor of “Prisoner of Babylon” refers only to the current BTC pledged through Babylon, which has liquidity restrictions. The author is very optimistic about Babylon. Its native BTC pledge provides shared security for PoS chains, truly opening the door to the Bitcoin financial ecosystem. How to fully release the liquidity of BTC on Babylon and provide users with more sources of income is the direction that Lorenzo is actively exploring.
When we talk about the Renaissance of Bitcoin, few people know what lies behind it. In fact, the Medici family is the “godfather of the Renaissance”, and the Medici Bank is the “financial pusher” behind the Renaissance.
If we compare the noble families of Europe in the Middle Ages to a dazzling summer night sky, then the Medici family is the most dazzling star. They were not only the de facto rulers of Florence but also produced three popes and two French queens. They patronized and funded artists, including Botticelli, da Vinci, Michelangelo, Raphael, and others. Such grand gestures mostly came from the fourth-generation heir of the Medici family, “The Magnificent Lorenzo” Lorenzo di Piero de’ Medici.
The liquidity finance of the Medici Bank was behind the Italian Renaissance, and the same goes for the Bitcoin Renaissance. The key is to stimulate and release the liquidity of BTC, building a more complex asset financialization scene for BTC. Babylon has achieved native BTC pledging on the Bitcoin mainnet, providing shared security for any PoS chain and opening the door to the Bitcoin financial ecosystem. However, the liquidity of BTC has not been fully released. The current liquidity constraints of Babylon are like the “prisoner of Babylon”. There are many projects hoping to solve this problem, but they are far from reaching the depth that Lorenzo has ventured, and the release of liquidity finance is not thorough enough.
Today, Lorenzo is strategically positioned to build a Bitcoin liquidity finance layer that combines Lido, Renzo, and Pendle, providing income based on native BTC from Babylon, connecting liquidity pledging, re-pledging, principal and interest separation, StakingFi, and more in a complete process. In other words, Lorenzo will become the capital entry point for users to access various BTC financial products. Currently, Lorenzo has received investment from Binance Labs and has launched the mainnet test version, with mainnet V2 set to be released in June. Additionally, Lorenzo has recently started the Bitcoin pre-pledge Babylon and Bitlayer joint mining activities, offering incentive pools and multiple incentive schemes for users participating in pre-pledging Babylon, bridging stBTC to Bitlayer for ecological projects, and other collaborations with Lorenzo to thank early supporters.
So, how will Lorenzo maximize the release of Bitcoin liquidity, recreate the financial empire of the Medici Bank, and lead Bitcoin towards a new Renaissance? Today, Foresight News will delve into a thorough analysis and interpretation of this.
Lorenzo: The Wealth Manager of the Popes
In the Middle Ages, the Pope was the main customer of Italian banks and trading companies, being the only ruler in Europe with taxation rights in all corners. Banks were financial institutions specialized in managing finances for the Pope, providing services such as tax collection, receiving and transferring taxes, currency exchange, and loans. The Medici Bank became an early manager of the Pope’s wealth. In the confidential account books, the accounts of the Pope’s treasury were under the name of the Roman branch, equivalent to the account of the U.S. Treasury Department in a Federal Reserve Bank today.
In Lorenzo’s time, the Vatican, aristocrats, and nobles believed that the Medici Bank had an unlimited lending capacity. In reality, the Medici Bank overborrowed, and the Vatican was unable to repay. In 1494, the Medici Bank was on the brink of bankruptcy, with the pillar Roman branch entangled in loans issued to the Pope’s treasury. As the wealth manager of the Pope, the Medici Bank had deep political ties. As the supply of English wool decreased and silver prices fell, the Medici Bank’s reinvestment opportunities diminished, revenue sources were severely lacking, cash reserves were well below 10% of total assets, and liquidity crisis ensued.
Today’s Lorenzo is also a “religious wealth” manager. Bloomberg calls Bitcoin the “first true religion of the 21st century,” with Bitcoin fundamentalists and holders as its believers. From a financial perspective, today’s public chains are like banks, spawning various financial products on top, including deposits, loans, mortgages, exchanges, structured products, insurance products, and more. However, due to the limitations of Bitcoin’s script language and technology, it has been unable to build its own liquidity finance on Bitcoin. This has led to a common phenomenon: the number of addresses holding over 100 BTC has remained stable at around 16,000 in the past four years. Although the current largest wrapped token WBTC has a market value of about $10.5 billion, Bitcoin’s total market value is a whopping $1.3 trillion, accounting for only 0.8%, coupled with the strong belief of the Bitcoin community in “Not your keys, not your coins,” few are willing to take the risk of participating in cross-chain and other DeFi protocols.
Lorenzo is targeting these long-standing BTC holdings. It is the first Bitcoin liquidity finance layer based on Babylon and the issuance and settlement platform for Bitcoin liquidity pledging tokens. It provides truly secure native income for Bitcoin users and issues LST for various Bitcoin pledging projects to establish a super bond market, offering integrated products for matching, issuance, settlement, and structured finance, fully releasing the liquidity of pledged BTC, activating the Bitcoin asset financialization scene, and supporting the construction of downstream DeFi ecosystems.
Competitive Market for LRT based on Babylon
2024 can be described as the first year of the Bitcoin ecosystem. After narratives of asset issuance such as inscriptions and runes, the Bitcoin ecosystem has entered the narrative of income-producing assets. In the past, due to the use of the Nakamoto Consensus, Bitcoin could not stake and generate income like PoS. However, today, users only need to deposit BTC into Babylon’s self-custody deposit address on the Bitcoin mainnet to provide shared security for PoS chains by including PoS verification information in the Bitcoin block through a timestamp protocol, and earn staking rewards without any third-party custody, cross-chain, or wrapping. Additionally, Schnorr signatures and Extractable One-Time Signatures (EOTS) mechanisms make BTC confiscatable assets, effectively preventing double-spend attacks.
Babylon’s shared security mechanism provides great potential for the Bitcoin financial ecosystem. However, the current problem is that the BTC provided for PoS chains staking through Babylon also loses liquidity and becomes the “prisoner of Babylon,” affecting capital utilization efficiency and having a single source of income. So, how can BTC liquidity be fully released on Babylon and provide users with more sources of income?
Considering this, there are now several re-staking protocols on the market, such as Uniport, Chakra, BounceBit, Bedrock, Solv Protocol, and StakeStone, all aimed at further releasing BTC liquidity. Let’s take a closer look at each of them:
Chakra is a Bitcoin re-staking protocol based on ZK, which cross-chains BTC and ETH from the Ethereum mainnet to the Chakra chain, forming the asset settlement center of BTC L2, and using lightweight client cross-chain technology to deploy ChakraBTC and ChakraETH to other BTC L2 chains. Chakra provides re-staking services for PoS chains based on SCS (Settlement Consumption Service). This is similar to what Babylon aims to do, but BTC is not originally staked on the Bitcoin mainnet. To address this issue, Chakra has now integrated Babylon and can map BTC staked through Babylon to any ecosystem through Chakra’s trustless settlement service/layer, allowing Babylon to use BTC staked through Chakra to ensure the security of the PoS system within its protocol, enabling stakers to share verification rewards. The ZK-STARK staking proof generated by Chakra allows users to obtain liquid assets on Chakra Chain, Starknet, and various other blockchains.
BounceBit is a Bitcoin re-staking infrastructure that uses a dual-token PoS structure, based on the wrapped token BTCB rather than native BTC, and converts BTCB into BBTC, with shared security based on the LRT stBBTC of staked BBTC. BBTC is designed to address the low liquidity and limited use cases of Bitcoin on the native chain, but compared to the Babylon solution, the native nature of BTC is relatively weak. Although its BTC Bridge will allow direct cross-chain conversion of native BTC into BBTC, there are always risks with cross-chain bridges and oracles.
Uniport is a Bitcoin re-staking chain that uses the UniPort zk-Rollup Chain built on the Cosmos SDK to achieve multi-chain interoperability of BTC ecosystem assets, converting native BTC into UBTC and managing it with a centralized multi-signature cold wallet (which will use multi-signature contracts in the future). UBTC will be deeply integrated with Babylon.
Bedrock is a multi-asset liquidity re-staking project that has partnered with Babylon to launch the LRT token uniBTC. Users can pledge WBTC on Ethereum and receive uniBTC, using a proxy staking and direct conversion method to connect with Babylon. The proxy mechanism involves staking the corresponding amount of native BTC on Babylon while staking wBTC on Ethereum. Direct conversion involves converting WBTC directly into BTC and staking it on Babylon. Holding uniBTC allows users to earn BTC income and use it in other DeFi protocols.
Solv Protocol is a full-chain income and liquidity protocol that converts WBTC on Arbitrum, M-BTC on Merlin, and BTCB on the BNB Chain into interest-bearing asset solvBTC, not native BTC.
StakeStone is a full-chain liquidity infrastructure that deposits native BTC into Babylon for staking and issues full-chain liquid income BTC STONE.
SataBTC is a Bitcoin re-staking layer that has not yet been launched.
After a comprehensive comparison, it can be seen that LRT projects in the same category are actively exploring their own ways. BounceBit, Bedrock, and Solv Protocol prioritize absorbing existing markets, with underlying assets being wrapped BTC rather than native BTC, unifying liquidity and providing income capabilities for BTC. However, they carry the same inherent risks as WBTC and other wrapped tokens. Other projects are targeting the LRT market based on Babylon, with Chakra, Uniport, and StakeStone focusing on the additional market brought by Babylon. They choose Babylon as the underlying source of income and issue LRT tokens to release the liquidity of pledged BTC but stop at restaking and LRT.
In fact, LRT with income also faces high volatility issues and cannot meet the needs of users with different risk preferences. Thinking about Ethereum, all income-producing assets eventually flow to Pendle, something that Bitcoin DeFi is still missing. This is exactly what Lorenzo aims to do, but they are not in a competitive relationship but will generate more cooperation.
Lido + Renzo + Pendle: How will Lorenzo build Bitcoin liquidity finance?
Some say that Ethereum covered in 9 years what Bitcoin did in 9 months. So, while it took Ethereum 4 years and 3 generations of products to go through the narrative of income-producing assets, Lorenzo can achieve this with just one protocol.
Communication Path between Bitcoin Mainnet and Lorenzo
Let’s take a look at the architecture of the Lorenzo protocol, as shown in the diagram below. It consists of three main parts: Lorenzo Chain, Bitcoin relayer, and a set of smart contracts for verifying off-chain information:
Lorenzo Chain (corresponding to the EVM-compatible layer) is a Cosmos application chain built using Cosmos Ethermint, compatible with EVM, mainly providing the underlying infrastructure for liquidity pledging tokens.
Bitcoin relayer: It can relay Bitcoin mainnet information to the Lorenzo application chain.
A set of smart contracts for verifying off-chain information, managing the issuance and settlement of liquidity pledging tokens.
The initial logic is that when users deposit BTC into the Lorenzo cold and hot wallet multi-signature addresses on the Bitcoin mainnet through the Lorenzo website to obtain Lorenzo liquidity tokens stBTC, the Bitcoin relayer of Lorenzo will monitor whether there are incoming transactions to the deposit address. Once a transaction is confirmed, the relayer will obtain the transaction’s Merkle proof and submit it to the Lorenzo Chain, and call the mint function of the “Lorenzo YAT_Control_Module” module to internally verify the legality of the transaction proof. After successful verification, Lorenzo will issue stBTC to the user’s EVM.
Accounts mint an equal amount of stBTC.
If users need to exchange stBTC back to BTC, they can initiate a request to burn stBTC on the Lorenzo website. The Lorenzo Monitor will monitor the burning of stBTC on the Lorenzo chain, send the transaction hash of the stBTC burning to the multi-signature service Vault Wallet System, and initiate a BTC withdrawal transaction. After verifying the legitimacy of the burn transaction, the final signature will be generated and sent back to the Lorenzo Monitor. Upon receiving the BTC signature, Lorenzo Monitor will broadcast the signed transaction to the Bitcoin mainnet to complete the user’s withdrawal operation.
Unlocking liquidity, unlocking the “Prisoner of Babylon”
Lorenzo uses Babylon as the underlying income layer, providing users with native secure income and minimal staking risk. Similar to the early EigenLayer, Babylon will also have a deposit limit after going online on the mainnet. As mentioned earlier, Babylon currently has liquidity restrictions similar to the “Prisoner of Babylon” and entry barriers.
However, this is not the end of the Babylon narrative. It serves as the financial foundation of the Bitcoin ecosystem, providing possibilities for Lorenzo. The first step for Lorenzo is to complete the construction of Bitcoin Lido, unlocking the liquidity of staked BTC, and solving the deposit limit issue of Babylon. Users can directly deposit BTC into Babylon through Lorenzo, which acts as an asset issuance and settlement platform, tokenizing the staked BTC to provide liquidity staking tokens for users, similar to stETH from Lido but with some differences as detailed in the next section.
As a Bitcoin liquidity financial layer, similar to Ethena, in addition to BTC staking rewards, Lorenzo also allows users to use their staked BTC for other trading strategies, liquidity mining, and other on-chain activities. Currently, Lorenzo has partnered with Bitlayer to integrate 7 to 8 downstream DeFi projects through the Bitlayer Mining Gala, allowing participation in staking, borrowing, and other on-chain activities.
Interest-bearing bonds and re-staking plans: an attempt at unified liquidity
Similar to stETH, Lorenzo’s LST is also a BTC interest-bearing asset, essentially a form of interest-bearing Bitcoin bond. However, since the staking in Babylon is actually on different PoS chains rather than being pegged to ETH like Lido’s stETH, different staking projects may result in different liquidity staking tokens. To address the issue of liquidity fragmentation more effectively, Lorenzo has come up with a model similar to Pendle’s interest-bearing separation model and has adopted a Bitcoin liquidity re-staking plan (BLRP) based on the staking in Babylon to avoid the dispersal of income-bearing tokens due to different projects and staking durations. Lorenzo will predefine BLRP staking plans, including the staking project (PoS chain) and the start and end times of the staking, and users can choose the plan they wish to stake in before the start of the plan.
The staking plan will generate Liquid Principal Tokens (LPT) and Yield Accruing Tokens (YAT) for users who deposit BTC into Babylon. Lorenzo will issue the same LPT for all low-risk staking projects, which is stBTC pegged 1:1 to the staked BTC, unifying the liquidity of BTC from different ecosystems. After the staking period ends, stakers can redeem the staked BTC principal. YAT is an ERC-20 token issued through BLRP, representing the future earnings generated from staking. YAT has its own re-staking plan, start, and end times. YAT can be traded and transferred before maturity, and holders can also claim PoS chain rewards. YAT holders can also exchange YAT from the same BLRP.
Upon maturity, YAT holders can receive earnings from Babylon, PoS chains, and Lorenzo.
Staking Agent: CeDeFi-based asset issuance and settlement system
Whether stBTC or YAT, they belong to the asset issuance side of Lorenzo, but they are also an asset settlement platform. As mentioned in a previous article, due to the paradigm shift in the asset issuance layer, DeFi has entered an active asset management stage, which is a characteristic of this generation. As the issuance and settlement layer of stBTC, it also serves as the asset management layer of native Bitcoin, determining the destination of stakers’ BTC.
Lorenzo admits that it does not provide intrinsic guarantees to stakers that their managed BTC will not be misused, but due to the limited programmability of the Bitcoin network, it is currently unable to build a fully decentralized settlement system. Therefore, Lorenzo has chosen CeDeFi as the “middle way” between centralization and decentralization. It has introduced the Staking Agent mechanism, where top Bitcoin institutions and TradFi institutions act as asset issuers and settlement layers, with Lorenzo being one of the staking agents. If a staking agent behaves improperly, their agent qualification will be revoked.
Staking agents are responsible for the entire asset issuance and settlement process at Lorenzo, which involves creating staking plans for users, accepting their BTC and depositing it into Babylon and PoS chains, then sending the Restaking proof to the Lorenzo protocol and issuing stBTC and YAT to users. When the staking plan expires, they will safeguard the returned BTC from the project and convert the staked stBTC and YAT to BTC principal and profits.
In terms of fund settlement, Lorenzo has also implemented a sorting mechanism. In the first phase, Lorenzo did not introduce YAT, so users only needed to burn stBTC to redeem the native BTC. However, after the issuance of YAT in the second phase, users who wish to redeem BTC need to burn the corresponding stBTC as well as an equal amount of Staking Proof Token (SPT), and then Lorenzo will return the BTC to the user.
SPT serves as proof of sorting, burning stBTC, and redeeming BTC. When YAT matures, the Lorenzo profit distribution contract will distribute earnings to YAT holders and convert YAT to an equivalent and non-tradable SPT. These SPT will enter a unified queue and be placed at the end of the queue, determining the order of stBTC burning. The agent ID associated with the burned SPT will determine which staking agent will redeem the BTC. Users who generate SPT by claiming YAT can use their SPT to burn stBTC up to the number of SPT generated, or they can claim YAT earnings to generate SPT without burning stBTC. If a user does not hold YAT but needs to redeem BTC, and there are no SPTs in the queue, they must wait for new SPTs to enter.
For example, User A stakes 100 BTC and earns 10 BTC. When A redeems 10 BTC from YAT to BitMonster staking agent, an equivalent amount of SPT is generated but stBTC is not burned. User B buys 50 stBTC in the market but does not have YAT. In this case, BitMonster must hold an equivalent amount of SPT to redeem 50 BTC; otherwise, B will have to wait in line for other users to generate SPT. Once all BTC in the “Staked_token” is redeemed, the SPT will be removed from the queue.
The issuance and settlement system based on staking agents effectively releases the liquidity of BTC and expected earnings, allowing users to access and trade income-bearing tokens in advance. Lorenzo’s SPT settlement method requires users to have sufficient earnings to extract BTC, which is why staking plans are necessary. Without earnings from expired staking, there will be no BTC to withdraw. In essence, the staking agent structure can be seen as a large fund pool, where the more diverse and stable the BTC earnings from Babylon, the more users deposit, the more earnings they receive, and the better the liquidity of Lorenzo’s dual currency.
StakingFi: Financialization of BTC assets
Lorenzo aims not only to unlock the liquidity of staked BTC but also to provide a good token structure for this staked liquidity. Due to the uncertainty of interest rates, interest-bearing separation inherently reduces reinvestment risk. For users looking to avoid volatility, they can purchase stBTC pegged to BTC to short earnings; for risk-seeking users, they can purchase YAT to go long on yield. Compared to other BTC LRT projects, this interest-bearing separation mechanism can support the construction of more complex downstream DeFi products, not just simple interest-bearing products.
Currently, Lorenzo’s stBTC can be cross-chained to Bitlayer. In the future, stBTC and YAT will be used in the following financial scenarios:
Interest rate swaps: Refers to the exchange of funds with the same currency, the same debt amount (same principal), and the same maturity date between fixed and floating interest rates. stBTC can be seen as another form of wrapped BTC and can eventually replace WBTC in almost all scenarios. The value of YAT comes from accumulated earnings and speculation on future earnings. There will be a basic trading pair between stBTC and all YATs, with YATs from the same staking plan being interchangeable. There may also be trading pairs between stBTC, YAT, and other mainstream assets.
Loan agreements: stBTC and YAT can be used as collateral to borrow any needed assets, ensuring that stakers have greater control over their investments and liquidity.
Structured BTC revenue products: For example, you can build Bitcoin fixed income products that protect the principal based on stBTC and YAT, as well as options-based financial derivatives that enhance returns.
Bitcoin-backed stablecoins: stBTC can support stablecoins.
Insurance products: Used to reduce the risk of native BTC being confiscated by Babylon.
Roadmap and Future Plans
Lorenzo will launch testnets and mainnets in stages, with the mainnet test version going live at the end of May and the mainnet V2 expected in June. At that time, Lorenzo will introduce the interest-bearing separation mechanism, support more income-bearing tokens (Yield Accruing Tokens, YAT), and introduce the staking agent model and SPT on V2 to further decentralize Lorenzo’s asset issuance and settlement. Additionally, Lorenzo plans to support more PoS projects in the Babylon ecosystem to provide users with more revenue scenarios.
Conclusion
Like any BTC LRT project currently, Lorenzo is also trying to activate the $1.3 trillion market value of BTC liquidity. This is a blue ocean market worth over a hundred billion dollars, and building DeFi around BTC LRT has unlimited potential. The “Prisoner of Babylon” is temporary, and the important thing is that Babylon lays the foundation for the entire Bitcoin liquidity finance, providing Lorenzo with a source of income assets. Unlike other BTC LRT projects, Lorenzo is the first Bitcoin liquidity hub based on the Babylon ecosystem and introduces an interest-bearing separation mechanism similar to Pendle, providing more complex liquidity financial scenarios for principal and interest tokens to meet the risk investment needs of different users, completely unlocking BTC liquidity.
However, in the author’s opinion, the staking agent model still carries centralization risks. While Bitcoin UTXO opcode can add output restrictions to BTC spending conditions, it cannot set secure limitations on staking agents. The Solv team has developed Solv Guard specifically to address this issue, providing an additional security layer set by third-party fund managers, which may help establish restrictions for BLRP investment strategies, specifying investment targets, smart contracts, etc., to separate fund usage rights from governance rights. Lorenzo may consider adopting a similar solution in the future to address this issue.
