By “locking” BTC, its economic security can be exported to almost any cryptographic application. This article is from the co-founder of Persistence Labs, Mikhil Pandey, entitled “Bitcoin Capital Efficiency with Liquid Staking,” and was compiled, translated, and written by Deep Tide TechFlow.
(Summary: Bullish signal》Exchange BTC inventory hits a 6-year low! Bloomberg: Australia is expected to launch Bitcoin spot ETF by the end of the year)
(Background: The most unique bull market in history? Glassnode: Multiple indicators broken after the fourth BTC “halving”!)
Table of Contents:
Understanding Bitcoin
Two Pillars Built on Bitcoin
Where is BTC Liquid Staking applicable?
What is the future of Bitcoin?
Is Bitcoin a store of value? The largest peer-to-peer payment network? World remittance system? Digital gold? Hedge tool for traditional finance? The first proof-of-work blockchain in history? What exactly is Bitcoin? Which of the above describes Bitcoin? In short, I believe all of them, and more.
Bitcoin is a first-layer blockchain originally designed for the trust and transparent flow of currency value. Its concept emerged during the global financial crisis in 2008. The native digital asset BTC that drives this network has evolved from one of the boldest financial experiments of our time into the largest cryptocurrency.
Today, Bitcoin, both as a network and an asset, has become a paradise for finance, mechanism design, and aspirations. The smartest people are pushing Bitcoin towards a more useful, capital-efficient, and programmable future. The world’s largest institutions are offering BTC ETFs to provide exposure to the general public. The next generation of builders is finding unique ways to utilize Bitcoin’s block space, including Ordinals, NFTs, BRC-20, Runes, and staking, among others. Bitcoin network activity has reached its highest level in history and has generated more value (fees) for miners than ever before. Bitcoin is for everyone. The best part is that the various perceptions of BTC are a feature, not a flaw.
For the public, Bitcoin is gradually transitioning from a “network” to an “ecosystem.” Recently, the ecosystem built on top of Bitcoin has seen exponential growth. However, this is not uncommon, as various stakeholders have attempted to build on top of Bitcoin, in addition to network improvements by the community. In fact, this is part of Satoshi Nakamoto’s vision.
Satoshi Nakamoto once said:
Since 2012, people have been trying to extend Bitcoin beyond payments for more widespread use:
Decentralized domain name service (Namecoin)
Wider asset representation (Colored Coins, MasterCoin, Counterparty)
Extending the Bitcoin network through sidechains, rollups, and Layer 2 solutions (Taproot, Stacks, Liquid Network, Merlin, Urbit, Lightning, bitVM, etc.)
Extending BTC functionality through Ordinals and Runes (Memes, NFTs, BRC-20, BRC-420) and generating revenue (Babylon, BounceBit, Stroom Network, Trustless Machines, etc.)
But where are these developments leading Bitcoin? An article by Portal Ventures about Bitcoin’s perspective summarizes it best: Making Bitcoin more programmable, addressing smart contract and scalability limitations to deploy on the Bitcoin network, and making BTC more capital-efficient, creating a super-financialization built with BTC.
Bitcoin is a proof-of-work network where miners contribute computing power to solve mathematical problems for block production and receive new Bitcoin as a reward. So how does staking, let alone liquid staking, come into play? Let’s understand some basics of blockchain.
Consensus involves maintaining a continuous agreement on the state of the network (data, transactions, balances, etc.). While PoW relies on computing power (mining) to achieve and maintain network consensus, PoS includes the concept of security guarantees. Staking involves locking tokens to participate in consensus, contribute to the overall network security, and receive staking rewards.
When we need to trust that others/counterparties will behave well, it is common to establish collateral to ensure good behavior. A typical example is a landlord collecting a security deposit from a tenant.
In short, PoS is driven by trust in the economic security of assets. What could be better than having an asset with billions of dollars of economic trust? And what could be better than Bitcoin?
By “locking” BTC, its economic security can be exported to almost any cryptographic application. Imagine a world where financial applications, including various shapes and sizes of blockchains, can leverage BTC to add vitality and security to each application.
Trustless BTC staking (hence, liquid staking) brings the possibility of vibrant BTC-dominated DeFi, making BTC more capital-efficient. Currency markets, stablecoins, economic security, insurance, and more. The applications are limitless.
Some may argue that BTC already has capital efficiency in terms of market value, adoption, and its primary role as a store of value in the cryptocurrency world. This brings up the question: What exactly is capital efficiency? Wall Street defines it as “how effectively a company uses funds to operate and grow.” In this context, BTC is essentially idle most of the time with retail holders, miners, and institutions.
This can be attributed to several factors:
Lack of sustainable revenue opportunities
Friction in moving BTC due to risk-averse holders
Lack of institution-friendly yield products
Unknown security risks in moving BTC out of the Bitcoin network
Resistance from some OG Bitcoin holders
Recently, the entire industry has been working to address the above obstacles faced by BTC in order to unleash its liquidity and capital efficiency in the crypto world.
While the Bitcoin community seems somewhat divided (which is always for the best), it is important to closely monitor important developments in the Bitcoin ecosystem, such as Bitcoin Layer 2, minimal trust BTC staking, Ordinals and Runes, VM, and more.
BTC liquid staking is more than just a statement. It has arrived and could determine the profitability of cryptocurrencies. With the anticipation of simple BTC-dominant financial products bringing much-needed liquidity and utility to today’s DeFi landscape, the future of Bitcoin has never been more exciting.
We have already witnessed exponential growth in Ethereum’s liquid staking and subsequent developments in the on-chain finance space. When the same happens to an asset that created the “cryptocurrency” asset class for the first time, one can only imagine the possibilities and doors opening.