Liquid Staking Lands On Bitcoin As Layer 2 Race Heats Up

After years of scant development on top of the Bitcoin network, activity on the oldest cryptocurrency is exploding, offering users the option to finally put their BTC to work.

One of the latest examples is Nomic DAO Foundation and Babylon Bitcoin, which together are introducing stBTC, a Bitcoin Liquid Staking Token (LST).

Liquid staking refers to users receiving a tradable token in exchange for staking a cryptocurrency in a proof-of-stake blockchain. Unlike traditional staking, which locks up tokens until they’re unstaked, liquid staking enables users to retain access to the value of their staked tokens to then use across DeFi.

Users can exchange BTC for nBTC by using Nomic’s BTC reserve. Through Nomic’s Staking Pool, users can lock their nBTC to mint an equivalent amount of stBTC tokens, which, like nBTC, can be used throughout the Cosmos ecosystem.

Nomic and Babylon are able to create LSTs for Bitcoin by using the former’s link to Cosmos’s PoS chain.

“Nomic and Babylon provide two important primitives to Bitcoin: decentralized custody and staking,” said Matt Bell, CEO of Turbofish, Nomic’s founders and core contributors, in a press release shared with The Defiant. “By pairing the two, their impact is magnified, making a more practical solution for the average Bitcoin holder to earn yield through staking.”

Nomic and Babylon’s combination will be powered by the Inter Blockchain Communication Protocol (IBC), a Cosmos-native interoperability standard.

This marks a potential watershed moment for the Bitcoin ecosystem.

Launching stBTC could have a twofold effect: it could capture some of the market share that wrapped Bitcoin (wBTC) holds at $10.5 billion, currently the only instrument that Bitcoin holders can earn a yield on. This would, in turn, reduce some of Ethereum’s Total Value Locked (TVL) in Decentralized Finance (DeFi).

Conversely, it could also onboard Bitcoiners to the Cosmos ecosystem when holders claim their staking rewards.

Liquid staking has become one of the most popular activities in DeFi, amassing a whopping $54 billion TVL on Ethereum, according to DefiLlama. Lido Finance is the top liquid staking protocol, with a more than 70% market share.

The Bitcoin “Economic Layer”

Nomic’s integration with Babylon isn’t the only Layer 2 garnering hype this week.

On April 9, Thesis, a venture studio funding and building on Bitcoin, unveiled the so-called Bitcoin Economic Layer, dubbed “Mezo.”

Mezo also disclosed a $21 million round led by Pantera Capital, Multicoin, Draper Associates, and Dan Held, among others.

The Bitcoin Economic Layer looks to leverage what they call “Proof of HODL,” opening up the option for Bitcoiners to earn yield on the previously stagnant BTC. PoH operates by multiplying a user's HODL score according to their length of deposits.

Mezo’s main difference, according to a press release, from other Layer 2s is that it will foster a Bitcoin circular economy through a Thesis-built tBTC token, which will offer trust-minimized bridging to other protocols.

Bitcoin’s Layer 2 landscape is flourishing, with Merlin Chain and Stacks leading the pack.

Merlin has seen explosive growth since it launched in early Feb. 2024, racking up 25,000 BTC or $1.6 billion in staked bitcoin, according to a Dune dashboard. Stacks showcases $173 million in TVL, with a whopping $4.5 billion market cap.