Nearly a year after the first BTC staking networks began deploying to mainnet, demand for capital-efficient bitcoin is growing. For years, bitcoin’s lack of a native mechanism to put its vast economic power to work, like Proof-of-Stake (PoS) assets can be used to secure their chains and earn rewards, resulted in significant pent-up holder demand for capital-efficient solutions to use bitcoin for economic security across other networks and products. Today, there is over $8.23 billion in BTC staking protocols.
The demonstrated inbound demand for these solutions has made staking BTC a hot topic across the crypto ecosystem. But it remains broadly misunderstood, with a lack of token-holder education surrounding the different models for BTC staking and how their security positioning compares. While many participants assume that, like in PoS, most BTC staking solutions follow a similar model with minor variations, in reality, there is a wide variety of differences across BTC staking designs.
As BTC staking solutions began launching in Q4 2024, the total value locked in Bitcoin DeFi dramatically increased, demonstrating pent-up holder demand for capital-efficient BTC. Source: DeFiLlama
Three primary models for staking BTC have risen to prominence as market demand has grown:
- Bridged BTC Staking: This model involves locking bitcoin with a custodian and minting a synthetic, “wrapped” equivalent (like wBTC) on another blockchain.
- Dual-Staking Model: These protocols require users to stake a representation of bitcoin alongside a separate, native network token.
- Native BTC Staking: The Babylon bitcoin staking protocol model uses bitcoin’s own scripting language to allow a user to lock their BTC in a self-custodial time-locked contract directly on the Bitcoin blockchain, then “exporting” the economic security to Proof-of-Stake chains through cryptographic proofs and commitments.
Each of these models comes with its own set of trade-offs for stakers. Understanding the risks and differences between each model is a critical first step for institutions, treasuries, and other long-term BTC holders who prioritize security and self-custody.
The Risks of Bridging and Dual-Staking Models
Bridged and dual-staking models, while functional, introduce significant risks that are misaligned with the security and custody mandates of long-term holders. In some cases, the pursuit of rewards on BTC has led to solutions that compromise the core principles that make bitcoin a cornerstone asset for institutions.
Bridging Risks
At its core, the ‘bridged BTC staking’ model requires holders to relinquish custody of their native BTC to a third party, reintroducing the very counterparty risk that bitcoin was designed to eliminate. The resulting wrapped token is not bitcoin; it’s a synthetic derivative whose value is entirely contingent on the security and solvency of the bridge and its custodians.
The history of cross-chain bridges is a cautionary tale of centralized failure points and vulnerable code. These “lock-and-mint” systems create a concentration of high-value assets, usually secured by systems far less robust than the bitcoin network itself. Across blockchains, bridge exploits have resulted in billions of dollars in losses. Major incidents like the Ronin, Wormhole, and Harmony bridge hacks (which cumulatively represent over $1.44 billion in digital assets compromised) illustrate the risks of insufficiently decentralized validator sets and complex, exploitable code.
Exit Friction and Lack of Transparency
Wrapped tokens can suffer from poor liquidity, creating ‘exit friction’ when many users try to redeem their wrapped/synthetic tokens for native BTC at once. Exit friction is exacerbated during times of market stress, increasing the liquidity risk of other incidents, like hacks or a dropping market price.
Transparency can also be lacking in models that use wrapping and bridging, which may not have a clear path for stakers to independently audit and verify that the custodian holds sufficient native BTC to back every wrapped token in circulation.
Dual-Stake Designs
The ‘dual-staking model’ attempts to move beyond bridging to improve security, but introduces its own compromises. Dual-stake designs require participants to stake a secondary, native protocol token alongside a bitcoin-derived asset, adding complexity. It also introduces exposure to the price volatility and liquidity risk of the secondary token, which is typically less established and more volatile than BTC. A sharp decline in the secondary token’s price can quickly negate any rewards received on one’s BTC.
A dual-staked network’s security represents a complex function of two assets, potentially diluting the strength of the bitcoin-backed security guarantee. This adds a layer of complexity and speculative risk that is extraneous to the core objective of activating one’s BTC to provide security to additional networks, while continuing to securely hold BTC for the long-term.
Centralized Relayers or Upgradeable Contracts
Many dual-stake systems depend on a small, centralized set of relayers to pass information between chains, creating single points of failure that can be attacked or censored. Additionally, the use of upgradable smart contracts, while intended for flexibility, introduce significant governance risks. A malicious or compromised party could potentially alter the protocol’s rules, putting user BTC at risk while staking.
The Babylon Bitcoin Staking Protocol’s Native BTC Model: How It Works
The ‘native BTC staking’ model pioneered by the Babylon bitcoin staking protocol offers a path for protocol staking that avoids these compromises. It is designed to be philosophically and technically aligned with bitcoin by enabling native staking without bridges, wrapped assets, or secondary tokens.
The Babylon bitcoin staking protocol leverages bitcoin’s native scripting language and bitcoin timestamps to allow a user to lock their BTC in a special time-locked transaction (UTXO) directly on the bitcoin blockchain. The staking transaction is self-custodial, meaning the user never relinquishes control of their private keys, and the bitcoin never leaves the bitcoin network. This non-custodial vault is a cornerstone of the protocol’s trust-minimized design.
While the staked bitcoin on the Babylon bitcoin staking protocol stays in cold storage, staking happens off-chain via cryptographic proofs. The protocol periodically takes a cryptographic snapshot (hash) of the state of a connected PoS chain (a bitcoin Supercharged Network, or BSN) and embeds the hash into a bitcoin transaction. The hash of the BSN’s state is placed in an OP_RETURN output, making it a permanent and immutable part of the bitcoin ledger. Anyone can independently verify these timestamped checkpoints without needing to trust the Babylon bitcoin staking protocol or any other intermediary, creating a trust-minimized staking ecosystem.
A participant’s staked BTC remains in their control, secured by a script with several outcomes:
- Default Withdrawal: After a pre-agreed timelock expires, the staker can reclaim their BTC using only their own private key. This default withdrawal represents a critical safety feature, making withdrawals entirely independent of the Babylon bitcoin staking protocol or any external operators.
- Early Unbonding: A staker can request to withdraw early, which requires a co-signature from a “Covenant Committee.” The BTC is then sent to a new timelock with a mandatory waiting period of about 7 days before becoming withdrawable.
- Slashing: In the rare event a delegated validator (called a Finality Provider) acts incorrectly by double-signing, a portion of the Provider’s delegated stake can be slashed. Slashing is enforced through a cryptographic signing primitive called Extractable One-Time Signatures (EOTS) that does not put the staker’s principal capital at risk from slashing—only the Finality Provider’s and the BTC that the delegator pre-approved as a slashing percentage in their original staking transaction.
In this ‘native BTC staking’ model, there’s no bridging, no wrapped assets, and no ‘up to 100% loss’ slashing risk for the staked BTC. The smart contract ‘honeypot’ risk is mitigated as the staked bitcoin stays in self-custodial cold storage, with the staking happening off-chain. Finality Providers ultimately take on the largest portion of slashing risk for poor validator performance, not BTC stakers.
For a detailed technical breakdown of how the staking, unbonding, and slashing processes work on the Babylon bitcoin staking protocol, read our article Babylon’s bitcoin Staking Contract Explained.
Why This Matters for Bitcoin-Aligned Users
For institutions, corporate treasuries, and other long-term holders, the Babylon bitcoin staking protocol’s model addresses the central dilemma of holding bitcoin: how to activate BTC to generate rewards, without introducing unacceptable counterparty or technical risk.
Staking BTC on the Babylon bitcoin staking protocol:
- BTC remains in native form, under the user’s custody: The most critical feature for fiduciaries is the elimination of counterparty risk through a self-custodial model. The private keys never leave the institution’s control, and the BTC never leaves the bitcoin blockchain. This avoids the risks, complex accounting, and compliance treatment required for synthetic, wrapped assets.
- Aligns with bitcoin’s ethos to minimize trust and maximize security: By prioritizing self-custody and building on bitcoin’s native foundation, the Babylon bitcoin staking protocol presents the most “bitcoin-aligned” approach to extending BTC’s utility.
- Avoids composability tradeoffs inherent in wrapped BTC: The act of wrapping bitcoin transforms it into a synthetic derivative, which is usually only interoperable and liquid in the smaller ecosystem of the protocol that wrapped it. The wrapped BTC’s value depends on the bridge’s security. Native staking avoids this asset swap, keeping one’s BTC in its core form as a globally-interoperable and highly-liquid digital asset.
What’s Live Today, and What’s Coming
The Babylon ecosystem is anchored by its Babylon Genesis Layer 1 blockchain, which went live on mainnet in April 2025. Babylon Genesis acts as the control plane for the Babylon ecosystem, coordinating the marketplace between bitcoin stakers (supply of security) and bitcoin Supercharged Networks (demand for security).
The ecosystem expanding rapidly BSNs can be any decentralized system—from a Layer 1 to a rollup or oracle—that enhances its security by renting it from the Babylon bitcoin staking protocol’s pool of staked bitcoin. Today, the BSNs on Babylon Genesis include Cosmos Hub, the central blockchain in the interoperable Cosmos SDK ecosystem, Sui Network, the Layer 1 blockchain and Move-based smart contract platform, Manta Network, the modular ecosystem focused on privacy and scalability for zero-knowledge applications, and many others.
Established infrastructure providers like Figment act as Finality Providers, running the necessary node infrastructure to secure these BSNs. BTC stakers are compensated by the BSNs, earning rewards in the native tokens of the networks they secure (e.g., BABY tokens for securing the Babylon Genesis chain).
Conclusion: Native BTC Staking Is the Future
Native protocol staking represents a paradigm shift for bitcoin. Finally meeting pent-up demand for capital efficiency, holders can put their BTC to productive use, helping to secure emerging decentralized economies without compromising on principles of self-custody and trust minimization.
Compared to alternative models, the Babylon bitcoin staking protocol’s self-custodial architecture is its critical feature for institutions. Institutions can stake BTC directly from their existing regulated custody solutions, ensuring that private keys never leave their control and that staked BTC never leaves the bitcoin blockchain. bitcoin can be turned into a productive, reward-generating asset, without violating strict fiduciary mandates or taking on the counterparty risk inherent in bridged models. In addition, because the stake remains native BTC on balance sheets, Babylon staking avoids the complex accounting and compliance issues associated with synthetic wrapped tokens. The Babylon bitcoin staking protocol offers a path for institutions to receive BTC rewards on BTC holdings, without compromise.
Figment is proud to support the Babylon bitcoin staking protocol’s secure, non-custodial architecture as a Day 1 Finality Provider, offering institutional-grade infrastructure to help clients confidently participate in the future of bitcoin staking.
Contact our team at Figment to learn more about Babylon staking, and to start staking BTC today.
