Behind the Renaissance of Bitcoin is liquidity finance.
Written by: Peng Sun, Foresight News
*Preface: The term “Babylon prisoner” only refers to the current BTC pledged through Babylon with liquidity restrictions. The author has high hopes for Babylon. Its native BTC pledge provides shared security for PoS chains, truly opening the door to Bitcoin’s financial ecosystem. How to fully release the liquidity of BTC on Babylon and provide users with more sources of income is the direction 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 “father of the Renaissance,” and the Medici Bank is the “financial driver” behind the Renaissance.
If European medieval noble families are likened to a dazzling starry sky on a summer night, 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 gathered and supported artists, including Botticelli, da Vinci, Michelangelo, Raphael, and others. Such grand gestures largely came from the hands of Lorenzo di Piero de’ Medici, the fourth-generation heir of the Medici family known as “the Magnificent.”
Behind the Italian Renaissance is the liquidity finance of the Medici Bank, and behind the Bitcoin Renaissance is the same, which is to stimulate and release the liquidity of BTC, constructing a more complex Bitcoin asset financialization scene. Babylon has achieved native BTC pledging on the Bitcoin mainnet, providing shared security for any PoS chain, opening the door to Bitcoin’s financial ecosystem. However, the liquidity of BTC has not been fully released. The current liquidity restrictions in Babylon are like the “prisoner of Babylon.” Many projects are hoping to solve this problem, but they are far from exploring as deeply as Lorenzo, and the release of liquidity finance is not thorough enough.
Today’s Lorenzo is strategically positioned to create a Bitcoin liquidity financial layer that combines Lido + Renzo + Pendle, providing income based on native BTC from Babylon, integrating liquidity pledging, re-pledging, principal and interest separation, StakingFi, and more. In other words, Lorenzo will become the funding gateway for users to access various Bitcoin financial products. Currently, Lorenzo has received investment from Binance Labs, and the mainnet test version has been launched, with V2 slated for release in June. Additionally, Lorenzo has recently initiated joint mining activities with Babylon and Bitlayer for pre-staking Bitcoin, offering incentive pools and multiple incentive schemes for early supporters participating in pre-staking Babylon, bridging stBTC to Bitlayer for ecosystem projects, and other collaborations.
So, how will Lorenzo maximize the release of Bitcoin liquidity, recreate the financial empire of the Medici Bank, and lead Bitcoin towards what kind of Renaissance? Today, Foresight News will conduct an in-depth analysis and interpretation of this.
Lorenzo: The wealth manager of the Pope
In the Middle Ages, the Pope was the main customer of Italian banks and commercial companies. He was the only ruler with the authority to levy taxes in every corner of Europe, and the bank was a financial institution that specialized in managing his finances, providing services such as tax collection, receiving and transferring funds, currency exchange, and loans. The Medici Bank became the manager of the Pope’s wealth early on. In the secret account, the accounts of the Papal Treasury were under the name of the Roman branch, equivalent to the account of the U.S. Treasury at a Federal Reserve Bank today.
During Lorenzo’s time, the Papacy, nobles, and royalty once believed that the Medici Bank had the ability to lend an unlimited amount. In reality, the Medici Bank borrowed excessively, and the Papacy was unable to repay. In 1494, the Medici Bank was on the verge of bankruptcy, and the pillar Roman branch was stuck with loans issued to the Papal Treasury. As the wealth manager of the Pope, the Medici Bank had deep political ties. With the shortage of English wool supply and the decline in silver prices, the Medici Bank’s reinvestment opportunities were drastically reduced, revenue sources were severely lacking, cash reserves were far below 10% of total assets, and it eventually fell into a liquidity crisis.
Today’s Lorenzo is also a “religious wealth” manager. Bloomberg calls Bitcoin the “first true religion of the 21st century,” and Bitcoin fundamentalists, as well as holders, are 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 where the number of addresses holding more than 100 BTC has remained stable at around 16,000 for the past four years. Although the current largest wrapped token WBTC has a market value of about 10.5 billion USD, the total market value of BTC is a staggering 1.3 trillion USD, accounting for only 0.8%, coupled with the deep 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 on-chain DeFi protocols.
Lorenzo is targeting these long-dormant BTC, it is the first Bitcoin liquidity financial layer based on Babylon, and it is also an issuance, trading, and settlement platform for Bitcoin liquidity pledging tokens, providing users with truly secure native income for Bitcoin and issuing LST for separating principal and interest in various Bitcoin pledging projects. Lorenzo can be understood as a combination of Lido, Renzo, and Pendle, to build a super-bond market, providing integrated products for matching, issuance, settlement, and structured financial management, thoroughly releasing the liquidity of pledged BTC, activating the Bitcoin asset financialization scene, and supporting the construction of downstream DeFi ecosystems.
Competitive Market of LRT based on Babylon
2024 can be called the first year of the Bitcoin ecosystem. After the narrative of asset issuance such as inscriptions and runes, the Bitcoin ecosystem has entered the narrative of income-generating assets. In the past, due to the use of the Nakamoto consensus, Bitcoin could not stake and earn income like PoS. But today, users only need to deposit BTC into their self-hosted deposit address on Babylon on the Bitcoin mainnet, include PoS verification information in the Bitcoin block through a timestamp protocol to provide shared security for existing PoS chains, and earn staking income without any third-party custody/cross-chain/wrapping. In addition, Schnorr signatures and Extractable One-Time Signature (EOTS) mechanisms make BTC a confiscatable asset, effectively preventing double-spending attacks.
Babylon’s shared security mechanism provides great potential for the financialization of the Bitcoin ecosystem. However, the current issue is that the BTC provided for PoS chains’ pledging through Babylon also loses liquidity and becomes the “prisoner of Babylon,” affecting capital utilization efficiency and revenue sources. So how can we fully release the liquidity of BTC based on Babylon and provide users with more sources of income?
Considering this, there are protocols like Uniport, Chakra, BounceBit, Bedrock, Solv Protocol, StakeStone, among others that aim to further release the liquidity of BTC. Let’s break them down one by one:
Chakra is a ZK-based Bitcoin re-pledging protocol that cross-chains BTC and ETH from the Ethereum mainnet to the Chakra chain to form a BTC L2 asset settlement center and provide re-pledging services for PoS chains based on SCS (Settlement Consumption Service). Chakra aims to do what Babylon is doing, but BTC is not pledged natively on the Bitcoin mainnet. To address this issue, Chakra has now integrated Babylon, allowing Chakra to map BTC pledged through Babylon to any ecosystem using Chakra’s trustless settlement services and layers, ensuring the security of the PoS system within the protocol by leveraging BTC pledged through Chakra, allowing pledgers to share verification rewards; the ZK-STARK proof generated by Chakra allows users to obtain liquid assets on Chakra Chain, Starknet, and various other blockchains.
BounceBit is a Bitcoin re-pledging infrastructure that uses a dual-token PoS structure based on the wrapped token BTCB rather than native BTC, and converts BTCB into BBTC, where the shared security mechanism is based on the LRT stBBTC of pledged BBTC. BBTC is designed to address the low liquidity and limited utility of Bitcoin on the native chain, but compared to the Babylon solution, its native BTC nature is relatively weak. Although its BTC Bridge allows direct cross-chain conversion of native BTC into BBTC, there are always risks with cross-chain bridges and oracles.
Uniport is a Bitcoin re-pledging 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 eventually use multi-signature contracts). UBTC will be deeply integrated with Babylon.
Bedrock is a multi-asset liquidity re-pledging project that has partnered with Babylon to introduce the LRT token uniBTC. Users can pledge WBTC on Ethereum and receive uniBTC, using proxy pledging and direct conversion to connect with Babylon. The proxy mechanism involves pledging an equivalent amount of native BTC on Babylon when users pledge wBTC on Ethereum; direct conversion involves converting WBTC directly to BTC and pledging it on Babylon. Holding uniBTC allows users to earn BTC income and use it in other DeFi protocols.
Solv Protocol is a full-chain yield and liquidity protocol that converts WBTC on Arbitrum, M-BTC on Merlin, and BTCB on BNB Chain into income-generating asset solvBTC, not native BTC.
StakeStone is a full-chain liquidity infrastructure that involves pledging native BTC on Babylon and issuing liquid BTC STONE.
SataBTC is a Bitcoin re-pledging layer that has not yet launched.
Comparing these projects in the same field, it is evident that each LRT project is actively exploring its own path. BounceBit, Bedrock, and Solv Protocol focus on absorbing existing markets, with underlying assets being wrapped BTC rather than native BTC, to unify liquidity and provide income-generating capabilities for BTC. However, the fundamental risks are consistent with wrapped tokens like WBTC. Other projects are targeting the incremental market brought by Babylon’s LRT, with Chakra, Uniport, and StakeStone leveraging Babylon as the underlying income source and issuing LRT tokens to release the liquidity of pledged BTC, but they 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-generating assets eventually flow to Pendle, something that Bitcoin DeFi lacks. This is exactly what Lorenzo aims to do, but their relationship is not competitive; it will lead to more cooperation.
Lido + Renzo + Pendle: How will Lorenzo build Bitcoin liquidity finance?
Some say that Ethereum completed what it did in 9 years in just 9 months with Bitcoin. So, while Ethereum took 4 years and 3 generations of products to go through the path of income-generating assets, Lorenzo can do it with just one protocol.
Communication Path between Bitcoin Mainnet and Lorenzo
Let’s take a look at the Lorenzo protocol architecture, as shown in the following diagram. It consists of the Lorenzo Chain, the Bitcoin relayer, and a set of smart contracts for verifying off-chain information:
The Lorenzo Chain (corresponding to the EVM-compatible layer) is a Cosmos application chain built using Cosmos Ethermint, compatible with EVM, providing the underlying infrastructure for liquidity pledging tokens.
Bitcoin relayer: Can relay information from the Bitcoin mainnet 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 when users deposit BTC into the Lorenzo cold and hot wallets’ multisig addresses on the Bitcoin mainnet through the Lorenzo website to obtain Lorenzo’s liquidity tokens stBTC, the Bitcoin relayer of Lorenzo will monitor the deposit addresses for incoming transactions. Once 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 transaction proof’s legitimacy. Upon successful verification, Lorenzo will issue stBTC to the user’s EVM.Account 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 destruction of stBTC on the Lorenzo chain, send the transaction hash of the stBTC destruction to the multisig service Vault Wallet System, and request signatures for the BTC withdrawal transaction. After verifying the legitimacy of the destruction transaction, the final signature is generated and sent back to the Lorenzo Monitor. Upon receiving the BTC signature, the Lorenzo Monitor will broadcast the signed transaction to the Bitcoin mainnet to complete the user withdrawal operation.
Unlocking Liquidity, Unlocking “Prisoner of Babylon”
Lorenzo uses Babylon as the base income layer, providing users with native secure income with minimal staking risks. Similar to the early EigenLayer, Babylon’s mainnet will also have a deposit limit. As mentioned earlier, Babylon currently has liquidity restrictions similar to the “Prisoner of Babylon” and an entry threshold.
However, this is not the end of the Babylon narrative. It is the financial foundation of the Bitcoin ecosystem, providing possibilities for Lorenzo. The first step for Lorenzo is to build the Bitcoin Lido, unlock the liquidity of staked BTC, and solve the deposit limit issue of Babylon. Users can directly deposit BTC into Babylon through Lorenzo, which serves as an asset issuance and settlement platform, tokenizing the staked BTC to provide users with liquidity staking tokens. This is similar to Lido’s stETH, but also different, as we will discuss in the next subsection.
As a Bitcoin liquidity financial layer, like Ethena, in addition to BTC staking income, Lorenzo also allows users to use the BTC they deposit for other trading strategies, liquidity mining, and other sources of income. Currently, Lorenzo has partnered with Bitlayer to integrate 7 to 8 downstream DeFi projects through the Bitlayer Mining Gala head mine event, allowing participation in staking, lending, and other on-chain activities.
Principal-Interest Separation Bonds and Re-Staking Plans: Attempt at Unified Liquidity
Similar to stETH, Lorenzo’s LST is also a BTC interest-bearing asset, essentially a type of Bitcoin bond with income. However, because the staking on Babylon is actually staking on different PoS chains, rather than anchoring to ETH like Lido’s stETH, different staking projects may generate different liquidity staking tokens. To more effectively address the issue of liquidity fragmentation, Lorenzo has come up with a principal-interest separation model similar to Pendle, and has adopted a Bitcoin liquidity re-staking plan (BLRP) based on Babylon staking to avoid scattering the liquidity of income 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 staking. Users can only choose the plan they wish to stake before it begins.
For example, if a user selects the “Babylon-Lorenzo-01” staking plan on Lorenzo, after depositing BTC into Babylon, the user will receive Liquid Principal Tokens (LPT) and Yield Accruing Tokens (YAT). Lorenzo will issue the same LPT for all low-risk staking projects, which is stBTC anchored 1:1 to the staked BTC, unifying the liquidity of BTC from different ecosystems. Holders of stBTC can redeem the staked BTC principal after the staking period ends. YAT, on the other hand, is an ERC-20 token issued through BLRP that represents future income generated from the staking. YAT has its own re-staking plan, start and end times. Before the maturity of YAT, it can be traded and transferred, and holders can also claim PoS rewards. YAT tokens from the same BLRP can also be exchanged.
After the maturity of the YAT, holders can receive the income from Babylon, PoS chains, and Lorenzo in one lump sum.
Staking Agents: CeDeFi-based Asset Issuance and Settlement System
Whether it’s stBTC or YAT, they belong to Lorenzo’s asset issuance side, but they also serve as an asset settlement platform. Just as mentioned in the previous article, due to the paradigm shift in the asset issuance layer, DeFi has entered the active asset management stage, and Lorenzo embodies this generational feature. As the issuance and settlement layer of stBTC, it is also the asset management layer for native BTC, determining where the stakers’ BTC goes.
Lorenzo acknowledges that it does not provide inherent guarantees to stakers that their managed BTC will not be misused. However, 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 road” between centralization and decentralization. It has introduced the Staking Agent mechanism, with top Bitcoin institutions and TradFi institutions serving as asset issuance and settlement partners, with Lorenzo being one of the staking agents. If a staking agent behaves improperly, its agent status will be revoked.
Staking agents are responsible for a complete set of asset issuance and settlement for Lorenzo, creating staking plans for users, accepting their BTC and depositing it into Babylon and PoS chains, then sending the restaking proofs to the Lorenzo protocol and issuing stBTC and YAT to users. When the staking plan expires, they will safeguard the project’s returned BTC for users and cash out the staked stBTC and YAT, converting them into BTC principal and income.
In terms of fund settlement, Lorenzo has also implemented a sequencing 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 introduction of YAT in the second phase, if users wish to redeem BTC, they must not only burn the corresponding stBTC but also an equivalent amount of Staking Proof Token (SPT), and then Lorenzo will return the BTC to the users.
SPT serves as a certificate for sequencing, burning stBTC, and redeeming BTC. When YAT matures, the Lorenzo profit-sharing contract will distribute income to YAT holders and convert YAT into an equivalent and non-tradable SPT. These SPTs will enter a unified queue and be placed at the end of the queue, determining the order of stBTC destruction. The associated agent ID of the destroyed SPT will determine which staking agent will redeem the BTC. Users who generate SPT by claiming YAT can use their generated SPTs to burn an amount of stBTC not exceeding the number of generated SPTs, or they can choose to only claim YAT income by generating SPTs 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 at BitMonster staking agent, an equal amount of SPT is generated but the staked stBTC is not burned; User B buys 50 stBTC in the market to exchange for BTC but does not have YAT, then BitMonster must hold an equivalent amount of SPT to redeem 50 BTC, otherwise B needs to wait in line for other users to generate SPTs. Once all the BTC in the “Staked_token” have been redeemed, the SPT will be removed from the queue.
The issuance and settlement system based on staking agents effectively unlocks the liquidity of BTC and expected income, allowing users to access and trade income tokens in advance. Lorenzo’s SPT settlement method requires users to have sufficient income to extract BTC. This is why staking plans are necessary because without income from maturing staking, there is no BTC to withdraw. The staking agent structure can be imagined as a large fund pool, where the more abundant and stable the income sources from Babylon’s BTC, and the more funds users deposit, the more income they can generate, resulting in better liquidity for Lorenzo’s dual-currency system.
StakingFi: Financialization of BTC Assets
Lorenzo not only aims to unlock the liquidity of staked BTC but also hopes to provide a good token structure for this staked liquidity. Due to the uncertainty of interest rates, principal-interest separation fundamentally reduces reinvestment risks. For users who wish to avoid volatility, they can purchase stBTC pegged to BTC to short the income; for risk-seeking users, they can purchase YAT to long the yield. Compared to other BTC LRT projects, this principal-interest separation mechanism also supports the construction of more complex downstream DeFi products, rather than just simple interest-bearing products.
Currently, Lorenzo’s stBTC can be cross-chain to Bitlayer. In the future, stBTC and YAT will be used in the following financial scenarios:
Interest Rate Swaps: Refers to the exchange of fixed-rate and floating-rate funds with the same currency, the same debt amount (principal), and the same term. stBTC can be seen as another form of wrapped BTC and could potentially replace WBTC in almost all scenarios. The value of YAT comes from accumulated income and speculation on future income, there will be a basic trading pair between stBTC and all YAT, YAT tokens from the same staking plan can be exchanged, and there may also be trading pairs between stBTC, YAT, and other mainstream assets.
Lending Protocols: stBTC and YAT can be used as collateral to borrow any assets needed, ensuring stakers have greater control over their investments and liquidity.
Structured BTC Yield Products: For example, it is possible to build Bitcoin fixed income products that protect the principal based on stBTC and YAT, as well as options-based financial derivatives to enhance income.
Bitcoin-backed Stablecoins: stBTC can support stablecoins.
Insurance Products: Used to mitigate the risk of native BTC being confiscated by Babylon.
Roadmap and Future Plans
Lorenzo will launch testnets and mainnets in phases, with the mainnet test version already launched at the end of May, and Mainnet V2 expected in June. At that time, Lorenzo will introduce the principal-interest separation mechanism, support more Yield Accruing Tokens (YAT) in addition to stBTC, and the staking agent model and SPT will also be introduced in V2 to make Lorenzo’s asset issuance and settlement more decentralized. Furthermore, Lorenzo plans to support more PoS projects in the Babylon ecosystem to provide users with more income scenarios.
Conclusion
Like any BTC LRT project currently, Lorenzo is also attempting to activate the $1.3 trillion BTC liquidity market. This is a billion-dollar blue ocean market, and building DeFi around BTC LRT will have unlimited potential. The “Prisoner of Babylon” is temporary, and what’s important is that Babylon lays the foundation for the entire Bitcoin liquidity finance, providing Lorenzo with the basis for building income-generating assets. Unlike other BTC LRT projects, Lorenzo is the first Bitcoin liquidity hub based on the Babylon ecosystem and introduces a principal-interest separation mechanism similar to Pendle, enabling more complex liquidity financial scenarios for principal and interest tokens, meeting the risk investment needs of different users, and fully unlocking the liquidity of BTC.
However, in the author’s view, the staking agent model still carries centralization risks. The underlying Bitcoin UTXO opcode can impose an output limit on BTC spending conditions, but it cannot impose secure restrictions 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 might help in setting restrictions on BLRP investment strategies, specifying investment targets, smart contracts, etc., separating fund usage rights from governance rights. Lorenzo may adopt a similar solution in the future to address this issue.