From WBTC to BTC-LRT on ETH,
An early exploration of the BTC-LRT ecosystem.
Author: Henry (@poopmandefi), IOSG
Introduction:
Special thanks to Ryan from SolvBTC and yandhii from Hashkey for the valuable insight.
Why BTC-LRT?
With the birth of Babylon, the protocol enabled an additional layer of yield for BTC by providing a security service known as timestamping. This re-staking service offers protection to protocols built on top of Babylon by making attacks economically more expensive, and the staking of BTC is made possible with the timelock mechanism.
While there is no actual staking reward being given in the first phase but points, the potential in BTC yield has inspired a wave of BTC liquid re-staking tokens (BTC-LST) such as SolvBTC, Lombard , babypie , FBTC etc.
In comparison to wrapped BTC that acts as a cross chain representation of native BTC, BTC LSTs leverage Babylon protocol to introduce yield bearing cross chain BTC representation.
As of writing, the BTC LST market has reached $1.07B, (excluding the $9BWBTC asset on ethereum). The market is primarily dominated by SolvBTC and Lombard, and the growth shows no signs of slowing down.
On the other hand, many DeFi or re-staking platforms (Symbiotic, karak etc) on ethereum see the opportunity from the influx of yield-bearing BTC assets and begin integrating these assets into their protocol to bootstrap TVL and volume.
This phenomenon is extremely bullish as the inflow of assets can strengthen Ethereum’s position as the hub of liquidity in the DeFi space and continuously create a stream of economic activities.
As BTC becomes more accepted by institutional and public, as observed in recent news such as BTC ETF, cbBTC, not to mention the BTC dominance (~ 58%), it is expected that Bitcoin adoption will continue to grow until new innovations emerge. Therefore, It’s necessary to have a clear picture of the current BTC LRT-fi landscape.
This research aims to provide a comprehensive mapping of the existing BTC-LRT, BTC wrapper and the DeFi protocols that are embracing the emerging trend of BTC waves on Ethereum to facilitate easier navigation in the future.
The BTC-LRT Ecosystem
BTC LRT Wrapper
BTC LST wrappers are the “newcomers” in this cycle, designed specifically for unlocking the liquidity of staked tokens in the BTC staking protocol, Babylon.
BTC liquid wrappers usually come in 3 forms:
1.A one-way cross-chain wrapper that is 1:1 backed by the BTC staked in Babylon on the Bitcoin mainnet. The “yield-generating token” is then minted on Ethereum as a receipt of the staked BTC.
Examples: SolvBTC.BBN, LBTC, pumpBTC, mBTC by babypie etc.
2. A wrapper on ETH that takes bridged BTC, such as LBTC or vanilla BTC (WBTC) as collateral and restakes the asset again into restaking platforms such as Symbiotic and Karak.
Example: eBTC by Etherfi, swBTC by swell
3.The “reverse mode” where they take WBTC as collateral and unlock the native BTC on Mainnet to stake on Babylon, They do it by relaying a staking proof to Bitgo via an oracle, allowing BTC from Bitgo to be unlocked and staked into Babylon for yield.
Example: Bedrock
While the first 2 types are focused on bridging or unlocking more BTC assets from the BTC mainnet to the ETH ecosystem, the latter type “extracts” WBTC assets from ETH and “reverse” staking the asset into Babylon protocol.
To provide a clearer picture of the overall BTC LRT landscape, here is a one-sentence summary of how some of the BTC LRTs works:
Market size of BTC LST
As of writing, LBTC dominates the market with 37% market shares, closely followed by solvBTC at 26% and pumpBTC at 9.5%. 79.6% of the BTC LST is on Ethereum’s mainnet, while the remaining 21.4% is scattered across the BNB Chain, Arbitrum, Avalanche etc.
The 2 largest players in the BTC LST market have different approaches. Lombard focuses exclusively on Ethereum while SolvBTC has taken a multi-chain approach, opening access to various networks include BNB, ARB etc.
ETH BTC Derivatives (Wrapper)
ETH BTC Derivatives is wrapped BTC that has been bridged from the Bitcoin mainnet to the Ethereum network, often through a custodian.
The wrappers are not competitors to BTC LSTs, but rather companions that serve as fuel for the growth of LST.
Unlike BTC LSTs, these derivatives are not staked into the Babylon protocol and do not inherently generate yield. Instead, they serve as a vanilla representation of native BTC on Ethereum. Despite not being yield-bearing assets in nature, ETH BTC Derivatives have become a crucial piece of the present day ETH DeFi landscape.
Most DeFi and restaking platforms accept WBTC because:
- They are battle-tested
- High market dominance throughout the years.
By the time of writing, BTC wrappers have bridged more than $9.9BB of assets since 2018. In which, 21.5% of the WBTC is deposited into aave (~$1.9B) for lending, which is about 20% of Aave total assets on Ethereum mainnet.
On the other hand, new generation wrappers , aka FBTC have also accumulated more than $152M on ETH, a 38% MoM growth according to the DeFillama. Another wrapper, SolvBTC, also attracted more than $1.15M in TVL and most of the assets are on BSC and BTC L2 such as Merlin.
These figures not only demonstrate the significance of BTC assets in the Ethereum ecosystem, but they also highlight an immense opportunity for Ethereum DeFi to capitalize.
Recently, there has been growing concern regarding WBTC’s affiliation with Justin Sun, leading to Sky (Ex-Maker) to consider removing WBTC variants from their vault. BA Lab has outlined the main concerns, which primarily revolve around the thesis that Justin Sun may have significant influence or control over the joint venture managing WBTC. However, Justin Sun himself has claimed that he does not have any control over WBTC or the assets it holds. This transfer should also be considered a risk to WBTC.
https://x.com/justinsuntron/status/1822370692014485937
BTC Restaking
BTC re-staking refers to BTC-related assets on ETH (in the form of wrapped BTC or BTC LSTs) that have been re-staked to generate yield. Babylon is a staking protocol rather than a re-staking protocol, so it has been excluded from this table.
Below is a table showcasing the accepted assets and the TVL for each re-staking platform:
In total, ~$150M worth of BTC is being re-staked on Ethereum, with the majority staked in Symbiotic, while a portion is deposited into SatLayer. Symbiotic alone holds $124M worth ofWBitcoin, including WBTC and tBTC, along with $10M worth of staked BTC LSTs. Together, these BTC assets have contributed 7% to Symbiotic’s TVL.
On the other hand, Pell Network has successfully attracted a significant amount of Bitcoin LSTs to be re-staked through various Bitcoin Layer 2 solutions, such as Bitlayer and B2network. These assets will be used to provide shared security services and generate yield, similar to the models employed by Babylon Finance and Eigenlayer.
While BTC LSTs have generated their first layer of yield from Babylon, some protocols, such as EtherFi, have leveraged the BTC-LSTs by re-staking the LST into other re-staking platforms, such Eigenlayer, Symbiotic and Karak to generate the second layer of yield.
Although this strategy allows stakers to enjoy leveraged yields and maximise the capital efficiency of a single asset, they are also exposed to the same risk as ETH LST, which is being slashed by multiple platforms simultaneously (Slash by Babylon, Symbiotic).
Anti-slashing policy could prevent a certain degree of slashing on ETH but there is no further information on babylon.
BTC-DeFi
There is no doubt that DeFi has been one of the most important sectors to facilitate the economic activity on blockchain.
With a growing market of $9.5B worth of BTC assets on ETH, DeFi on ETH can benefit from the institutional recognition and potential yield that BTC has offered to the market.
Overall, beside swap, BTC / BTC-LST related DeFi can be categorised into 2 major sector:
- Money Market & IR swap
Morph blue, Aave, Pendle, Zerolend, Curve - BTC staking / Point farming Strategy
Corn, Meso, Gearbox , Mellow
Money Market
BTC, as the most “secure” asset, is a common asset used for collateral in the ETH DeFi landscape.
Aave, the oldest, most reputable money market has more than $2B WBTC deposit but only with $218M borrowed, a relatively low utilisation rate (7.69%) compared to stablecoin (86.7%) or WETH (85%).
On the other hand, Morpho Blue has managed to achieve a much higher utilization rate but having a smaller deposit base (20% of Aave). The most demanded market on Morpho Blue is WBTC / USDC, which has an impressive 90% utilization rate.
So far, Aave and Morph only accepted WBTC, to stand out from the competitive lending market, zeroland is the first market that has an entire deployment dedicated to BTC LST tokens and support PT-eBTC. To date, there is $17M worth of eBTC supplied with around $3.28M borrowed, an utilisation rate of 20%.
Curve, not only as a haven for stablecoin swaps, but also as a popular destination for BTC related assets to park their assets. On the curve, users can do 2 things as a BTC supplier:
First, they can provide liquidity to the tri-pools.
Second, they can borrow crvUSD using tBTC and WBTC as collateral.
As of the time of writing, ~ $50M worth of BTC assets have been deposited to borrow crvUSD. On the other hand, among the available pools, the tBTC — WBTC pool stands out as the deepest pool with $25M in assets and a daily trading volume of $2.24M. Unfortunately, despite the active presence of BTC-related assets on Curve, no $CRV incentives have been offered to incentive users.
IRS Swap
Aside from the money market, the interest rate swap (IRS) product offered by Pendle is also one of the most popular places for BTC LST DeFi.
Pendle leverages the future yield of BTC LSTs and speculation on points to create multiple dedicated markets: PT / YT for SolvBTC.BBN, LBTC and eBTC etc. These markets have collectively attracted over $136M, a 150% growth MoM boosted by points and incentives farming.
The new round of voted incentives also signifies the growing interest in BTC LSTs. For instance, SolvVBTC on corn pool is voted to attract the most emission from the pendle. As a result, it is expected that there will be a growing supply of BTC LST assets in the near future.
TVL bootstrapping Vault / Point farming Strategy
While Money Market and IRS products generate additional yield for BTC assets based on the demand and supply of BTC on the ETH mainnet, TVL bootstrapping vaults prioritize using BTC to boost the TVL of their respective chains for ecosystem growth. Moreover, some vaults offer leveraged point farming strategies by looping or borrowing BTC to maximize yield with the same amount of capital.
Gearbox offered 27x lombard points by leverage borrowing WBTC (Up to 7x). Yet, this service is not popular as the supply is very limited in the gearbox (only ~$3M)
Beside point farming strategy, some L2s, such as Mezo by Thesis and Corn backed by Binance Labs, are leveraging the value of BTC by allowing nodes to “stake” their bridged BTC LSTs as collateral, in return the nodes earn fee in $BTC by participating in the validation process, a good attempt to put BTC to use and bootstrapping the TVL of these networks for fostering the future ecosystem growth. So far, mezo has attracted $121M in BTC related assets and $20M in corn .
Up to this point, it is clear that most DeFi activities with BTC LSTs are mostly incentive-driven.
While the adoption of BTC is growing, to generate actual demand for BTC LSTs in the long run, it will be highly dependent on the yield performance of Babylon that could make BTC LSTs a more attractive asset than ETH.
Risk
Liquidity issue
Despite having $300M in TVL, the deepest pool only has ~$10M liquidity in the Uni v3 pool (According to nansen) . A swap of $345K of ETH to LBTC will lead to 1.06% slippage, which is 4x worse than WBTC (~0.4%).
This discrepancy reflects one of the critical issues that BTC LSTs must overcome: the liquidity issue when large-scale exits from LBTC positions.
Conclusion
In summary
- Bridged BTC can largely take two major forms: vanilla BTC, such as wrapped BTC (WBTC), and restaked BTC in Babylon, known as BTC-LST.
- The BTC LST-Fi landscape is in its early stages but shows healthy signs of bridging more TVL from BTC to the ETH DeFi ecosystem.
- The adoption of BTC is expected to increase due to its growing recognition and market dominance in the current cycle. The opportunity to generate yield for BTC has also created a market on ETH for speculation and trading activity.
- WBTC remains one of the most widely adopted forms of BTC on ETH. However, with recent challenges faced by its affiliation with Justin Sun, it is expected that tBTC or LBTC will gain more adoption.
- It is becoming increasingly common to see BTC restaked tokens being restaked again in Symbiotic or Karak for leveraged farming. While this might generate higher yields, users must bear the risk of facing multiple slashing events.
- Currently, the majority of BTC-related DeFi activity on ETH is mostly incentivized by points or rewards. For actual demand to emerge, BTC LSTs need to create value (potentially in the form of yield) that is greater than ETH LSTs.
- Custodial risks, slashing risks, and liquidity risks are the major concerns in the BTC LST landscape.
This research aims to provide a high-level overview of the rising trend of BTC LSTs on ETH and hope to raise awareness of the opportunities and risks involved in dealing with the new generation of BTC assets. Further study on the impact of BTC asset in ETH and other chain would be required for assessing the potential of cross-chain finance in the future .
If I have overlooked anything, please reach out to me on @poopmandefi (Twitter), and I will do my best to keep this research as up-to-date as possible.
Reference:
https://www.diadata.org/bitcoin-ecosystem-map/
https://dune.com/yandhii/btc-lrt-evm
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