Babylon Protocol
Leverage the Bitcoin network as security layer for PoS chains
Since Bitcoin’s inception, staking was never built into the network, and likely for good reason. With more than 19 million BTC mined so far, the industry has never been short of ideas to generate more demand for the Bitcoin network, expanding its versatility and relevance to the burgeoning DeFi sector that allows for more user participation aside from just holding the coins.
Babylon Protocol is one of these ideas that seek to leverage Bitcoin’s robust security to benefit other blockchains, offering them insurance against possible attacks. This turns out to be a very attractive idea, as seen from the amount of Bitcoin staked with them.
At the time of writing, there’s 43,912 BTC staked with a TVL of $5.209 billion with the Babylon Protocol. This is out of $6.899 billion of total staked BTC, according to DeFiLlama, which is equivalent to around 0.22% of the entire BTC supply. Out of that, 75% of staked BTC is with Babylon.
With such a dominant position in the market, it’s worth finding out what all the fuss is about. In this issue, let’s explore the Babylon Protocol.
What It Does
Babylon Protocol offers the service of providing additional security to other PoS chains using the Bitcoin network. It is the middleman between the Bitcoin network and other PoS chains. PoS chains that sign up for this service are known as “Bitcoin Supercharged Networks” (BSNs).
Babylon Genesis, a Layer-1 blockchain built on the Cosmos network, is the first “client” to sign up. This network is where the coordination for the other PoS chains occur. The service goes live for other chains in Phase 3.
Babylon Architecture
There are three layers that make up the whole thing:
Bitcoin connection Layer: The Bitcoin Timestamp is created and used as point of reference for other blockchains.
Babylon Genesis Layer: Coordinates activity for Bitcoin-Supercharged Networks (“customers”), Finality Providers and Covenant Committee (for staking and slashing requests).
Finality Providers + Bitcoin-Supercharged networks (BSNs) Layer: Finality Provider signs checkpoints with EOTS signatures to confirm networks are secured by Bitcoin.
How the protocol works
Knowing how the protocol works is an important part in our research. This information tells us:
Where demand is coming from
Where the potential risks lie (that may affect our investment)
Sustainability of the protocol in the long run
Here's how it works in simple terms:
BSN creates a block and sends checkpoint to Babylon
Vigilante Relayer timestamps it on Bitcoin
Finality Providers sign it with EOTS signatures
BSN gets both real-time and historical Bitcoin security
The process above is facilitated by the Babylon Genesis blockchain.
The diagram below is a more detail overview of the process.
By subscribing to Babylon’s services, the BSN now has triple-layer security for its blockchain: native security on its own blockchain, real-time security, and historical security, the latter both backed by Bitcoin. This is certainly an attractive proposition for many blockchains for their consideration.
What Makes It Unique
Non-custodial Bitcoin Staking - The coins never leave the Bitcoin system throughout the staking process. The process itself is secured by native Bitcoin programming.
EOTS Signature - Unique, verifiable keys used for confirming checkpoints and enables slashing if Finality Providers misbehave.
Dual security layers - Real-time finality + historical timestamping, both Bitcoin-backed for PoS network’s peace of mind.
How it Works for Stakers
Now that you understand how Babylon makes money, let’s see how we can have a share of that through staking our BTC.
Connect your wallet with the Babylon platform. Wallets that can be used include OKX, Binance Wallet, and Bitget to name a few. Most hardware wallets can’t be used at the moment, and doing so might result in lost funds.
Choose the Finality Provider (FP) you want to stake your BTC with.
After you’ve made your choice, the following happens in the background:
A UTXO transaction is created and the information is used to create a Extractable One-Time Signature (EOTS) that is unique to your staked BTC.
Transference of ownership of the EOTS to the FP.
The EOTS is then used as part of the consensus mechanism by FP to confirm validity of BSN block on your behalf.
In the unfortunate event that the FP misbehaves, the EOTS will then be exposed and a slashing request will be made to the Covenant Committee. This results in the BTC being destroyed, which means you lose access to the BTC.
Rewards are paid out in the BABY token. There is a built-in 8% inflation to the token, half of which goes to the BTC stakers, with the other half going to BABY stakers.
Babylon Protocol makes money through fees paid by the BSN and also from Babylon Genesis users using the blockchain. These fees are pooled together and distributed to stakers. The FPs earn commission but the rewards are not directly paid out by the FP, but by Babylon.
If you decide to unstake your BTC, wait 7 days after you have initiated the request on the platform to have the BTC returned to your wallet.
Who Started This?
David Tse, a graduate of the MIT School of Engineering with a PhD in Electrical, Electronics, and Communications Engineering, met up with Dr. Fisher Yu and collaborated with him on a research paper on “coded Merkle Tree” during the latter’s postdoc researcher role at USC. The research project collaboration included a third member, Sreeram Kannan, who founded EigenLayer when they parted ways.
Tokenomics
Babylon has raised $96.8 million, including an $8.8 million seed round, $18 million Series A, and $70 million Series B.
Those who stake BTC with the Babylon Protocol will get the yield in the form of BABY tokens. Recipients of the token can use them to participate in other DeFi activities with platforms that offer such opportunities for BABY tokens.
There are also a number of platforms that allow the BABY token to be staked to earn yield. The yield from these tokens have their own tokens to represent the staked tokens. These are cBABY (issued by SatLayer), eBABY (Escher), and milkBABY (Milkyway).
The token launched with an airdrop amount that is 6% of its initial token supply of 10 billion. The breakdown of the token distribution is as follows:
15% Community Incentives - where the airdrop came from and managed by the Babylon Foundation.
18% Ecosystem building
18% Research & Development
30% Private Investors
15% Team - The core Babylon team
3.5% Advisors
The BABY token has the following functionality for the blockchain:
Reward for staked BTC holders
Transaction fee for using the Genesis chain
Staked to secure the security of the Genesis chain
Governance for holders to propose and vote on proposals that benefit the blockchain.
There seems to be a fairly well-rounded distribution of the tokens with the majority of it towards making the ecosystem better and sharing rewards with the community supporting the project.
People & Partners
The Key Players in the Babylon ecosystem
Bitcoin-Supercharged-Networks (BSNs) = Babylon’s customers.
These are other PoS chains that wants the insurance provided by Babylon.Vigilante Relayer = Babylon’s security camera.
They submit checkpoints collected from other PoS networks to the Bitcoin network for a timestamp.Babylon Genesis validators = Babylon’s staff.
They faciliate all the activity occuring between BSNs, Finality Providers, and Vigilante RelayersFinality Provider = Babylon’s security guards.
They sign the checkpoints from the PoS networks with a EOTS signature to confirm the validity of the PoS checkpoint.
Ecosystem Partners
Lombard Finance, with the second largest amount of locked BTC TVL ($1.558 billion), is a major partner in the ecosystem. Aside from also being a Finality Provider, they issue LBTC tokens that can be used for DeFi activities on their own chain for users choosing to stake their BTC with them.
Other smaller players like SatLayer, Milkyway and Escher offer the ability for BABY token holders to stake them on their platform and get liquid tokens to for further DeFi activity.
Investors
The project has managed to round up an impressive number of VC interest. Many of these names might only be familiar for those in the VC world but I see two that I’ve heard of from other places:
OKX Ventures - part of the OKX Exchange team. OKX wallet is one of those that can be used to stake BTC.
Galaxy Capital - also run a Finality Provider. Dogfooding into their own investment, which is usually a good sign. They have vested interest in making the project work.
Competitors
The competition faced by the Babylon team is found in the answers to the following questions:
Who else is doing something similar to Babylon?
CoreDAO, Babylon’s direct competitor. Core is also a non-custodial Bitcoin staking provider. Bitcoin holders lock up their Bitcoin to be eligible for electing Core validators. The selected validator that manages to add a block to the Core chain gets CORE rewards, which are then shared with the Bitcoin holders.
Where else can I do something with my Bitcoin?
You can use BTC to run a Lightning node on he Lightning Network to facilitate Lightning transactions and earn a fee for doing so. Granted, some technical expertise is needed to do this, therefore it may not be feasible for most people.
What else can I stake in instead of Bitcoin?
EigenLayer, which is doing the samething for Ethereum, can be a source of indirect competition for capital.
Growth & Adoption
Babylon presents us with a 3-phase roadmap as their growth path:
Phase 1 - The Prep Stage
Launched at the end of 2024, the Babylon team succeeded in attracting sufficient capital “57,290 BTC in staking deposits through three capped deposit rounds.” - Messari to jumpstart the project.
Other players in the ecosystem also emerge around this time, including the Covenant Committee and Liquid staking providers such as Lorenzo, Lombard, SatLayer, and Milkyway.
Phase 2 (May 8th 2025) - The Implementation Stage
Prior to the phase 2 launch, Babylon Genesis went live in April 2025. It is Babylon’s own blockchain, built on the Cosmos network. It is tasked with facilitating the Bitcoin-backed security offer to other PoS chains. It is also the first BSN to use the Bitcoin network to further secure its network’s own security.
The key outcome for Phase 2 is about putting theory to action. The Genesis chain is expected to perform its duties successfully and will be closely monitored. Both the Bitcoin timestamping protocol and Finality Providers are activated, doing a run-through of the entire process.
Phase 3 - Real Business Begins
After having battle-tested the concept, it’s time to do this for real with live customers. The implementation of multiple EOTS keys ensure double-signing does not occur by the Finality Providers.
Blockchains in queue for phase 3 to go live include, but not limited to:
Osmosis - The flagship DEX for the Cosmos blockchain.
Build On Bitcoin (BOB) - Provides access for Bitcoin apps to access the Ethereum DeFI world, and vice versa for Ethereum-based (EVM) projects to access BTC.
Corn - a yield-farming platform for wrapped BTC holders to earn yield.
SUI - a Layer-1 blockchain using its own programming language called Move that handles tons of transactions super-fast. People can build all kinds of dApps on the blockchain in gaming, NFT, and DeFi.
The project is already seeing strong signs of adoption from the market and also votes of confidence in the crypto space. Evidence of this is having other projects lined up to be customers, angling to benefit from Babylon’s ecosystem.
What to Watch Out For
With a project of this magnitude with this many number of moving parts, risks are multi fold. Let’s see if these risks are worth the reward:
Risks from the Protocol
Flaws in EOTS implementation which could lead to unintended key exposure or failure to execute slashing requests.
Changes to the Bitcoin network in the future could affect the Bitcoin script used now for staking and locking up BTC. Also, the health of the Bitcoin network could affect Babylon.
A small number of Finality Providers holding the majority of the staked BTC could trigger a centralisation risk.
Trust in the Covenant Committee - Enough of them banding together could undermine the protocol.
Trust in Vigilante Relayer submitting correct, not false, checkpoints. While anyone can check, it could be a Tragedy of the Commons problem if no one ever checks because they trust someone else will.
Phase 3 not launched yet - ecosystem has not yet been properly battle-tested. We don’t know what kind of bugs or boogeymen could be hiding underneath the bed.
Strong support from the Cosmos chain is needed as it is where the Genesis blockchain is located. Any disruptions on Cosmos might affect Genesis, which could then have a ripple effect on the entire ecosystem itself.
Risks from the Market
If a black swan event causes many users to unbond at the same time, there could be a liquidity crunch.
The health of Lombard Finance’s LBTC token, which also has a sizeable chunk of the market share with staked BTC, could have a ripple effect on the Babylon protocol.
Conclusion
What Babylon offers is a solution to a problem that other PoS chains may face. The chains that sign up for this service is essentially buying insurance for the security of their chains, in case something bad happens. To this end, there could be sufficient interest for the business model to be a viable and sustainable one in the long term.
However, at this stage, before Phase 3 is launched, it would not hurt to be cautious and gauge the success of Phase 3 before putting anything into Babylon. While being an early adopter likely has its perks, it is worth weighing those perks against the risk that could lead to loss of funds. Even so, I am optimistic about Babylon’s success and look forward to a bright future for the project.
That's a wrap on Babylon Protocol! Think it's the future of Bitcoin or just expensive complexity? Leave a comment below and let me know what you're thinking.
And if this kind of analysis helps you make sense of crypto, subscribe below—there's plenty more where this came from.
Major Sources (links/connections)
https://messari.io/report/state-of-babylon-q1-2025
https://medium.com/@core_dao/economics-of-bitcoin-staking-what-matters-3197f1e2232b
With research and editing help from Claude AI