StakeStone and Merlin Chain, two heavyweight projects in the Bitcoin ecosystem, have joined forces to expand the boundaries of Bitcoin’s development. Foresight News invited Blue Wharf, a core contributor to StakeStone, and Jeff, the founder of Merlin Chain, to discuss the significance of this collaboration and its impact on the Bitcoin ecosystem.
Host: Peng SUN, Foresight News Researcher
Guests: Blue Wharf, Core Contributor to StakeStone; Jeff, Founder of Merlin Chain
Positioning
Host: Please introduce yourselves and your respective projects.
Blue Wharf (Core Contributor to StakeStone): Hello everyone, I’m Blue Wharf from StakeStone. StakeStone is a full-chain liquidity distribution protocol that primarily focuses on liquidity assets in the market. Before the rise of the Bitcoin ecosystem, the main liquidity assets in the market were based on Ethereum. However, during the development of the Bitcoin ecosystem, we realized the potential of Bitcoin as a new liquidity asset. With the vision of liquidity distribution, we chose to fully support and be compatible with Bitcoin assets.
For Ethereum assets, the architecture of our protocol is clear. Users provide us with liquidity assets, and we distribute them continuously through the transition layer to obtain risk-free returns. We support various consensus mechanisms such as PoS, restake, AI, and RWA. We are not just an LP, and ETH is one of our underlying consensus assets. As more consensus mechanisms emerge in the market, we will also support more underlying consensus assets because they are essentially risk-free.
In addition to consensus assets, if there are further risk-free underlying assets similar to RWA in the market, our protocol can also support them. Each underlying asset is a strategy, and this strategy is pluggable. Our entire protocol framework is based on the distribution of liquidity to various risk-free underlying assets. After the emergence of interest-bearing assets, we distribute them to various chains and applications in the ecosystem. Together, this forms a liquidity distribution protocol based on mainstream assets.
With the growth of the Bitcoin ecosystem, we realized that there was an opportunity for Bitcoin to generate interest. By creating interest-bearing assets for Bitcoin and distributing liquidity downstream to various chains and application layers, this became possible for the first time. At the beginning of this development, in line with our long-term vision for liquidity distribution, we announced the launch of the interest-bearing BTC “mSTONEBTC” for the Bitcoin ecosystem.
Jeff (Founder of Merlin Chain): Hello, I’m Jeff, the founder of Merlin Chain. Since last year, we have been developing and building protocols on the Bitcoin Layer 1 and launched the Bitcoin scalability solution, Merlin Chain, this year. Our main goal is to enable Bitcoin assets to have smart contracts on Layer 1 and have better liquidity in a highly efficient and low-cost environment. This also facilitates access to more applications such as DeFi, gaming, and social activities.
Since the launch of Merlin Chain in February, we have seen nearly 2 million active addresses and nearly 40,000 BTC and a large number of other Bitcoin native assets on the chain. We have also announced our collaboration with StakeStone to ensure decentralization of the entire network and enable the Oracle on the network to handle more data verification and network security maintenance.
Host: What is StakeStone’s core narrative and positioning?
Blue Wharf (Core Contributor to StakeStone): In April last year, we had in-depth discussions with liquidity providers and found that it was difficult for them to supply liquidity with native Ethereum assets. This was because native ETH had an annualized staking yield of about 4%, and the settlement method was based on ETH, with interest settled in ETH. When a public chain absorbs ETH liquidity, it faces a 4% PoS opportunity cost. This 4% opportunity cost should not be underestimated because it is settled in Ethereum. For a public chain token like Manta, for example, it would need a 10% annualized Manta token yield to cover this 4% opportunity cost.
For projects in the Manta ecosystem, they would need a yield rate of possibly 20% to cover the PoS cost. We saw this as a significant industry contradiction and an irreconcilable one. When LSDfi became popular in April last year, the contradiction emerged during the upgrade process in Shanghai. Since then, we believed that the history of Ethereum as a liquidity asset was about to change.
Because ETH was no longer the most efficient asset in terms of capital utilization, it meant that someone needed to step up and create a new liquidity asset carrier. The new Ethereum assets would serve as a substitute for the liquidity attributes of ETH, covering all opportunity costs. Only then could various public chains and others continue their necessary ecological development at a lower cost. We believe this is a huge problem and opportunity for the industry, and that’s why StakeStone was launched in April last year. Initially, many chains and projects didn’t fully understand this concept. It wasn’t until Blast stepped forward to create a Layer 2 solution with interest-bearing capabilities, exposing the industry’s biggest problem.
At that time, we were the only solution provider in the industry, and Manta was the first project to adopt this solution. Our collaboration with Manta was very successful because we not only identified the problem but also provided a solution seven months before Blast’s solution was available. Since then, projects have been adopting new solutions to attract liquidity. We don’t trust any specific underlying asset in this industry because they are constantly changing. Therefore, StakeStone was designed as a protocol compatible with multiple underlying assets, though Ethereum is currently the largest risk-free underlying asset. However, if the landscape changes in a few months, people will understand the significance and value of StakeStone as an upstream liquidity protocol.
The same logic applies to the Bitcoin ecosystem. We will continue to use our protocol, but it doesn’t mean the code won’t change. We will still make customized developments for Bitcoin, addressing similar problems. For example, Bitcoin now needs a carrier to solve the opportunity cost issue. Our positioning and vision have always been about distributing liquidity assets to improve the liquidity efficiency of the entire Web3 industry.
Host: What strategic considerations are reflected in your foray into the Bitcoin ecosystem through interest-bearing BTC? How will your collaboration with Merlin Chain work?
Blue Wharf (Core Contributor to StakeStone): It was difficult for us to predict the explosive growth of the Bitcoin ecosystem as it is today. Our initial idea was to provide interest-bearing ETH when the Bitcoin ecosystem was still in its early stages. As the Bitcoin ecosystem developed, we realized that relying solely on interest-bearing ETH was not enough to meet the needs of the Bitcoin ecosystem. That’s why we decided to take the next step and offer interest-bearing BTC. Currently, there are two approaches to interest-bearing BTC. One is similar to the Babylon approach, where timestamps are created on another chain and someone issues invoices on the chain. The other approach is to directly issue invoices on the Bitcoin chain.
The first approach seems very crypto-native because the assets are staked on a public chain. However, there is a major problem with this approach: Layer 1 itself does not have interest-bearing capabilities. Therefore, those who choose the first approach must seek a genuine source of interest, and the protocol itself does not have interest-bearing capabilities.