There are some key truths that determine accepted thinking about blockchain networks. One such truth is that without compromises like wrapped tokens and blockchain bridges Proof-of-Stake Networks How ether And Proof-of-Work Networks How Bitcoin are synonymous with water and oil: they simply don't mix.
Now a new startup led by a Stanford professor and a former Dolby engineer is trying to disprove that. Babylon, a project designed to allow users to stake Bitcoin (BTC) to validate nodes on a variety of proof-of-stake networks including Ethereum, Solana and Polygonis already well on its way to achieving its unlikely-sounding goal.
The company has just submitted an application $18 million funding round Co-led by Polychain Capital and Hack VC, with participation from funds such as Framework Ventures, Polygon Ventures, OKX Ventures and Castle Island Ventures. It is also in ongoing discussions with several blockchain networks about integrating its services, including Polygon, a Polygon Labs spokesperson confirmed Decipher.
How could it be possible, even theoretically, for someone to stake BTC – actual BTC, not a wrapped token using a blockchain bridge – on a proof-of-stake network? Using proof-of-stake networks like Ethereum Smart contracts to control the staking process, which rewards users who deposit a certain amount of ETH with rewards accrued over time.
In return, these ETH deposits are used to validate transactions on the Ethereum network. The entire staking process represents a complex web of if/then conditions that are automatically executed by a smart contract.
However, smart contracts are not natively supported on the Bitcoin blockchain – but Babylon says it has found a workaround.
The solution is based in part on Bitcoin's “time-lock” mechanism, which allows users to deposit a certain amount of BTC for a certain period of time and withdraw it after that period without relying on third parties. But Babylon also had to find a way around the annoying smart contract problem.
“The biggest challenge with staking is that the stake is a security,” said David Tse, an engineering professor at Stanford University and co-founder of Babylon Decipher. “In other words, I need to be able to short the Bitcoin if the validator on the proof-of-stake chain does something bad.”
Typically, a smart contract would either release collateralized funds to a staker if all conditions were met, or destroy (or shorten) those funds if they had not. Tse says his team was able to replicate this process on the Bitcoin network without smart contracts.
“We found a way to leverage the existing Bitcoin scripting language to effect the cut,” Tse said. “This is the main innovation of the project.”
If Tse and his team have actually done this right – he says they still need to make a few final tweaks to the technology – then the potential for huge upside is huge.
Proof-of-stake blockchains of all kinds could rely on the $838 billion worth of incredibly secure Bitcoins already in circulation to validate their transactions. This innovation would be a near-certain path to deflation for any proof-of-stake network, as it would no longer need to issue as many new tokens to incentivize validation.
“The cosmos Hub pays about 10% – inflating the token by 10% – to pay for Cosmos security,” Tse said, giving an example. “The adoption of Bitcoin can potentially significantly reduce security costs because Bitcoin represents a much larger source of capital.”
Babylon will not be able to make its technology available to a specific proof-of-stake blockchain ecosystem until that blockchain's governance gives its approval. Therefore, the company's vision is currently still theoretical.
But Babylon, as mentioned above, is currently in serious discussions with major proof-of-stake blockchains like Polygon – and has also already received the blessing of industry leaders, including Polygon co-founder Sandeep Nailwal.
“Babylon’s vision aligns with our commitment to fostering decentralized ecosystems by providing communities with diverse options to choose from seamlessly,” Nailwal said in a statement. “We are excited about the positive impact this collaboration will have on the broader blockchain community.”
If (or when) proof-of-stake networks like Polygon begin adopting Babylon's novel technology, they could create new parameters for what it means to stake BTC on their chain, as opposed to the network's native token.
Ethereum, for example, may not require the minimum amount of BTC required to be staked on the network to equal 32 ETH, the current demand of the system. It could also choose to offer BTC stakers a lower reward yield.
Even if proof-of-stake networks that ultimately partner with Babylon decide to make such decisions, the demand for passive, guaranteed returns on Bitcoin will likely be extremely attractive to BTC holders around the world.
Edited by Andrew Hayward
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