How Lorenzo Protocol is Supercharging Bitcoin DeFi With Liquid Restaking

By Decrypt Staff

Bitcoin is the original cryptocurrency—and dominates the market as the largest crypto by market capitalization.

But as a trailblazer, it also suffers from limitations that have been addressed by the cryptocurrencies that followed in its wake. Those limitations—Bitcoin’s slow consensus mechanism, limited data storage capacity and lack of smart contract compatibility—mean that much of Bitcoin’s liquidity is cut off from the flourishing decentralized finance (DeFi) space.

That’s what Lorenzo Protocol is aiming to address with its novel Bitcoin liquid restaking protocol.

Liquid restaking builds on the existing model of liquid staking, which enables investors to participate in staking on proof-of-stake blockchains, while still retaining their personal liqudity.

Lorenzo Protocol’s liquid restaking enables users to stake the stBTC derivative token that represents their staked asset across multiple blockchains, earning additional yield from their staked Bitcoin.

“We are a platform to help stakeholders to lend BTC liquidity to the projects needing them for scale, and then to provide the yield from these projects,” Lorenzo Protocol founder Matt Ye told Decrypt. He added that, by tokenizing the lending and borrowing of BTC liquidity, it effectively creates BTC bonds.

“First of all, we’re matching BTC holders with all the projects for BTC yield,” Ye said. “Two, we do the tokenization for staking.”

“On top of that, we build StakingFi or YieldFi application layers on top of them,” he added. The platform uses the Lorenzo Appchain, an EVM-compatible Bitcoin Layer 2 network that’s secured by BabylonChain's Bitcoin shared security. “This L2 is in charge of the issuance and settlement of these staking tokens, and then also for building the DeFi ecosystem on top of these token standards,” Ye explained.

The platform’s testnet will be launched “very soon,” Ye told Decrypt, enabling users to trial Lorenzo Protocol’s staking portal. “You can basically stake through us to Babylon, and at the same time we’re going to issue stBTC on our own L2s, and you can bridge them to the other L2 or L1 ecosystem with our bridge,” he explained.

“Eastern BTC capital can meet western projects.”

As the Bitcoin DeFi ecosystem evolves, Ye predicted “huge demand for Bitcoin liquidity,” across purposes including L2s, BTC yield products, and staking portfolio management. “Every L2 is one BTC yield source; trading desks, trading strategies are others,” he said. “Given that BTC’s been expanding, demand in every single sector will grow.”

“We tokenize everything every single staking opportunity, and we become like a marketplace,” he said, adding that Lorenzo Protocol aims to help to bridge the divide between BTC holders and staking opportunities across projects in the English-speaking world and Asia. At the moment, he said, there’s “no trust base, there are language barriers, it’s impossible for them to work together.” With Lorenzo Protocol in the middle, he said, “Eastern BTC capital can meet western projects.”

Lorenzo also functions as a BTC bond trading protocol. “You could lend your money to anyone in the world, but without a bond market or money market your assets are very illiquid,” Ye said. A BTC bond market, he said, enables holders to “keep your liquidities and safety for financial stability for your asset investment.

Its ecosystem could expand to encompass a wide range of products, Ye said, including yield swap products, lending protocols, structured Bitcoin yield products, insurance products, and BTC-backed overcollateralized stablecoins that use Lorenzo Protocol's stBTC derivative token as collateral.

Ultimately, Lorenzo Protocol has sweeping ambitions, said Ye. “My hope is that eventually, BlackRock, Franklin Templeton, Brevan Howard, Two Sigma, Citadel, Fidelity—they could all be borrowing BTC capital on our platform,” he said, adding that, “We want to go very institutional. We're supposed to be the BTC bond exchange market in the world.

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