There are a few essential truths that govern accepted thinking about blockchain networks. One such truth is that, without compromises like wrapped tokens and blockchain bridges, proof-of-stake networks like Ethereum and proof-of-work networks like Bitcoin are tantamount to water and oil: They just don’t mix.
Now, a new startup led by a Stanford professor and a former Dolby engineer is attempting to disprove that. Babylon, a project that seeks to allow users to stake Bitcoin (BTC) to validate nodes on a variety of proof-of-stake networks including Ethereum, Solana, and Polygon, is already well on its way to achieving its improbable-sounding goal.
The company just raised an $18 million funding round co-led by Polychain Capital and Hack VC, with participation from funds including Framework Ventures, Polygon Ventures, OKX Ventures, and Castle Island Ventures. It is also in ongoing conversations with multiple blockchain networks about integrating its services, including Polygon, a Polygon Labs spokesperson confirmed to Decrypt.
How could it be possible, even theoretically, for someone to stake BTC—actual BTC, not a wrapped token that utilizes a blockchain bridge—on a proof-of-stake network? Proof-of-stake networks like Ethereum utilize smart contracts to govern the staking process, which rewards users who deposit a certain amount of ETH with rewards accrued over time.
In return, these ETH deposits are used to validate transactions on the Ethereum network. The entire staking process represents an intricate web of if/then conditions executed automatically by a smart contract.
Smart contracts, however, are not natively supported on the Bitcoin blockchain—but Babylon says it’s found a workaround.
The solution relies in part on Bitcoin’s “time lock” mechanism, which allows users to deposit a certain amount of BTC for a certain period, then withdraw it after that period without depending on a third party. But Babylon also had to find a way to get around the pesky smart contract problem.
“The biggest challenge for staking is that the stake is a collateral,” David Tse, an engineering professor at Stanford who co-founded Babylon, told Decrypt. “In other words, I have to be able to slash the Bitcoin when the validator on the proof-of-stake chain is doing something bad.”
Typically, a smart contract would either release collateralized funds to a staker if all conditions were met, or burn (or slash) those funds if they hadn’t been. Tse says his team has been able to replicate that process on the Bitcoin network without smart contracts.
“We came up with a way to use the existing Bitcoin scripting language to effect the slashing,” Tse said. “That is the main innovation of the project.”
If Tse and his team have in fact gotten this right—he says they still have a bit of final tweaking to do on the technology—then the potential upside is enormous.
Proof-of-stake blockchains of all sorts could tap into the $838 billion worth of incredibly secure Bitcoin already in circulation to validate their transactions. That innovation would be an all-but-certain path to deflation for any proof-of-stake network, that would no longer have to issue so many new tokens in order to incentivize validation.
“The Cosmos hub is paying about 10%—inflating the token 10%—to pay for Cosmos’ security,” Tse said, giving an example. “By bringing in Bitcoin, it can potentially lower the cost of security quite a bit, because Bitcoin is a much larger supply of capital.”
Babylon won’t be able to provide its technology to any given proof-of-stake blockchain ecosystem until that blockchain’s governance gives consent. So, at the moment, the company’s vision is still theoretical.
But Babylon is, as mentioned above, currently in serious conversations with major proof-of-stake blockchains like Polygon—and also has already received the blessing of industry leaders including Polygon co-founder Sandeep Nailwal.
“Babylon's vision aligns with our commitment to fostering decentralized ecosystems by offering diverse options for communities to seamlessly choose from,” Nailwal said in a statement. “We are enthusiastic about the positive impact this collaboration will bring to the wider blockchain community.”
If (or when) proof-of-stake networks like Polygon begin adopting Babylon’s novel technology, they may create new parameters for what it means to stake BTC on their chain as opposed to the network’s native token.
Ethereum, for example, may not require the minimum amount of BTC needed to stake on the network to equal 32 ETH, the system’s current requirement. It might also elect to offer a lower rewards return rate for BTC stakers.
Even if proof-of-stake networks that eventually work with Babylon opt to make such choices, though, the demand for receiving any sort of passive, guaranteed return on Bitcoin will likely be immensely attractive to BTC holders around the world.
Edited by Andrew Hayward