Bitcoin and Beyond EP11: Is economic security a meme?

Transcript

[Music] [Music] [Music] what's going on guys welcome back to the rollup and for our Bitcoin and Beyond Series today we have senka bannery and Robbie uh from the rollup and senka from Babylon to talk about Economic Security

reaking and some interesting Bitcoin Primitives that are being built over here in the cosmos land um Rob good morning sir um how you doing today another beautiful day in Florida Andy uh good to be here gon to be talking uh reaking uh in the Bitcoin world uh with senka um I mean reaking is all the all the memes these days uh a ler of course has uh been doing quite a bit of reaking on the ethereum side of things and so now we're seeing this new world on bitcoin uh Blossom and so I'm very very curious to see and hear from s about uh some of the implementations that that they have on

Babylon uh Sena welcome thank you guys for having me thank you so much for coming on uh maybe you could tell us a little bit about the origin story of Babylon how you guys uh got to where you are today yeah so Babylon is a a Bitcoin staking protocol it was founded by um two of our co-founders Professor David say at Stanford University he's an information theorist he has actually been in blockchain over the last five years um pretty dominantly working with the E Research Foundation in helping them with the uh work from proof of work to proof of stake so some of the core ideas um in kind of evolving into developing The Babylon protocol came a lot from his

experience um as well as the our other co-founder Fisher U has been a postdoc and a research student of Professor David so they were uh basically the incubators of the idea and I joined the protocol roughly one one year two months ago as the chief protocol Economist so I kind of worked U mostly on the mechanism design and the business model for Babylon and I was very helpful and a bit lucky that that we kind of build this protocol in the Bitcoin Renaissance Era so really excited to talk about it yeah definitely I mean you guys kind of came on the scene um like quite abruptly if you will over the last like three to six months more than kind of most other

Bitcoin projects and it was at actually kind of an interesting time with igen layer too like you kind of have like these two dual like teams building out like similar ideas at its core they the extension of Economic Security but kind of different how do you H how do you kind of see the core idea of extension of Bitcoin Economic Security like if you had to explain that as like a foundational concept for us like how is that how does that work and what is that idea yeah so um so we like so a lot of uh so uh swam um from igen Lair was uh a a post talk at David's lab so uh we have very good relationship with the igen lair ecosystem and igen L co-founder but fundamentally in terms of the idea level

we're actually very different so in case of igen lay you have the E stakers who are already getting the base staking rate and now they can opt in to get more staking ELD and in in return they can actually op in to take more slashing risk which is what they are being paid for in terms of sticking yield in case of Babylon we're actually going to bitcoin which is a proof of work chain where the word staking was never there so Babylon is like the first protocol to actually bring the word staking to the Bitcoin nomenclature and what we are trying to say here is that bitcoiners can actually lock their Bitcoin on the Bitcoin blockchain it never leaves the

Bitcoin blockchain and they can actually take on slashing risks from POS systems to get staking yielded so igen layer is built on the word reaking because the ethereum staking is already there in our case we're actually first building the word staking to the Bitcoin nomenclature and then once you staking you can also do the reaking you can enable your reaking so fundamentally we are actually building like an ecosystem or a base layer of bitcoiners who are interested in taking the slashing risk they can actually op in um to get staking yield from POS systems awesome we uh we had previous presentation with uh the

project cow uh also as part of Bitcoin and Beyond and Rich from that team mentioned this op time lock I'm curious if you use a similar mechanism if so it makes sense how we we lock that Bitcoin on the network the slashing part of that I'm still quite curious about if you could kind of expand further on the technical sure um so yes we do use the the time lock and fundamentally the time lock is very important because the time lock um signifies the lock which uh if you are taking your Bitcoin locking it on bitcoin and you're you're like importing the dollar strength of this Bitcoin into a POS system the POS system needs to be confident that this Bitcoin

is locked right because or else the economics of staking completely gets not not in the right frame so fundamentally before I get there I want to make this one point that in proof of State um the Staker is bonding his capital in order to put Economic Security in order to validate the blocks so if he uh so these are the validators they you can think a group of validators producing um they're creating this block and and once that block is created U from the the reward gets pushed back into a validator pool and each validator based on its economic weight gets a part of that reward right now what's very important is that the

system the proof of stake system needs to know that this economic weight is bonded for a lot longer time than actually the block production time right so that even if in the case of slashing it has enough time to understand if there is a bad behavior in the system so the word lock is very important so that's where now we come back to the Bitcoin ecosystem the time lock is very important right so imagine we are going into the cosmos ecosystem where the stake bonding time is 21 days if you are not able to do the time lock on bitcoin this dollar voting power would not have the same security guarantee to that

proof of stake system than its native token right then that's the philosophy of the time lock but let's go through a user story of what um babylon's Bitcoin staking like if you're a user and you want to stake your Bitcoin so basically we have this script which has so you come in and you want to sign on this Bitcoin script using your public key and it's basically a utxo transaction and what you're doing is this script has two parameters one uh one is the signing aspect uh of the script but the other two parameters is how long are you planning to lock this Bitcoin on the Bitcoin chain and the second is once

your Bitcoin has been locked on the Bitcoin blockchain and you are delegating the dollar the dollar voting power to a POS chain let's say a cosmos chain uh if the validator to which you are delegating this dollar voting power double signs then we have the P the validator or some external agent has the power to slash you so in order to slash this Bitcoin that's the third parameter that you are giving the right that if the allocation of dollar voting power which you are doing to the validator and that validator double signs then there is a way to slash you like slash your Bitcoin right so that's the third

parameter and so so fundamentally the Bitcoin staking script has these two very important parameters one is how long are you staking your Bitcoin which is the time law and second is when you're delegating the voting power of this time uh of this Bitcoin locked on the Bitcoin chain to a POS validator if that validator double signs there is a way to slash your Bitcoin so that's that's basically the journey but let me walk you through as if I'm a Bitcoin holder so I come in I go I sign this script let's say I want to lock my Bitcoin very standard the cosmos bonding period 21 days right so I'm locking my

Bitcoin for 2 days and I'm also signing on that if this Bitcoin dollar strength which I'm let's say delegating it to figment if that that dollar strength is given to figment and now figment is signing blocks let's say on Babylon chain or Cosmos Hub if at some point at a certain height figment by mistake or for some reason has signed two blocks at the same height that's a double sign in POS uh nomenclature and now a part of your Bitcoin which has been used to do this signing would get slashed right um and so so so that's basically um the mechanism but what's very interesting

here is the word slashing how do you incorporate the word slashing in uh the context of Bitcoin as we know that Bitcoin is not smart contract enabled so how are you making Bitcoin uh enable this flashing mechanism so that's where we are using a technology from cryptography it's called onetime extract signature and the mechanism of this onetime extract signature is that if the validator is signing two messages and these two messages are at the same height then the onetime extract signature function is able to uncover the private key of this dollar delegated

delegation and now once it has uncovered this private key anyone who has access to this private key can actually go and take control of the dollar amount which has been used for validating these blocks and so what we are making it's a little bit of a watchtower kind of situation that once this onetime extractor uh signature uncovers the private key of the validator anybody who is watching this system can actually go to that private key and take that Bitcoin and move that Bitcoin from the validator position so in that way we are kind of emulating the slashing phenomena and would that be like they would be

able to take all of the Bitcoin in that private key or just a certain amount based on some other parameter yes so basically your pre-signing of how much amount you are comfortable to getting slashed so it's not going to be all your it's basically a pre-signing even before you your voting power is activated on the POS side your pre-signing of how much Bitcoin you're willing to get slashed and based on that your dollar voting power would be picked up so it's not going to be all your bit gotcha and so why would one deleg like and maybe the answer is because you can get more yield but maybe it's a little bit deeper than that why would I as a user delegate and and not choose like the minimum

amount of viable slashing to still be able to participate in in the system then user B would then do much more like why why would one user differentiate their like their total amount from others is it is no no no so there's a there's an economic rational behind it which is basically um so just to give you the stats on slashing so when you when you when you allocate $100 um to slashing generally the slashing probability or the slashing risk is between 3 to 5% right so and and partly why these lsds have come around is because before the lsds people had this huge Capital inefficiency problem

with the amount of stake which is being allocated right so that's where the lsds came and they try to create more Capital efficiency on your lock so given we know this number that if you are staking $100 the most in the case of a double sign you can get slashed is $5 like roughly 5% and I'm just quoting this stats from like let's say the cosmos staking flashing rates right so um so what happens is let's say you have two stakers and U initially your idea is you just want to let's say both the stakers have $100 to stake $100 in terms of Bitcoin wealth um now one one Staker says I only want to get 1% slashed the other sler says I only want to get 5%

slashed then the chances are that the validator is actually going to pick the 5% one because he wants a little bit of cushion right so if you as a ster keep a very low uh slashing amount chances are you might not get picked up by the validator in the active voting power gotcha cool okay um Rob did you have a question as well I think that that you had something there yeah yeah around the private key so when when I signed this utxo to lock my Bitcoin on the Bitcoin Network um my Bitcoin stays in my wallet right so my private key has I signed this transaction and this is the transaction action that is associated with my private key when I signed that

utxo I'm curious as to how unlock that onetime extract your signature doesn't give the private key for my entire Bitcoin wallet so this is very important to differentiate so let's say you're a Bitcoin holder and you have some amount of Bitcoin then your private key of this personal wealth is different than the private key which you are generating when you are delegating it to a validator so what we mean here is the private key of that delegated validator account rather than your own private key got it so we generate a different private key when we delegate this time

yes yes awesome okay that that makes sense and so how how have you seen the adoption of of this across the ecosystem like on the bitco side as well as the validator side on Cosmos yeah so I think this is where we want to go a little deeper into the economic stats right so fundamentally we have um in Bitcoin um fundamentally people buy Bitcoin because they think the price of Bitcoin eventually is going to go to the Moon um now with this institutional adoption people at least know that Bitcoin is here to stay this this whole like passive Asset Management industry which is trying to allocate a part of their portfolio into Bitcoin um Bitcoin is more looked as an inflation

resistant uh asset it's kind of looked as more like digital gold you can't you can't have like hundred million doar of gold and move around but you can have hundred million dollar so the fluidity of holding Bitcoin is actually a very important use case in the adoption of Bitcoin so so where uh so fundamentally the use case of Bitcoin has been to do nothing and just hold right and hope that it it just keeps going move up so their the first use case I would say which came to bitcoin was like rap Bitcoin so people would put the Bitcoin into a custody they would mint an ERC 20 version of Bitcoin push that into lending protocols like a um so the yield

which you can make annualized on that kind of operation is roughly uh maybe the max is a 1% annualized yield right so it's very minimal compared to everything which is out there so the e staking rate is roughly 4 and a half% so what has been happening is people who own Bitcoin they push it to custody then they somehow collateralize it to e and then they stake it on E and now they're making some e staking e so what we felt that staking is such an important use case to bring uh to bitcoiners and the reason why bitcoiners might be very interested in taking on this slashing risk is because the slashing risk specifically the double sign

is uh objectively attributable as well as it's verifiable on chain so nobody can actually really take your money money away without having proper digital proof that this slashing has happened right so it's a very uh strong signal of the type of um risk you are taking and it's very documented so given that we looked very heavily into the ecosystem that what are the things which fundamentally this massive uh base of passive asset holders are not willing to do so the two risk which we identified which they're not willing to do is do external custody and second is bridging right and when babylon's designed we

actually have none of this so you're not sending it to anyone as well as you're not bridging so it's a self- custodial design so given that we feel very strongly that if we can actually improve on what are the eeld potential which is being offered by rap Bitcoin we are able to suck in that whole Market as well as um right now over the last 18 months with the bare Market we see that a lot of the cryptoeconomic D dabs and they're extremely concerned of not giving High inflation bootstrapping to their products right because uh most applications or even existing chains uh when they're giving out 18% 15% of

annualized apy to their validators in some sense that's a sell pressure right because the validators are eventually going to liquidate a part of that thing specifically if the token keeps going down right because eventually there's this calculation of what's a cost basis for a validator to run his operation and the tokens he's getting does that even make sense so in some sense what we have seen over the last 18 months is the validators are becoming probably one of the biggest systemic cell pressures because they have to cover their own um cost basis which is actually in dollars and not in Native tokens right so given this scenario we think that Bitcoin holders they actually have the lowest

cost of capital with the highest security so if you can onboard such a capital and this is very relevant in our collaboration with Cosmos Hub that Cosmos Hub was roughly paying annualized 10% um so if you think that the cosmos of security budget is like 2 billion 10% is 200 million so roughly 200 million of assets have the option of coming back to the market so in a bare market and this is a this takes a toll on the tokens uh activity so here if you are on boarding Bitcoin capital and the bitcoiners are happy rather than um 200 million they're happy to take 1/4 of that right and now you're saving

economic tokens which could be used to incentivize economic activity so our thesis has been that we feel compared to what type of yields is available for Bitcoin holders and that that Bitcoin staking through Babylon would enable bitcoiners to get a more competitive yield because we see this huge Market in POS which also wants to reduce the type of inflation they're giving to their participants right so fundamentally we're trying to map um high security low yield expectations from bitcoiners to like a stable inflation environment

for POS systems so that they can really focus on bootstrapping the economic activity it's a win-win yeah I mean Bitcoin like like you said I think the last sentence they really struck home which is that bitcoiners don't have a high expectation of yield um and so they're able to make more than they are accustomed to making Cosmos they're accustomed to paying out 10% yield uh that would exceed bitcoiners expectations so they can sort of meet in the middle and both of them end up better off uh Andy did you have something there yeah I mean I think hit on a lot of like the economic uh kind of aspects of this and this is kind of like what we were talking about prior to

actually recording was a couple things one being like this like economic is economic security a meme which I'd like to get into in in a second here but um similarly to similarly to like the igen lay like ABS uh realm like what kind of applications do you expect Babylon to power or like why are you guys building this extension of Economic Security to power what or to like accomplish what is the is kind of like what I'm trying to understand yeah yeah great um so I'll take that first question because I I I I do um see that it's a pretty hot debate that is cryptoeconomic security amim um I think um I think it's a way to look at it right so and it's kind of like this

the the glass is half full and half empty so um for for ecosystems which don't have a massive tvl right a ma like I would say eum has probably the biggest tvl and then you know Solana is doing very well too the concern is that uh when you when you don't have a lot of tvl um then the economics kind of doesn't come into play then it's more like usage um you know what's the user interface what are the type of products but when you come when the Eon when the tvl comes to your play then one of the factors which you want to do is make sure that the that whatever you're doing on the consensus level it does not

reduce the economics which you have built on top of it right so I think one of the ways to think about cryptoeconomic security is do you want to do something at the consensus level any form of decision making any form of mechanism design which can impact the economy which is built on top of it right and I think where ien um is very important is that fundamentally what they uh what they showed is that the middleware security and the consensus level security they're not standardized to be the same security right and that's where they have a very nice plot that they have been able to

bring igen Lair to standardize the economic security of middleware as well as a base consensus layer right so there can be a situation where the Oracle security and um like an app security is at the same level which before this reaking narrative this was not able to do this standardization because consensus like e consensus level security they were not able to opt in to provide this security and as a result standardize the security between the consensus layer and the middle World layer right so for Babylon we so we are right now the first attack we are trying to do is we're going after existing POS

chains starting with the cosmos ecosystem because we find that um the most of the apps on the cosmos ecosystem or existing chains like let me give you an example like there's a cloud marketplace right the cloud Marketplace it brings in lot of gpus lot of supplies the tender is being given out in the native token and then the buyers of this uh Supply are also paying in the native token the problem is this whole Marketplace is standing on the stability of the token right so imagine you come in when your token price was a dollar and you create this agreement but then suddenly the token goes down to like 50

cents so if it goes down the the security of that Marketplace becomes a massive question right so for us what we are trying to do with Babylon specifically in the cosmos sub and we have some other Ambitions too but right now focusing heavily is we want to give every Marketplace a stability to their token price because it's almost like a truning where you have the Bitcoin Capital which has the most stable volatility and it also has very stable expectations in terms of of yield and then you can actually put on top of that U the native token if you want to have it as a dual Quorum model but fundamentally that helps the stability

of your economic Marketplace that the people who are participating in that Marketplace they're not concerned that hey these validators may actually opt out and now the security is a concern this this blockchain can can have other issues so so we feel very strongly with the Partnerships we have with Cosmos Cosmos Hub has two other consumer chains one is a DEX Neutron the other is a liquid staking provider um called stride and there are few other Cosmos sub chains as well as we are reaching out to some of the more uh important upcoming Cosmos chains as well as some existing Cosmos chains like Axel where we're trying to understand how can we bring this Bitcoin security uh to the cosmos

ecosystem to help the stability of the security Market isn't crypto just inherently like volatile though like you can't control the price of assets but you can you can control the effects of price changes on your system that's a good point but uh just to kind of reframe that question so what I meant was fundamentally the thesis of the shared security Paradigm is that we feel that people no matter what are going to hold on to bitcoin and ethereum right at least to start with so if you have the holders that no matter what they're going to keep holding right that's a very strong base to build on

your security marketplace right so I think that's kind of one of the I would say like a good way to my feedback for this whether cryptoeconomic security is a meme it is a meme if the economic security is being built on a token which is not really that stable but fundamentally if you look at Bitcoin and ethereum it's almost the the top two assets which are competing right now with traditional markets too right so nobody who is buying Bitcoin they have any short-term thinking they're basically holding it as generational wealth and so if that idea still prevails um the marketplaces for

offering shared Security on bitcoin through Babylon or on igen Lair I think there's a value proposition here because the the when you are bootstrapping a dab as a protocol co-founder you're actually not concerned on the volatility of the token what your concerned is that if the volatility of token creates sell pressure yeah I think I mean like I think it's going to be so glaringly obvious in like five years that like this was a viable mechanism to uh secure applications uh especially ones which if we get I think in the next bare Market which what always happens the bare markets is people hate tokens again so I think like this model might be

especially popular in the next bare Market if you will where uh we have um applications coming live without needing to like launch their own token or bootstrap their own uh set of nodes and things so you know as as like this kind of like logarithmic growth of of eth and Bitcoin plays out it's almost like this S curve I think it'll be yeah it'll be extremely obvious as a volatility dampens it'll be it'll make sense to have these sort of mechanisms that are a bit more flexible and can kind of bring more uh utility to different applications and for Builders rather than kind of relying on the steadfast like proof of work proof of stake like hardcore like like Tech or metal or like or um just kind of like other other

forms of securing a network yeah so I think one point is important is and if we look into the history of the internet so generally if you look at like the awss of the world right if you're building a new company uh and let's say you have a big budget most of the time um your budget does not go into your AWS infrastructure expenses because if it does that something is like not aligned right so fundamentally if you're raising money um you do have an expense from the infrastructure but tends to be that the infrastructure expense is not like more than five 6% of that whole uh expense ense but if you look at crypto economy

um before Babylon and igen came um it could turn out that infrastructure expenses were as high as 20% 30% so as a result what was happening was that this amount of inflation which you're giving to bootstrap your infrastructure it actually kills your economic uh idea which you are really trying to build so I completely agree with your point that in five years you will see that there a standardization of infrastructure expenses through Babylon Oran and that basically completely cleans up the mind of the protocol Founders that they should really focus on economic incentives like sorry the economic development of the idea all you guys

have to do is just just stay cool stay calm keep building don't [ __ ] it up in five years it's gonna be like bad was so obvious yeah yeah yeah that that's the plan I don't have a lot to add I think that was great uh we debunked whether or not Economic Security is a meme and uh a lot more than that too so Sanka thank you so much for coming on it was uh it was enlightening to say the least and uh very very cool to see all of this activity coming to bitcoin thank you so much thank you for having me Cheers Cheers