By “locking” BTC, its economic security can be exported to almost any cryptographic application. This article is sourced from the article “Bitcoin Capital Efficiency with Liquid Staking” written by Mikhil Pandey, co-founder of Persistence Labs. It is organized, translated, and written by TechFlow.
(Summary:
Bullish signal》Exchange BTC inventory hits a 6-year low! Bloomberg: Australia is expected to launch a Bitcoin spot ETF by the end of the year.
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(Background:
The most special bull market in history? Glassnode: Multiple indicators of the fourth BTC “halving” have been broken!
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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? Hedging 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 it is all of them, and more.
Bitcoin is a first-layer blockchain that was originally designed for the trust and transparent flow of currency value, and its idea emerged during the 2008 global financial crisis. 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, staking, and more.
Bitcoin network activity has reached an all-time high
, generating 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.
But this is not uncommon, as multiple 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 to more extensive uses:
Decentralized domain services (Namecoin)
Wider asset representation (Colored Coins, MasterCoin, Counterparty)
Extending the Bitcoin network through sidechains, Rollups, and L2 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 income (Babylon, BounceBit, Stroom Network, Trustless Machines, etc.)
Further reading:
Bitcoin Layer 2 making money quickly! Who is dissing? Who is reaping the benefits behind?
But where are these developments leading Bitcoin? An article by Portal Ventures provides the best summary of the Bitcoin perspective:
Make Bitcoin more programmable to solve smart contract and extension limitations and deploy on the Bitcoin network.
Make BTC more capital efficient and build a super financial system using BTC.
Bitcoin is a proof-of-work network where miners contribute computational power to solve mathematical problems for block production and receive new Bitcoin as a reward. So how did staking come to the market, let alone liquid staking? Let’s understand some basics of blockchain.
Consensus involves maintaining ongoing agreement on the state of the network (data, transactions, balances, etc.). While PoW relies on computational 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 earn staking rewards.
When we need to trust that others/counterparties will behave well, it is common to set up 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 the asset. What asset is better than one with billions of dollars in economic trust? What is 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 potential for vibrant BTC-dominated DeFi, making BTC more capital efficient. Currency markets, stablecoins, economic security, insurance, and more. Endless applications.
Some may argue that BTC already has capital efficiency in terms of market value, adoption, and its primary store of value status in cryptocurrencies.
This raises a 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 income opportunities
Friction in moving BTC due to risk-averse holders
Lack of institution-friendly income-generating 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 barriers faced by BTC, in order to unlock 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 L2, trust-minimized BTC staking, Ordinals and Runes, VM, etc.
BTC liquid staking is not just a saying. It is here and could determine the profitability of cryptocurrencies. With the expectation that simple BTC-based financial products will bring much-needed liquidity and utility to today’s DeFi landscape, the future of Bitcoin has never been more exciting.
We have seen exponential growth in Ethereum’s liquid staking and subsequent progress in on-chain finance. When the same thing happens to an asset that created the “crypto” asset class for the first time, one can only imagine the possibilities and doors that open.
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