11 min read

Babylon: Unlocking Bitcoin with Hybrid Security

With the powers of PoS and PoW!

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Published on

23 May, 2024


Babylon Chain is a player in the shared security narrative for Proof-of-Stake (PoS) blockchains secured by Bitcoin. With Babylon, Bitcoin holders can earn yield from their idle Bitcoin holdings without bridging to another chain. Holders lock their Bitcoins, which earns them the right to validate PoS chains and earn yield in return. With quick unbonding times and scalable restaking features, Bitcoin stakers can enjoy maximal liquidity and yields. Furthermore, it is self-custodial.

Notable investors like Hack VC and Polychain Capital led Babylon Chain's Series A funding round. Additional investors included Polygon Ventures, Framework Ventures, OKX Ventures, and others. Babylon is using these funds to build its Bitcoin staking protocol, which will bridge the DeFi ecosystem with the Bitcoin blockchain.

Absolute Market Dominance

Bitcoin is at the heart of blockchain technology. Thanks to its Proof-of-Work (PoW) system, its top-notch security is well known. Bitcoin launched the idea of digital money without central authority in the catastrophic aftermath of the 2008 financial crisis.

It has a unique position in the blockchain ecosystem, with the highest market cap ($1,232.41 billion), first-mover advantage, and unparalleled decentralization. It also has plenty of idle assets ready to be used.

Independent Security

In PoS systems, validators lock up crypto funds to contribute to their chain's security, whereas computational work completes Bitcoin's PoW security, thus freeing up the BTC asset. PoS secures blockchain networks via financial stakes rather than computational work. .

Idle Assets

Glassnode reported that approximately 66% of Bitcoin's circulating supply has remained dormant for the past year. Much of BTC is idle compared to PoS chains, where yield-generating activities are more common. Thus, bridging or custody solutions have been the only ways to leverage Bitcoin. However, they bring risk to the equation..


The Bitcoin network is broad, diverse, and resilient against centralization pressures. However, while unique, Bitcoin and PoW, in general, could use more innovation to gain a foothold in DeFi, which mostly happens on PoS systems.

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Babylon Combines PoW and PoS

Combining Bitcoin's robust PoW security features with the speedy and energy-efficient PoS consensus is a novel and exciting prospect. Imagine a protocol that could use Bitcoin as the foundation for PoS networks, making them even more secure. This approach combines the best of both worlds. It uses Bitcoin's rock-solid security to shore up some weak spots in PoS systems, such as small groups of people garnishing too much control.

Babylon aims to create fast, energy-efficient networks that can withstand new types of attacks. Whether developers want to bootstrap a new PoS chain or enhance the economic security of an existing one, Babylon's Bitcoin staking protocol brings it to life.

Babylon Chain borrows Bitcoin's security features and applies them to PoS chains. This shift from PoW to PoS is a pivotal moment in blockchain history.

Unlocking 21 Million Idle Bitcoins

PoS staking is capital-intensive. Users must stake a lot of funds to secure these networks. However, 21 million Bitcoins are sitting idle. Why not harness their potential to enhance the economic security of PoS chains and their decentralized applications (dApps)?

What makes this challenging is that Bitcoin's scripting language is not Turing-complete and thus cannot function outside the Bitcoin network. To deploy BTC crosschain demands users to wrap or bridge their tokens. Neither solution is ideal because it relies on trusting a third party. Thus, utilizing these idle Bitcoins to secure the decentralized economy seems impossible at first glance.

Babylon Chain's Origins

The Standford Tse Lab, led by David Tse (a notable professor at Stanford University and advisor to Bain Capital Crypto), developed Babylon. Its passionate creators are a group of global blockchain developers and researchers from Stanford who are all driven to solve the most significant problems in the blockchain arena. For instance, Xinshu Dong is also the co-founder of Zilliqa. The combined intellect makes up the team's foundation at Babylon.

Notably, we can trace Babylon Chain's genesis to a research paper on Bitcoin security co-authored by co-founder David Tse and others. The paper exposed the weaknesses of PoS chains and was accepted by the 2023 IEEE Symposium on Security and Privacy, a top global platform for security discourse.

This research paper led to the Babylon protocol, designed to enhance PoS chains' security with Bitcoin-Enhanced Proof-of-Stake Security.

The goal is to build a fast, safe blockchain network that can handle many transactions—in other words, a network that combines the best parts of PoS and Bitcoin technologies.

Babylon's Bitcoin Staking Protocol - EOTS

Babylon employs Extractable One-Time Signature (EOTS), a cutting-edge cryptographic technology. EOTS and Bitcoin's native time lock let Bitcoin holders participate in PoS security by staking their Bitcoins on the Bitcoin network. This is all accomplished without third-party interference.

Moreover, a staker's Bitcoins are secure if the staker does not engage in malicious behavior, such as attacking the PoS chain. Babylon employs the most advanced Bitcoin time-stamping protocol to ensure that Bitcoin and PoS chains stay in sync. This feature enables quick unbonding times for users looking to unstake their Bitcoins.

EOTS is a cryptographic primitive. It can be constructed from the Schnorr signature algorithm, which Bitcoin has supported since the Taproot upgrade. The signer uses a secret and public key in the Schnorr signature algorithm. To sign a new message, the signer generates a secret nonce and uses that nonce with the secret key to sign the message. Next, the signer computes the public nonce of the secret nonce and publishes the signature and public nonce so that the public can verify the signature.

The secret nonce must be new for each new message. If the signer uses the same secret nonce to sign two different messages, then any observer of the two signatures can extract the signer's secret key. When constructed appropriately, Schnorr's can deter the signer from committing equivocation, which makes it EOTS.

An EOTS Example

We can explain EOTS more simply with a user named Alice. Let's say she receives two job offers. If she's only allowed to pick and sign one offer, the way to deter her from signing both job offers is to fine her. Put in the context of Bitcoin staking, the EOTS cryptographic primitive could cause Alice's secret key to be decrypted if she signs more than one offer. If the secret key manages a sizable amount of her assets, the risk of getting decrypted and slashed will deter her from signing more than one job offer.

A Modular Staking Protocol

Babylon is a modular protocol that can secure any PoS chain and allows scalable restaking for Bitcoin holders. Babylon's Bitcoin staking protocol creates a two-sided market. Bitcoin holders who stake their Bitcoins can choose which PoS chain(s) to stake on and earn yield. Furthermore, developers can configure how much Bitcoin stake to accept and how much to reward stakers for optimizing their crypto economy.

Babylon's 3-Layer Architecture

Babylon Chain's design mixes the best of Bitcoin and PoS across these critical layers:

Babylon 3 Layered Architecture

Bitcoin Layer:

Bitcoin is Babylon Chain's foundation layer, which utilizes Bitcoin's security to keep all transactions safe.

Babylon Layer:

The Babylon layer connects Bitcoin with various PoS chains. It runs smart contracts and handles transactions, ensuring the ecosystem works together.

PoS Chains Layer:

The top layer consists of various PoS chains. Babylon selects each chain for its unique strengths, which gives Babylon Chain its scalability and flexibility.

Babylon's Unlimited PoS Chain Validation

With Babylon's protocol, participating validators like Luganodes get exposure to billions of dollars in potential delegations while earning commissions by validating PoS chains. Furthermore, due to Babylon's modular design, the type of PoS chains the validator can validate is unlimited.

Bitcoin PoS Chain Validation

For Bitcoin to become a legitimate staking asset, it must be lockable, delegatable, slashable, and have an unbonding period.

A user can apply a time lock to their stake to lock it. Upon the expiration of the time lock, the condition provides a guaranteed exit for the staker, so only that user can spend the Bitcoin.

Babylon guarantees complete slashable security for any PoS chain. If an attacker attacks the network, the protocol enforces PoS security by slashing the staker's stake.

To achieve slashing, the user must create a Schnorr key pair as their EOTS key pair (described above). One problem is that the slashing condition only requires the user's EOTS signature, meaning that without prevailing conditions, malicious users can withdraw their Bitcoin to avoid getting slashed.

To avoid this, the staked Bitcoin can only be sent to a pre-determined burn address rather than directly to the user. No one knows the secret key to this address, so the funds are only spendable after the time lock expires.

On the other side of this equation, a "covenant committee" cannot randomly slash a user. Only the user knows their secret EOTS key, and when behaving honestly, no one else will know their secret key so that no one can slash them. Only when misbehaving do they expose their secret key. All in all, the user does not need to trust the covenant committee at all. Even a compromised covenant committee cannot slash their Bitcoin.

Safe Delegation

Delegation is an intuitive process. Users can place a third-party validator's EOTS public key under the slashing condition. If the validator is malicious, the user can be slashed.

At first glance, some might worry that a delegated validator and the covenant committee could collude to steal their Bitcoin. Users can add their public key (not an EOTS key) to the slashing condition to ensure this does not happen. The user will only pre-sign a slashing transaction that sends their stake to the pre-defined burn address.

The protocol ensures that no one can steal the user's stake by using three sets of signatures—staker, validator, and covenant committee—in the slashing condition and requesting that the staker and covenant committee only sign the slashing transaction that burns the stake.

Things to note: If the user (or the validator they delegate to) misbehaves, their stake gets slashed. If they behave honestly, their stake cannot be slashed.

Atomic Slashing

When delegating, after the user and the covenant committee give their pre-approval, the delegated validator's signature is the only one needed to trigger the slashing condition. If the validator acts maliciously, it can sign the slashing transaction and get the trusting user slashed alone. No other user stakes delegated to this validator are affected in this case.

However, adaptor signatures overcome this problem. Users can encrypt their signature using the delegated validator's EOTS public key. Then, to target the user's stake, the validator must decrypt the adaptor signature using its EOTS secret key. This action will cause its EOTS secret key to be extracted. Once extracted, all stakes delegated to it become slashable, including its self-delegated stake. Thus, the protocol accomplishes atomic slashing.

Partial Slashing

Slashing a user's entire stake can scare people away from staking. However, many PoS systems support partial slashing. In such cases, only a tiny portion of the stake gets slashed for an infraction, and the remainder is returned to the staker.

Babylon BTC Staking

Refunds come at a delay to mitigate re-entry attacks whereby malicious stakers abuse the slashing mechanism to exit, get their funds back, and then quickly re-enter the system as a staker to attack again. A refund delay significantly slows these kinds of attacks.

Restaking on Babylon Chain

Restaking refers to a user (or delegated validator) using their Bitcoin to participate in multiple PoS systems simultaneously. If the user or delegated validator behaves maliciously on any of them, they will be slashed and removed from all of their PoS networks.

This means that Babylon has constructed a contract that turns Bitcoin into a staking asset with all the necessary properties. Not only is it trustless and self-custodial, but it is also lockable, slashable, delegatable, restakable, and unbondable.

Babylon's Testnet Announcement

Babylon's previous Bitcoin staking testnet, known as bbn-test-3, concluded on May 16th, 2024. This groundbreaking testnet, the first to introduce trustless and self-custodial Bitcoin staking, launched in February 2024. It has now paved the way for Testnet-4, reflecting ongoing improvements and community-driven enhancements. Testnet-4 will persist in using the Bitcoin Signet to provide a safe and simulated environment for testing. Participants are advised to start the unbonding and withdrawal process of their Signet BTC in preparation for the new phase.

For more detailed information on this transition and the upcoming testnet features, you can visit Babylon's official announcement here.

Babylon Chain Summary

Imagine a blockchain network that harnesses Bitcoin's solid security combined with the speed and efficiency of the latest PoS technology, and you have Babylon Chain. This lofty goal requires a bold solution, which is precisely what Babylon Chain is offering—PoS networks to stake BTC.

Babylon unlocks the largest blockchain asset and opens new possibilities for Bitcoin-backed security services. Staking will likely encourage more developers to create solutions on the Bitcoin blockchain.

About Luganodes

Luganodes is a world-class, Swiss-operated, non-custodial blockchain infrastructure provider that has rapidly gained recognition in the industry for offering institutional-grade services. It was born out of the Lugano Plan B Program, an initiative driven by Tether and the City of Lugano. Luganodes maintains an exceptional 99.9% uptime with round-the-clock monitoring by SRE experts. With support for 40+ PoS networks, it ranks among the top validators on Polygon, Polkadot, Sui, and Tron. Luganodes prioritizes security and compliance, holding the distinction of being one of the first staking providers to adhere to all SOC 2 Type II, GDPR, and ISO 27001 standards as well as offering Chainproof insurance to institutional clients.

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