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Introduction

Over the past decade, Bitcoin (BTC) has established itself as the most secure and valuable cryptocurrency in the world. Its simplicity and immutability, combined with its use of Proof-of-Work (PoW) consensus, have propelled it to the forefront of global digital asset adoption. Yet, despite a market cap of ~$2 Trillion, Bitcoin’s potential remains largely underutilized when it comes to more advanced blockchain applications.

For other cryptocurrencies, Proof-of-Stake (PoS) networks — including Ethereum, Solana, and Cosmos-based chains —  have demonstrated the economic power of staking and smart contracts to fuel a thriving ecosystem of decentralized applications (dApps), liquidity provisioning, lending, and more. However, many PoS chains have faced challenges around securing enough capital to bootstrap robust validator sets and protect themselves against attacks.

The Babylon protocol has emerged to connect the best of both BTC and alternative Layer 1 (L1) PoS platforms to unlock Bitcoin’s capital for broader economic use cases in a way that is both trustless and natively anchored to Bitcoin’s blockchain. Instead of bridging BTC into wrapped assets or requiring large custodial intermediaries, Babylon serves as the Bitcoin staking infrastructure enabled by its own novel L1 chain.

In other words, Babylon is not another “Bitcoin sidechain” or an L2 reliant on bridging. Instead, Babylon is building a sovereign, full-featured, Cosmos-SDK-based  L1 — capable of running its own dApps and supporting an entire ecosystem — while drawing economic security from the Babylon Bitcoin staking protocol.

This report offers an in-depth exploration of the Babylon protocol’s approach, focusing on its L1 nature, its mission to bring real utility to Bitcoin, and the evolving ecosystem building around it. 

Babylon as a Layer-1 Blockchain

While Babylon first and foremost exists to support Bitcoin staking, the team behind Babylon sees Babylonchain as a way Bitcoin Secured Networks (BSNs) can compete directly with leading L1 chains, such as Ethereum, Solana, Sui, etc., in attracting developers, users, and economic capital to Bitcoin. Unlike solutions that simply stand up a bridging scheme or a series of smart contracts on another L1, Babylon is building out a chain that:

1. Sets its own consensus rules and can evolve independently.
2. Operates with the Cosmos SDK (and integrates the Inter-Blockchain Communication Protocol — IBC).
3. Hosts its own dApps so developers can leverage the full expressiveness of a Turing-complete environment while still engaging with Bitcoin for security.
4. Manages the staking of real BTC locked on the Bitcoin mainnet through specialized on-chain logic.

Babylon sees its path to competing with major L1s like Solana or Sui through offering high throughput, maintaining an active developer community, and attracting a strong user base. The critical distinction and advantage that Babylonchain has over other L1s is that rather than relying solely on the market value of a newly launched token for security, Babylonchain’s architecture incorporates staked BTC.

The Babylon L1 chain itself is a PoS-based blockchain that runs its own consensus by choosing validators and finality providers (FPs) based on the amount of BTC delegated to them. Additionally, instead of just bridging BTC to the chain, users actually lock their BTC in specialized scripts directly on Bitcoin’s own blockchain and then delegate voting power to an FP on Babylon. This means that no third-party custodians ever hold the BTC. The staker always retains self-custody, which is the entire premise of Babylonchain’s security model.

Babylonchain’s Security Model

Babylon’s BTC staking infrastructure and Babylonchain both employ multiple layers of cryptographic security to make it a leader in the BTC staking ecosystem. It works like this: BTC is locked on the Bitcoin main chain. A specialized script (referred to as the “bond contract”) ensures that funds remain locked and cannot be moved until the staker either unbonds or the stake expires.

Babylon leverages extractable one-time signatures (EOTS), made possible by Bitcoin’s native Schnorr signatures. If a validator double-signs a block, the private key can be extracted, allowing anyone to broadcast a transaction on Bitcoin to burn a portion of the staked BTC. To finalize blocks on the Babylonchain, validators sign with special keys. If they sign contradictory final states, they risk slashable punishment.

Lastly, the chain’s data is occasionally anchored into Bitcoin, ensuring that long-range or “posterior corruption” attacks cannot roll back the chain’s state without detection. However, from Babylon’s perspective, timestamping is merely one aspect of this broader security approach.

This layered system means that any malicious attempt to attack the Babylonchain or other BSNs is thwarted by the real possibility of losing actual BTC. This is the backbone of why Bitcoin can be considered the ultimate security solution. A malicious staker cannot easily reacquire or restore burned BTC.

Why Build a Standalone L1?

Why build an entirely new chain rather than rely on existing infrastructure? The short answer is that advanced staking functionality needs deeper control over staking logic, slashing, and cross-chain coordination than typical bridging or contract-based solutions can provide. 

Babylonchain:

• Manages Slashing and Staking: Babylonchain operates as an L1 to ensure Bitcoin staking security is trustless, enforceable, and self-custodial. Additionally, without requiring a large bridging contract on Bitcoin or a Bitcoin sidechain, Babylonchain’s approach enforces slashability by cryptographic extraction of private keys in the event of double-signing, helping to align incentives and deter malicious actors.

• Enables Developer Ecosystem:  By providing a Turing-complete environment, developers can build dApps that rely on Bitcoin’s capital while still operating on the Babylonchain.
• Serves as an Opt-In Hub: Eventually, other PoS chains (or even specialized L2s, oracles, and/or data-availability layers) can choose to “buy security” from the staked BTC aggregated in Babylon. Thus, the Babylonchain becomes the control plane for all these interactions.

Beyond solving purely technical security challenges, Babylon aims to bring Bitcoin’s user base and brand awareness into a new ecosystem. By attracting major liquidity and offering comprehensive developer tooling, Babylon is determined to challenge existing L1s — and has a path to do so. 

Specifically, this path for Babylonchain’s L1 success is predicated on creating real utility for BTC:

• Empowering Native dApps: The end goal is to have DeFi protocols that accept BTC as collateral while letting users remain in custody of their funds. As of Q1 2025, however, the staked BTC cannot be used in DeFi on Babylonchain. Instead, for the time being, custodial Liquid Staked Tokens (LSTs) are utilized. The LST services stake BTC on behalf of the user and mint a token representing the staked BTC position on the PoS chain.

• Aggregated Security: For aspiring new blockchains or L2s seeking to jumpstart strong security, Babylon can act as an anchor, lending them “Bitcoin-level economic security” while letting stakers earn multiple sets of rewards.
• Bitcoin-First Developer Experience: Because so many developers are eager to build on top of Bitcoin but find themselves limited by its scripting language or bridging constraints, Babylonchain’s approach makes this more accessible.

The Three-Phase Mainnet Rollout

Babylonchain’s mainnet launch is deliberately split into three phases, each targeting a different set of objectives. This phased rollout ensures that each major subsystem is heavily tested and that stakers, developers, and external PoS chains can align with the network’s evolution.

Phase 1 – Supply-Side Bootstrapping

Phase 1 laid the foundation for Babylonchain by focusing on acquiring and organizing the supply side of Bitcoin staking. From the onset, users were invited to stake real BTC via specialized scripts on the Bitcoin mainnet, which lock up their BTC in a self-custodial manner. In return, these stakers would eventually assume PoS voting responsibilities (or delegate those responsibilities to FPs) once the full Babylon blockchain launched. During Phase 1, however, the main priority was validating user interest and testing the initial staking infrastructure.

Stakers generated on-chain Bitcoin transactions that committed their BTC to a time-locked script — typically up to around 15 months. Importantly, slashing was disabled for Phase 1, meaning stakers faced no penalty for any misbehavior. This intentional design was chosen to eliminate complexity and allow participants to experiment freely with unbonding and staking. 

Initially, the protocol introduced a modest staking cap (1,000 BTC) to gauge interest and test infrastructure. Later, the protocol opened additional windows (Cap-2 and Cap-3), allowing more BTC flow into staking. By the end of Phase 1, over 56,000 BTC had been staked, with more than 135,000 unique stakers. A notable single entity staked 10,000 BTC in December, illustrating strong confidence in the protocol’s trustless design. Through these caps, Phase 1 validated the demand and trust that diverse holders place in a self-custodial BTC staking model.

Lastly, rather than direct token rewards, a points mechanism tracked and rewarded each staker’s ongoing participation. The system measured how much BTC was staked, for how long, and with which finality provider — allowing the network to gauge user engagement without distributing any protocol-native tokens prematurely.

Phase 2 – Activation of the Babylonchain

Following the success of Phase 1, Phase 2 transitions Babylon from a staking-only phase into a fully operational blockchain that enforces Bitcoin staking security at scale. This is where the locked BTC evolves from a placeholder into an actively securing asset. FPs who attracted adequate BTC delegations will now participate directly in Babylonchain’s on-chain consensus.

The BTC locked during Phase 1 becomes the economic backbone of Babylonchain’s PoS consensus. FPs (and self-delegated stakers running their own nodes) finalize and validate blocks, confident that malicious behavior would be met with genuine financial loss. Once slashability goes live, any detected violation of consensus rules leads to the burning of staked BTC on the Bitcoin mainnet.

Although Phase 2’s main emphasis is on launching the chain, Babylon continues to use Bitcoin for anchoring. An upgraded timestamping protocol ensures that critical events from Babylon (and potentially other networks) are periodically embedded in Bitcoin blocks, making malicious rollbacks exceedingly difficult.

Transitioning from a Placeholder to Real Security

During Phase 1, stakers essentially “pre-positioned” their BTC. Now, that capital actively underwrites Babylonchain’s consensus. This dynamic shift means the network can boast a robust security budget from day one — an unusual advantage for a newly launched chain. Phase 2 also positions Babylon as a direct competitor to established L1s, distinguished by an unprecedented reliance on slashable BTC rather than purely native token economics.

Overall, this has a number of effects on the Babylon ecosystem:

• Enhanced Validator Accountability: With the ability to slash funds live, finality providers and validators must maintain impeccable key management and honest behavior — or risk the permanent loss of staked BTC.
• Developer Influx: The availability of a high-security, BTC LST-backed chain running (permissioned) CosmWasm invites diverse dApp developers — particularly those who want to tap into Bitcoin’s user base.

Once Babylon is proven stable under its own PoS consensus, attention shifts to making this cross-chain security available to other networks. Phase 2’s success is thus crucial for building confidence in multi-staking.

Phase 3 – Multi-Staking and Widespread Adoption

Phase 3 completes Babylonchain’s focus on creating a multi-chain security marketplace where each staked BTC can simultaneously secure multiple PoS systems. In this environment, Babylon looks to fulfill its original vision by becoming the go-to hub for BSNs and opening its BTC reserves to a range of blockchains eager to rent secure validator power.

Put specifically — a single user (or finality provider) can allocate their BTC stake to multiple PoS networks, each potentially offering separate yield in their native tokens. This creates an ecosystem in which stakers earn stacked rewards while consumer chains gain robust protection from Bitcoin’s economic weight. Any PoS chain, L2, oracle solution, or data-availability project can opt into Babylonchain’s security. Referred to as “Bitcoin Secured Networks,” these chains outsource part of their consensus security to staked BTC on Babylon. In return, they provide consistent staking rewards or fees to participants.

The Babylonchain oversees the entire cross-chain staking process, verifying delegations, collecting malicious evidence, and enforcing slashing when necessary. By acting as a central coordinator, Babylon ensures consistent security standards across all participating networks — preventing conflicts or double-counting of staked BTC.

Implications for BTC Holders

Stakers can decide how they allocate their BTC across various consumer chains, potentially earning a patchwork of different tokens and rewards. This scenario flips Bitcoin’s traditional narrative from an idle store-of-value hold to something that can be seen as active with multi-faceted reward-bearing opportunities with no need to sacrifice the trustless security of holding coins on the Bitcoin mainnet.

As more chains vie for Bitcoin’s security and offer competitive APRs, the broader market could see heightened demand for holding and staking BTC. Over time, this dynamic has the potential to shift how mainstream investors perceive Bitcoin’s utility.

Babylon Ecosystem

One of the more critical successes with the Babylon Bitcoin staking protocol’s Phase 1 was the abundance of new collaborations that materialized even before the chain itself went live. Over 150 FPs — including major names like P2P, Galaxy Digital, and InfStones — registered to receive BTC delegations. Several large custodians, such as Anchorage Digital and Hex Trust, integrated with the protocol so institutional clients could natively stake their BTC.

Plus, a full wave of liquid staking token (LST) protocols also sprang up around Babylon protocol’s Phase 1, allowing participants to easily lock BTC while still holding the associated derivative token representing the staked positions. Projects like Lombard, PumpBTC, Lorenzo, and several others launched specialized campaigns, collectively pooling tens of thousands of BTC under management.

While these developments exemplify the wide demand for reward on BTC, they also demonstrate the potential for an even more comprehensive ecosystem once the Babylon L1 is operational:

• DeFi Protocols: On Babylon, we may see DeFi applications where BTC is staked in the underlying chain’s security while also deployed in lending pools or used as collateral in decentralized stablecoins.
• Data-Availability and Oracle Services: Projects that rely on robust cross-chain data can make use of Babylonchain’s aggregated security.
• Novel dApps: With CosmWasm, developers have near-Ethereum-level expressiveness to build advanced financial and social dApps, all anchored by real BTC collateral.

Lombard

One of Babylonchain’s most notable integrations is Lombard, a startup committed to integrating Bitcoin into comprehensive reward-generating activities without forcing users to sacrifice self-custody. Lombard received recent backing to develop and expand its approach for a “liquid Bitcoin” — an initiative that closely ties into Babylonchain’s staking foundation.

LBTC (Liquid Bitcoin) Tokens

At the heart of Lombard’s solution are “LBTC” tokens, which serve as freely tradable on-chain receipts representing staked BTC in the Babylon protocol. In this process, users deposit BTC to an address controlled by Lombard, Lombard then stakes the BTC on the user’s behalf, and then, finally, Lombard mints LBTC for the user.

By integrating LBTC, Lombard aims to create a seamless, multi-chain experience where users can move their LBTC assets into lending protocols, decentralized exchanges, or other yield strategies. In parallel, the staked BTC contributes to Babylonchain’s broader security marketplace. This partnership exemplifies a “win-win” dynamic: Lombard helps users maintain liquidity while Babylon secures greater BTC stake, bolstering both ecosystems in the process.

PumpBTC

PumpBTC is a user-centric platform that offers liquid staking solutions designed to help BTC holders maximize their on-chain reward potential. While many other protocols focus on bridging or wrapping Bitcoin into various DeFi ecosystems, PumpBTC was one of the first to solely root its operations in Babylon protocol’s native staking model. 

PumpBTC streamlines the staking process by issuing an easily transferable asset once users stake BTC through Babylon protocol’s self-custodial scripts. This asset functions as a “ticket” into multiple DeFi strategies, letting users retain liquidity over their locked BTC. The PumpBTC platform itself actively scans for opportunities across multiple PoS chains integrated with Babylon. As more networks become Bitcoin Secured Networks (BSNs), PumpBTC can route stakers’ capital to the highest-reward environments — reinforcing an ever-expanding market for BTC-based returns.

Because PumpBTC inherits Babylonchain’s trustless and slashable security, participants are shielded from typical cross-chain risks. In the event of validator misconduct, the slashable stake ensures bad actors face real financial penalties — reducing the probability of network-level exploits.

Lorenzo

Lorenzo is an L2 infrastructure built to push Bitcoin’s utility beyond simple transactions and into the realm of sophisticated reward-bearing operations. Rather than employing centralized custody or conventional bridges, Lorenzo taps directly into Babylon protocol’s staking mechanism, ensuring that its BTC holders can participate in advanced DeFi scenarios without relinquishing self-sovereignty.

Lorenzo specializes in structured financial products, allowing users to earn extra rewards on their BTC holdings via strategies such as automated market-making, lending, or derivative-based positions — all anchored by a robust security baseline from the Babylon Bitcoin staking protocol. The project offers native rollups that manage complexity off-chain while periodically settling back to Bitcoin for reliability. By collaborating with Babylon, Lorenzo ensures that both rollup finality and validator honesty are underpinned by slashable BTC, reducing the need for external trust.

Through interop with the Cosmos ecosystem and other IBC-ready networks, Lorenzo’s L2 can seamlessly shuttle data and value across different chains. BTC holders thereby gain access to a wide array of dApps, liquidity pools, and staking markets.

Bitcoin Secured Networks (BSNs)

In anticipation of Phase 3, multiple PoS chains announced their intent to become BSNs on Babylonchain, including Corn. Becoming a BSN means that the chain formally integrates with Babylonchain, giving the PoS chain a few strategic benefits:

• Security on Demand: Each chain has the ability to pay rewards to BTC stakers to “borrow” shared security‍
• IBC and Interoperability: Because Babylonchain leverages Cosmos SDK and IBC, integrated networks can communicate with it seamlessly. This fosters a fluid environment in which tokens, data, and security can move across chains in a trustless manner.‍
• Multi-Staking Economics: A single staker’s BTC might earn smaller percentages from each of five different networks. But combined, that reward could surpass typical rewards in conventional BTC bridging or lending markets, offering stakers significant incentives.

This layered security approach aims to do for Bitcoin what “restaking” does for Ethereum — yet in a way that treats BTC as the ultimate capital base, all while running on the Babylonchain.

Developer Enablement and dApp Potential

Fundamentally, one of the most important aspects of growing a new native L1 chain is the ability to attract and host a thriving community of builders. Babylon has taken deliberate steps to do just that, such as offering highly flexible smart contracts via CosmWasm, featuring upgradeable logic and support for a wide array of DeFi and NFT use cases. Additionally, Babylonchain features Inter-Blockchain Communication (IBC), giving Babylonchain direct interoperability with the broader Cosmos ecosystem so that dApps on Babylonchain can tap into a large liquidity pool and even share user bases across multiple IBC-enabled chains.

Both of these features are highly desirable to dApp builders, but Babylonchain sees its ability to offer native access to Bitcoin as the figurative cherry on top of other L1 ecosystems. Although the chain does not replicate Bitcoin’s PoW environment, it does provide “remote staking” that can be integrated at the contract level. Developers can build applications that rely on slashable, staked BTC for trust-minimized financial or gaming applications, among others.

Bringing Utility to Bitcoin

To grasp the full significance of Babylon protocol’s approach, consider what it means for Bitcoin as an asset. Historically, Bitcoin has had two indisputably native use cases:

1. Holding (store of value).
2. Spending/transferring (medium of exchange).

Everything else, from bridging to wrapped tokens to borrowing/lending on centralized platforms, involves trusting external entities or custodians. Babylon brings staking as a native Bitcoin use case, enabling BTC holders to secure PoS networks without relying on custodians or wrapped assets. It does so while offering the following unique advantages:

• No Custodians: Stakers do not give control of their BTC to any third party; they lock it in a specialized script on the Bitcoinchain.
• Slashability: If a staker’s key signs blocks maliciously (e.g., double-signing for an attack on a PoS chain), that same key is cryptographically revealed, allowing the BTC to be burned.
• Self-Custodial: The user can unbond and withdraw their BTC from the staking script at any time, subject to the unbonding schedule. When it expires, the user reverts back to holding normal BTC UTXOs.

The ramifications for Bitcoin are massive. For the first time, BTC holders can earn staking rewards from a trust-minimized process that retains Bitcoin’s ethos of self-sovereignty. Meanwhile, the broader ecosystem gains access to the largest crypto asset in a slashable manner—an unprecedented form of capital injection.

Conclusion

From its earliest vision to the three-phase rollout culminating in a multi-chain security marketplace, Babylon is an innovative reimagining of how Bitcoin can interface with advanced blockchain ecosystems. Rather than focusing exclusively on bridging or timestamping, Babylon Labs is building an entire L1 environment that taps the economic power of Bitcoin. This approach, already validated by tens of thousands of BTC stakers in Phase 1, speaks to a deep user appetite for turning BTC into a reward-bearing, chain-securing asset.

Looking ahead, Babylonchain’s trajectory is positioned to reshape the conversation around what it means to “use Bitcoin.” For the first time, BTC holders gain a truly native method of earning rewards, while decentralized networks gain a reliable source of security. As the Babylonchain L1 matures, developers can build dApps that fuse the best aspects of Bitcoin’s sound money properties with the expressiveness and scalability of PoS blockchains.

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Disclaimer: This report was commissioned by the Babylon Labs. This research report is exactly that — a research report. It is not intended to serve as financial advice, nor should you blindly assume that any of the information is accurate without confirming through your own research. Bitcoin, cryptocurrencies, and other digital assets are incredibly risky and nothing in this report should be considered an endorsement to buy or sell any asset. Never invest more than you are willing to lose and understand the risk that you are taking. Do your own research. All information in this report is for educational purposes only and should not be the basis for any investment decisions that you make.