From WBTC to BTC-LST on ETH: Early exploration of the BTC-LST ecosystem
Written by: IOSG Ventures
1. Introduction
Why choose BTC-LST?
With the birth of Babylon, it provides a timestamp calledSafetyThis re-staking service protects the protocol built on Babylon by increasing the cost of attacks and makes BTC staking possible through a time lock mechanism.
Although there are no actual staking rewards in the first phase, but points are given, the potential for BTC gains has stimulated a wave of BTC liquidity re-stakingTokenThere is a wave of (BTC-LST), such as Lombard, babypie, FBTC and SolvBTC.
Compared to wrapped BTC, which acts as a cross-chain representation of native BTC, BTC LST leverages the Babylon protocol to introduce a cross-chain BTC representation with yield.
As of this writing, the BTC LST market has reached $1.07 billion (excluding the 9BWBTC assets on Ethereum). The market is mainly dominated by SolvBTC and Lombard, and the growth momentum shows no signs of slowing down.
Source: @yandhii, dune dashboard
On the other hand, many DeFi or re-staking platforms on Ethereum (such as Symbiotic, Karak, etc.) saw the opportunities brought by the influx of BTC assets with yields and began to integrate these assets into their protocols to guide the total locked value (TVL) and transaction volume.
ThisThe phenomenon is extremely promising, because the inflow of assets can strengthen Ethereum’s position as the liquidity center of the DeFi field and continue to create a flow of economic activity.
As BTC becomes more accepted by institutions and the public, as can be observed from recent news such as BTC ETF, cbBTC, not to mention BTC's dominance (about 58%), it is expected that BTC's adoption will continue to grow until new innovations emerge. Therefore, it is necessary to have a clear understanding of the current BTC LST-fi landscape.
Source: Henry
This study aims to comprehensively sort out the existing BTC-LRT, BTC wrappers, and DeFi protocols that follow the emerging trend of the BTC wave on Ethereum, so that it can be easier to navigate in the future.
2. BTC-LST Ecosystem
Source: IOSG
Bitcoin LST Wrapper 是这一周期的「新成员」，专为解锁在 BTC 再质押协议 Babylon 中质押Token的流动性而设计。
BTC liquidity packaging usually comes in three forms:
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One is a one-way cross-chain wrapper, backed by BTC staked by Babylon in the BTC mainnet at a 1:1 ratio. The “yield-generating tokens” minted on ETH serve as receipts for the staked BTC.
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Examples: LBTC, pumpBTC, babypie’s mBTC, etc.
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On Ethereum, use LBTC or regular BTC (such as WBTC) as collateral and re-pledge the assets to wrappers on re-pledge platforms such as Symbiotic and Karak.
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Examples: Etherfi’s eBTC, Swell’s swBTC
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"Reverse mode", using WBTC as collateral on ETH and passing proof of stake to Bitgo through an oracle, allows BTC unlocked from Bitgo to be staked on Babylon to generate income. "Reverse mode" users can use WBTC as collateral to unlock native BTC on the Mainnet and stake it on the Babylon platform. They pass the proof of stake to Bitgo through an oracle, which unlocks the BTC and uses it for staking on Babylon to generate income.
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Example: Bedrock
While the first two types focus on bridging or unlocking more BTC assets from the BTC mainnet to the ETH ecosystem, the latter type extracts WBTC assets from ETH and "reversely" pledges the assets to the Babylon protocol. In terms of architecture, one thing these wrappers have in common is that BTC is stored at a custodian (such as Cobo or Copper) on the BTC mainnet to protect its assets, which is the cheapest and most convenient way. To show the entire BTC LST/LRT landscape more clearly, here is a summary of how some BTC LST/LRTs work:
Source: Henry
BTC LST Market Size
As of this writing, LBTC dominates the market share with 37%, followed by solvBTC with 26% and pumpBTC with 9.5%. 79.6% of BTC LST is on the Ethereum mainnet, while the remaining 21.4% is scattered across networks such as BNB Chain, Arbitrum, Avalanche, etc.
The two major players in the BTC LST market have taken different approaches. Lombard focuses on Ethereum, while SolvBTC has taken a multi-chain approach, opening up various networks including BNB, ARB, and others.
Source: @yandhii, dune dashboard
2.1 ETH BTC Derivatives (Wrappers and Synthetics)
ETH BTC derivatives are wrapped BTC that are bridged from the BTC mainnet to the ETH network, usually through a custodian. These wrappers are not competitors to BTC LST, but rather serve as a key factor in driving LST growth.
Unlike BTC LST, these derivatives are not staked into the Babylon protocol and do not inherently generate yield. Instead, they are staked on ETH. BlockchainAs a general performance of BTC. Although not a yield-generating asset in nature, ETH BTC derivatives have become a key component of today's ETH DeFi landscape.
Most DeFi and re-staking platforms accept WBTC because:
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They are battle-tested
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High market dominance in the 2024 cycle
As of this writing, Bitgo’s WBTC has bridged over $9 billion in assets from BTC to ETH since 2018. Of this, 21.5% (about $1.9 billion) has been deposited into Aave for lending, accounting for about 20% of Aave’s total assets on ETH.
Most DeFi and re-staking platforms accept WBTC because:
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They are battle-tested
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Maintained a high market dominance for many years
Source: @yandhii, dune dashboard
On the other hand, the new generation of Wrapper (Eg, FBTC) has also accumulated more than $152 million on ETH, and according to DeFillama's data, its monthly growth rate is 38%.Xiaobai NavigationA wrapper SolvBTC, between BSC and BTC L2 For example, Merlin has attracted more than $800 million in TVL.
These figures not only demonstrate the importance of BTC assets in the ETH ecosystem, but also highlight the huge potential of ETH DeFi to take advantage of this opportunity.
As mentioned above, the main problem with WBTC is trust in the custodian.
Recently, there have been growing concerns about WBTC’s relationship with Justin Sun, leading Sky (formerly Maker) to consider removing WBTC variants from their vaults. BA Lab outlined the main concerns, mainly around the argument that Justin Sun may have significant influence or control over the joint venture that manages WBTC. However, Justin Sun himself claims that he does not have any control over WBTC or its holdings. This transfer should also be considered a risk for WBTC.
2.2 BTC Re-staking
BTC re-staking refers to BTC-related assets on ETH (in the form of wrapped BTC or BTC LST) that have been re-staking to generate yield.
The following table shows each asset accepted on the staking platform and their respective TVL:
Source: Henry
In total, there is about $150 million of BTC being re-staked on ETH, most of which belongs to Symbiotic, and some is deposited in SatLayer. Symbiotic alone holds $124 million worth of BTC products, including WBTC and tBTC, and $10 million worth of staked BTC LST. Karak's BTC assets are only about $100,000. These BTC assets together contribute 7% to Symbiotic's TVL.
On the other hand, Pell Network has successfully attracted a large amount of BTC LST to be re-pledged through various BTC second-layer solutions such as Bitlayer and B2network. These assets will be used to provide sharedSafetyServices and generate revenue, similar to the model adopted by Babylon Finance and Eigenlayer.
While BTC LST already earns first-layer yield from Babylon, some protocols like EtherFi are leveraging BTC-LST to generate second-layer yield by re-staking LST to other re-staking platforms like Eigenlayer, Symbiotic, and Karak.
While this strategy allows stakers to enjoy leveraged returns and maximize capital efficiency on a single asset, they also face the same risk as ETH LST, namely being slashed by multiple platforms at the same time) Babylon, Symbiotic slashed).
Anti-slashing policies can prevent a certain level of slashing on ETH, but further information about Babylon is unclear.
2.2.1 BTC-DeFi
There is no doubt that DeFi has been drivingBlockchainOne of the most important areas of economic activity. With the growth of the $9.5 billion BTC asset market on ETH, DeFi on ETH can benefit from the stability, institutional recognition, and potential returns that BTC provides.
In general, in addition to exchanges, BTC/BTC-LST related DeFi can be divided into two main areas:
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Money Market & Interest Rate Swaps: Morph Blue, Aave, Pendle, Zerolend, Curve
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BTC staking/points strategies: Corn, Meso, Gearbox, Mellow
Source: IOSG
2.2.2 Money Market
BTC is the mostSafety", an asset commonly used as collateral in the ETH DeFi landscape. Aave, the oldest and most reputable money market, has over $2 billion in WBTC deposits but only $218 million in borrowings, with a relatively low utilization rate (7.69%) relative to stablecoins (86.7%) or WETH (85%).
Source: @KARTOD, Dune dashboard
On the other hand, Morpho Blue has achieved a higher utilization rate despite having a smaller deposit base (Aave’s 20%). The most popular market on Morpho Blue is WBTC/USDC, which has a utilization rate of 90%.
Source: WBTC/USDC Vault, Morphblue
So far, Aave and Morph only accept WBTC. In order to stand out in the competitive lending market, zeroland is the first market dedicated to BTC LST tokens and supports PT-eBTC. To date, they have $17 million worth of eBTC supply, about $3.28 million has been lent, and the utilization rate is 20%.
In addition, Curve is not only a safe haven for stablecoin exchange, but also a popular destination for BTC-related assets to store assets. On Curve, BTC suppliers can do two things: first, they can provide liquidity to the three pools. Second, they can use tBTC and WBTC as collateral to borrow crvUSD.
As of this writing, about $50 million worth of BTC assets have been deposited to borrow crvUSD. On the other hand, among the available pools, the tBTC-WBTC pool stands out with $25 million in assets and $2.24 million in daily trading volume. Unfortunately, despite the active BTC-related assets on Curve, $CRV incentives have not yet been offered to attract users.
2.2.3 Interest Rate Swap (IRS)
In addition to the money market, the interest rate swap (IRS) product provided by Pendle is also one of the most popular places for BTC LST DeFi.
Pendle uses the future earnings of BTC LST and speculation on points to create multiple dedicated markets: SolvBTC.BBN, PT/YT for LBTC and eBTC, etc. These markets have attracted more than $136 million in total, a month-on-month increase of 150% driven by points and incentive farming.
The new round of voting incentives also marks a growing interest in BTC LRT. For example, SolvVBTC in Corn was selected to attract the most Emission from Pendle. Therefore, it is expected that the supply of BTC LRT assets will continue to grow in the near future, taking into account emission incentives.
Source: Pendle Dashboard
2.2.4 TVL Bootstrapping Treasury/Points Strategy
While Money Market and IRS products generate additional yield for BTC assets based on the demand and supply of BTC on the ETH mainnet, TVL guides vaults to prioritize using BTC to increase the TVL of their respective chains to promote the growth of the ecosystem. In addition, some vaults provide leveraged point farming strategies by recycling or borrowing BTC to maximize returns with the same capital.
Gearbox offers up to 27x lombard points for borrowing WBTC via leverage (up to 7x). However, this service is not popular because the supply in Gearbox is very limited (only about $3 million).
Source: gearbox.fi
In addition to the points strategy, some second-layer networks, such as Thesis's Mezo and Binance Labs-backed Corn, are leveraging the value of BTC by allowing nodes to "stake" bridged BTC LSTs as collateral. In return, nodes earn $BTC fees by participating in the verification process, which is a good attempt to leverage BTC and guide the TVL of these networks to promote future ecosystem growth. So far, mezo has attracted $121 million in BTC-related assets and $20 million in corn.
So far, it is clear that most DeFi activities related to BTC LSTs are primarily incentive-driven. While BTC adoption is growing, in the long run, the actual demand for generating BTC LSTs will be highly dependent on Babylon's yield performance, which may make BTC LSTs a more attractive asset than ETH.
2.2.5 Liquidity Issues
Despite having $300 million TVL, the deepest pool has only about $10 million in liquidity in the Uni v3 pool (according to nansen). Swapping $345,000 of ETH for LBTC would result in a slippage of 1.06%, which is 4 times that of WBTC (about 0.4%). This difference reflects a key problem that BTC LSTs must overcome: liquidity issues when exiting large quantities from LBTC positions.
Source: Uniswap
3. Conclusion
Bridging BTC can mainly take two forms: regular BTC, such as Wrapped BTC (WBTC), and BTC that is re-collateralized in Babylon, called BTC-LST.
The BTC LST/LRT-Fi landscape is still in its early stages but shows healthy signs of bridging more TVL from BTC to the ETH DeFi ecosystem.
Due to BTC’s growing recognition and market dominance in the current cycle, BTC adoption is expected to increase. The opportunity to generate yield for BTC also creates a market on ETH for speculative and trading activities.
WBTC remains one of the most widely adopted forms of BTC on ETH. However, due to the recent challenges associated with Justin Sun, tBTC or LBTC is expected to gain more adoption.
It is increasingly common to see BTC re-collateralized tokens being re-collateralized again in Symbiotic or Karak for leveraged farming. While this may generate higher yields, users must bear the risk of facing multiple slashing events.
Money markets and interest rate swaps are the most in-demand BTC DeFi activities on ETH, and attempts from layer 2 to use BTC as fees in the validation process are also interesting.
Currently, most BTC-related DeFi activities on ETH are primarily incentivized by points or rewards. In order to generate actual demand, BTC LSTs need to create value (possibly in the form of earnings) that is greater than ETH LSTs.
Custody risk, slashing risk, and liquidity risk are the main concerns in the BTC LST landscape.
* Notes:
This study aims to provide a high-level overview of the trend of the rise of BTC LSTs on ETH, and hopes to raise awareness of the opportunities and risks involved in dealing with the new generation of BTC assets. Future assessments of the potential for cross-chain finance will require further research into the impact of BTC assets on ETH and other chains.
If I missed it, please contact @poopman on Twitterdefi, I will do my best to keep this research up to date.
The article comes from the Internet:From WBTC to BTC-LST on ETH: Early exploration of the BTC-LST ecosystem
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