Exploring the Rise of BTC-LST: Decoding the Bitcoin Liquidity Restaking Landscape in Ethereum DeFi

Exploring the Rise of BTC-LST: Decoding the Bitcoin Liquidity Restaking Landscape in Ethereum DeFiWith the advent of Babylon, Bitcoin (BTC) has gained an additional revenue stream, offering a time-stamping security service. This restaking service not only protects protocols built on top of Babylon by increasing attack costs, but also enables BTC staking through a time-lock mechanism

Exploring the Rise of BTC-LST: Decoding the Bitcoin Liquidity Restaking Landscape in Ethereum DeFi

With the advent of Babylon, Bitcoin (BTC) has gained an additional revenue stream, offering a time-stamping security service. This restaking service not only protects protocols built on top of Babylon by increasing attack costs, but also enables BTC staking through a time-lock mechanism. While there are no actual staking rewards in the first phase, instead, points are given, the potential for BTC yields has spurred a wave of Bitcoin liquidity restaking tokens (BTC-LST) on Ethereum, such as Lombard, Babypie, FBTC, and SolvBTC, among others. Unlike wrapped BTC, which acts as a native BTC cross-chain representation, BTCLST leverages the Babylon protocol to introduce a cross-chain BTC representation with yields. As of this writing, the BTCLST market capitalization has reached $1.07 billion (excluding 9BWBTC assets on Ethereum). The market is primarily dominated by SolvBTC and Lombard, with a significant growth momentum.

On the other hand, many DeFi or restaking platforms on Ethereum (such as Symbiotic, Karak, etc.) have seen the opportunity presented by the influx of yield-bearing BTC assets, integrating these assets into their protocols to drive Total Value Locked (TVL) and trading volume. This trend is positive as the influx of assets can bolster Ethereum's position as a liquidity hub in the DeFi realm, and continue to generate a flow of economic activity. With increasing adoption of BTC by both institutions and the public, as seen in recent news like BTCETFs, cbBTC, not to mention the dominance of BTC (around 58%), BTC adoption is expected to continue growing until further innovation emerges. Therefore, it is essential to have a clear understanding of the current BTCLST-fi landscape.

This study aims to comprehensively dissect the existing BTC-LSTs, BTC wrappers, and DeFi protocols that are riding the wave of this emerging trend on Ethereum, to enable easier navigation in the future.

BTC-LST Ecosystem

BitcoinLSTWrapper is a "new entrant" in this cycle, designed to unlock liquidity for tokens staked in the BTC restaking protocol, Babylon. There are typically three forms of BTC liquidity wrapping:

1. One-way cross-chain wrapper: Backed by BTC staked in the BTC mainnet by Babylon in a 1:1 ratio. The "yield-bearing token" minted on ETH acts as a receipt for the staked BTC. E.g. LBTC, pumpBTC, babypie's mBTC, etc.

2. Restking wrapper: Uses LBTC or regular BTC (e.g. WBTC) as collateral and restakes the assets on restaking platforms like Symbiotic and Karak. E.g. Etherfi's eBTC, Swell's swBTC.

3. Reverse mode: Uses WBTC as collateral on ETH and leverages oracles to deliver a proof of stake to Bitgo, allowing the unlocked BTC from Bitgo to be staked in Babylon to earn yield. Users can use WBTC as collateral to unlock native BTC on the Mainnet and stake it on the Babylon platform. They deliver a proof of stake to Bitgo through an oracle, which unlocks the BTC and uses it for staking on Babylon, thereby earning yield. E.g. Bedrock.

While the first two types focus on bridging or unlocking more BTC assets from the BTC mainnet to the ETH ecosystem, the latter type extracts WBTC assets from ETH and "reverses" the assets to stake them in the Babylon protocol. One commonality among these wrappers, in terms of architecture, is that BTC is stored with a custodian (like Cobo or Copper) on the BTC mainnet to secure its assets, the cheapest and most convenient way.

For a clearer picture of the overall BTCLST/LRT landscape, here are some summaries on how some BTCLST/LRTs work:

BTCLST Market Size

As of this writing, LBTC dominates with a 37% market share, followed by solvBTC at 26% and pumpBTC at 9.5%. 79.6% of BTCLSTs are on the Ethereum mainnet while the remaining 21.4% are distributed across networks like BNB chain, Arbitrum, Avalanche, etc. The two major players in the BTCLST market have adopted different approaches. Lombard focuses on Ethereum, while SolvBTC takes a multi-chain approach, opening up various networks including BNB, ARB, etc.

ETHBTC Derivatives (Wrappers vs. Synthetics)

ETHBTC derivatives are wrapped BTC bridged from the BTC mainnet to the ETH network, usually through custodians. Such Wrappers are not competitors to BTCLSTs but rather serve as a crucial driver for LST growth. Unlike BTCLSTs, these derivatives are not staked on the Babylon protocol and do not inherently generate yields. Instead, they act as a regular representation of BTC on the ETH blockchain.

Despite not being inherently yield-generating assets, ETHBTC derivatives have become a key component of today's ETH DeFi landscape. WBTC is accepted by most DeFi and restaking platforms because:

• They are battle-tested.

• They hold a high market dominance in the 2024 cycle.

As of this writing, bitgo's WBTC has bridged over $9 billion worth of assets from BTC to ETH since 2018. 21.5% of this (about $1.9 billion) is deposited in Aave for lending, representing about 20% of Aave's total assets on ETH.

On the other hand, the new generation of Wrappers (E.g., FBTC) has also accumulated over $152 million on ETH, with a 38% monthly growth rate according to DeFillama. Another wrapper, SolvBTC, also attracted over $800 million TVL on BSC and BTCL2 like Merlin. These numbers not only showcase the significance of BTC assets in the ETH ecosystem but also highlight the immense potential for ETH DeFi to leverage this opportunity.

As mentioned above, the main issue with WBTC is trust in the custodian. Recently, there are growing concerns about the relationship of WBTC with Justin Sun which led Sky (former Maker) to consider removing WBTC variants from their vaults. BALab outlined the main concerns, primarily revolving around the argument that Justin Sun may have significant influence or control over the joint venture managing WBTC. However, Justin Sun himself claims that he has no control over WBTC or the assets it holds. This shift should also be seen as a risk for WBTC.

BTC Restking

BTC restaking refers to the assets related to BTC (in the form of wrapped BTC or BTCLST) on ETH that have been restaked to generate yields. The following table shows the accepted assets on each restaking platform and their respective TVLs:

Overall, there is about $150M worth of BTC being restaked on ETH, most of it staked on Symbiotic, with some deposited on SatLayer. Symbiotic alone holds $124 million worth of BTC products, including WBTC and tBTC, as well as $10 million worth of staked BTCLST. Karak only has about $100,000 worth of BTC assets. These BTC assets collectively contribute 7% of Symbiotic's TVL.

On the other hand, PellNetwork has successfully attracted a large amount of BTCLST for restaking through various BTC second-layer solutions such as Bitlayer and B2network. These assets will be used to provide shared security services and generate yield, similar to the model adopted by BabylonFinance and Eigenlayer.

While BTCLST already earns first-layer yield from Babylon, some protocols (e.g. EtherFi) leverage BTC-LST by restaking the LSTs on other restaking platforms (e.g. Eigenlayer, Symbiotic and Karak) to generate second-layer yields. While this strategy allows stakers to enjoy leveraged yields and maximize the capital efficiency of a single asset, they also face the same risks as ETHLST, being slashed by multiple platforms (Babylon, Symbiotic slashing) at the same time. Anti-Slashing policies can prevent slashing to a certain extent on ETH, but further information on Babylon is unclear.

BTC-DeFi

Undeniably, DeFi has been one of the most important drivers of blockchain economic activity. With a growing BTC asset market worth $9.5 billion on ETH, DeFi on ETH can benefit from the stability, institutional recognition, and potential yield that BTC provides.

Overall, besides swapping, BTC/BTC-LST related DeFi can be categorized into two major areas:

• Money Market & Interest Rate Swap: Morphblue, Aave, Pendle, Zerolend, Curve

• BTC Staking/Point Strategies: Corn, Meso, Gearbox, Mellow

MoneyMarket

BTC, being the most "secure" asset, is commonly used as collateral in the ETH DeFi landscape. Aave, the oldest and most reputable money market, has over $2 billion worth of WBTC deposits but only $218 million in borrowings, a relatively low utilization rate (7.69%) compared to stablecoins (86.7%) or WETH (85%).

On the other hand, MorphoBlue, despite having a smaller deposit base (20% of Aave), achieved a higher utilization rate. The most popular market on