Author: haotian

It has been nearly a month since the launch of @babylonlabs_io Mainnet, but the market response for BTCFi is not as enthusiastic as expected. So, what problems were exposed during the first phase of stake in Babylon? Does Babylon's sustainable interest narrative logic hold true? Was the market expectation for Babylon overestimated? Next, let me share my thoughts:

1. The innovative core of Babylon adopts the Self-Custodian self-custody method, which locks users' BTC assets in the form of script contracts on the BTC Mainnet, and can output 'secure consensus services' on many BTC layer2s to 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 potentially earn additional income while holding BTC in a self-custody form. Other CeDeFi or Wrapped forms require a third-party custodial platform for native BTC to break free from the original chain's constraints, but Babylon does not. If the Wallet supports it, users can see that the BTC they stake to Babylon protocol still appears in their balance.

And the latter half of this sentence can only be considered as an immature "pie" at present. Because to transform Babylon's secure Consensus into services and generate income, the following prerequisites are needed:

Firstly, there must be a large number of users, including Validators Nodes with a significant proportion of voting power, staking BTC in Babylon deployed within the BTC Mainnet protocol.

Secondly: it is necessary to aggregate a large amount of LST assets and generate strong Liquidity to form the foundation for the growth of the ecological users and TVL.

Thirdly: there should be a large number of newly born layer2 POS chains to 'procure' Babylon's secure Consensus services and provide sustainable Yield income.

2. Currently, Babylonprotocol has only opened a limited stake of 1,000 BTC for the first phase, which can only be considered as an experimental launch phase, but it has exposed many problems, making it challenging to meet the above three prerequisites. For example:

1. The stake process interacting with the Babylon protocol will result in a higher 'transaction fee loss'.

Including: the overall transaction fee surge caused by the network FOMO effect of stake, as well as the corresponding handling fees generated by subsequent protocolUnbond, Withdraw, and other operations.

Taking the first phase of stakeWar as an example: if each transaction is limited to depositing only 0.005 BTC, and only transactions within the first 5 Blocks are valid. Assuming an institutional Validator needs to deposit 100 BTC, they would need to initiate 20,000 transactions on-chain within one hour, and these transactions must be confirmed earlier than those of other competitors. This will inevitably lead to a short-term big pump in network transaction fees, greatly increasing the cost for stakeholders. It is understood that the Miner fee rate exceeds 5%. (For reference only, please refer to the official data for specific information)

2. The native BTC deposited in Babylon and its ecosystem's circulating Wrapped version BTC are not limited to a 1:1 ratio.

Since Babylon does not have a directly circulating Wrap version of BTC, the Wrapped version of BTC circulating within the Babylon ecosystem is provided by some participating Nodes, including: @SolvProtocol, @Bedrock_Decentralized Finance, @LorenzoProtocol, @Pumpbtcxyz, @Lombard_Finance, etc. These institutional Validators stake a certain amount of BTC in Babylonstake, but the actual aggregated Wrapped version BTC Liquidity far exceeds the quantity of BTC they have staked (in fact, the scale of LST Liquidity also needs to be expanded).

This means that while Babylonprotocol can ensure the security of staked native BTC assets on BTCMainnet, it cannot guarantee the liquidity risk and absolute trust of various Wrapped versions of BTC circulating on the aggregation platform. This relies on these aggregation platforms to conduct public audits, contract transparency, and a series of credibility endorsements.

In other words, if Babylon is likened to Lido, users will not have corresponding stETH for circulation after depositing ETH, and the actual Liquidity is provided by aggregate platforms such as Solv Protocol (SolvBTC.BBN) and BedRock (uniBTC). Babylon plays a role similar to a partially reserved Central Bank, only constraining its Liquidity providers (local bank role) with a small reserve, and overall security relies on the unified efforts of the central and local authorities to ensure it.

The above two issues determine that Babylon plays only a role of 'security reinforcement' in the torrent of BTCFi, and the real show still relies on Solv Protocol, BedRock, Lorenzo, PumpBTC and other aggregated Liquidity platforms to sing.

The key is that the overly FOMO market sentiment at the beginning will significantly increase the entry cost for these participants, undoubtedly strengthening the pressure to 'exit' the subsequent Yield farming.

The development trend of the Eigenlayer AVS service market is as vital to the Restaking track as the progress of Babylon's secure Consensus service commercialization is a market answer that Babylon must deliver.

So, how can the Babylon "Shared Security" service paradigm generate sustainable Yield income? In my opinion, relying solely on the market evolution driven by Babylon's social security Consensus incentives is not enough. Another force is needed to strengthen the demand pool for POS chains.

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

Assuming a newly built POS chain wants to connect to the Babylon ecosystem, Babylon needs to have a complete NodeValidators network to generate AVS services, such as: Eigenlayer has established AVS as a service narrative, providing a series of services including DecentralizationSequencer, Oracle Machine, ZK co-processor, etc.

And at this stage, perhaps it's just because the Mainnet protocol was launched too early, Babylon does not have a mature commercialized service. The market seems to only expect active participation in stake voting rights for Babylon, then aggregate Liquidity for a Point battle, and finally rely on expanding the overall Babylon Liquidity market to share the overflow dividend. This approach may work, but relying on stacking market expectations to drive ecological development would be too "passive". Is there an "active" BTCFi interest-bearing solution?

Yes, as I mentioned in a previous article, Babylon essentially provides a 'social security Consensus' for BTC layer2 through an economic model constraint, providing a 'secure' batch replication paradigm. It also provides a 'technical security Consensus' replication paradigm for BTC layer2 to quickly start chains by relying on various chain basic modular components built with ZK technology.

Taking the ZK universal architecture AppChain @GOATRollup as an example, the @ProjectZKM team has built a universal layer2 framework based on the underlying ZK technology, including: the underlying zkVM universal execution layer, the Entangled Rollup Network shared interactive communication layer, the DecentralizationSequencer shared layer, etc., and ultimately provides universal component services to layer2 for Native Cross-Chain Interaction without Cross-Chain Interaction bridge and unified Liquidity interactive operation center.

Compared to Babylon, Goat locks the user's native BTC on BTC Mainnet, then provides a 1:1 wrapped version of BTC (goatBTC), and enriches the possibility of earning interest through Decentralization Sequencer native Mining revenue (yBTC), and introduces Pendle debt interest separation design, etc.

Goat Network can be regarded as the "Rollup as a Service" service provider in the ETH layer2 system, which can output a universal modular paradigm to scale up the BTC layer2 POS chain and provide a sustainable BTC revenue economic model to ensure the feasibility of its narrative.

Above.

It is not difficult to see that the greatest value of Babylon's innovative cryptographic security paradigm lies in quickly aggregating the previously fragmented BTC market Liquidity and forming ecological development momentum. The core Liquidity capital scale and efficiency are the underlying logic supporting its narrative establishment.

To expand the scale effect of the POS chain, increase the commercial output of secure Consensus services, we still need to rely on zk technology for complementarity, and promote modular shared services such as Sequencer, Interoperability, DA components.

As for whether Babylon is overvalued or misjudged, I believe the above views can be enlightening for everyone.