Bringing native Bitcoin collateral to Ethereum

Transcript

Okay. Okay. Testing testing. Uh hello, everyone. Um yeah, my name is Fisher. I'm local founder of a project called Babylon. And today, uh my topic is uh bring native Bitcoin collateral to Ethereum. Okay. Uh very quick question. Is there any Bitcoin hater here? No? Okay, good. Then then then we are friends. Then I I'm safe. Okay. So, yeah. So, Babylon So, Babylon is Bitcoin project, and this is our first time entering the Ethereum space. So, yeah, we are very curious to know more uh everyone here. So, because we are

new, so a very quick overview of us. So, yeah, our project was founded in year 2022 by Professor David Tse from Stanford University and myself. You both of us uh from academia. And we are uh recently backed by a16z, Paradigm, Polychain, uh Eazy Labs, yeah, all the famous VC you can uh name it. And our current team size is 40. We are fully remote team with 25 nationalities. And our mission is to make Bitcoin productive in a trustless way.

And we are most famous for our trustless Bitcoin staking protocol, which to date has activated over 10 billion dollar worth of native Bitcoin. Yeah, and all the major exchanges and some very prudent international funds are the yeah, uh stakers of our uh protocol. But today, I'm not going to talk about Bitcoin staking. I'm going to talk about a new protocol we are working on. So, I will start. So, the opinion here is the argument here is collateral is the foundation of finance, and my argument is Bitcoin is a pristine um collateral. So, what we are working

on is to bring native programmable Bitcoin as a collateral for the Ethereum ecosystem. Okay. So, start from the first one. Collateral is the foundation of finance. Why? Think about borrowing, okay? Borrowing lending, you collateralize uh digital asset as a secure to borrow money. In terms of like option trades, perp trades, you collateralize some asset to have covered calls or covered put options. And then in the insurance industry, the insurance company collect premium, okay? And but they cannot deploy all the premium for yield. They have to reserve,

say, at least 50% of the cash they collected as a reserve to be just in case of the incident payment. So, the reserve asset there is unusable. Or it can only be used to buy like treasury bonds, short-term treasury bonds. So, very low capital efficiency. So, the reserve part of insurance is actually also can be viewed as a collateral. So, collateral is the foundation of finance. Now, next, I'm going to convince you why Bitcoin is the perfect collateral.

So, here I have some I have a uh qualitative uh graph here. X axis is the risk level of the deployment strategy. Y axis is the yield. Yeah, so we are talking about the yield to return ratio here okay? We first look at stablecoin. Stablecoin, the almost zero risk uh return is roughly like 3, 4% uh because of the US treasury bond. And then uh yeah, as you take more risks, the yield goes higher.

And then we will look at the ETH. ETH staking is the almost zero risk option. So, it's uh return is roughly 2%. Then yeah, as you go become more aggressive, you have higher yield. What about Bitcoin? Bitcoin, the safest uh option is Babylon's Bitcoin staking, which is roughly like half percent to 1%. Much lower compared to the others. And also, you can see its trajectory is lower, which means for the same level of risk you take, the yield you can generate using a Bitcoin is actually lower.

Why? This is because like compared to stablecoin, okay? Stablecoin has better risk-reward ratio because of deeper liquidity on chain. And also, you have more use cases. Because stablecoin is a currency. So, any financial applications can use stablecoin. But Bitcoin's not the case. Indeed, only 1% of the Bitcoin is currently used on chain DeFi. 99% off chain. So, most of the Bitcoins are sitting here idle and counting on appreciation of its price. Okay? So, Bitcoin is not a productive asset, which means it's actually the best collateral.

For example, if for insurance case, instead of using cash as the reserve, if you can swap it with Bitcoin as the reserve, then the insurance company can have the 100% of the premium be productive and deployed for yield instead of only 50%. Okay? So, so our uh the goal of Babylon is to bring Bitcoin, which is a store of value, digital gold, idle asset as the collateral asset for the Ethereum uh on chain finance ecosystem to unlock the liquidity of all the other assets.

Yeah. So, basically, for Bitcoin holders, the best strategy for them is to collateralize Bitcoin to acquire stablecoin and then deploy stablecoin for yield. Okay. Not seeking direct Bitcoin yield. Low uh high risk, low return. And for DeFi applications, accept Bitcoin as a collateral will expand its uh customer reach. And for application such as insurance that I mentioned, swapping cash reserve with Bitcoin reserve will unlock a lot of liquidity and productivity for the cash reserve for cash part.

Okay. So, Bitcoin collateralized for on chain finance is what we do. But there's a challenge. The problem is called wrapping. Bitcoin chain is not Turing complete. It is not programmable. So, in order to use Bitcoin on Ethereum chain, there's no like zero knowledge of light client based uh trustless bridge, okay? So, for almost all the solutions, you actually have to give your native Bitcoin to a wrapper or yeah, basically a multi-sig wrapper, and they print you a wrapped Bitcoin, such

as wBTC, cBTC, okay? The problem here, yeah, it's obvious. You have counterparty risk. If it's not trustless, you're basically trusting a multi-sig gift card issuer. That is gift card issuer, which is not good. So, yeah, because of this counterparty risk, the Bitcoin collateral will be at danger. So, here I list a few questions which uh constitute a Bitcoin collateral risk assessment framework.

So, I'll yeah, quickly go through uh the the the questions can ask to evaluate the risk associated with the Bitcoin collateral solution from the both the Bitcoin holder side and also the on chain application uh DeFi application side. Okay. So, we start with uh things that Bitcoin holders care about. First, it's assured access to to the app. So, the the last thing Bitcoin holders want to see is that after they deploy the Bitcoin in the DeFi app, say, "No, I don't recognize you. I didn't receive it."

Then the Bitcoin got wasted, okay? Then the next one Bitcoin holders care about is no loss of title to their Bitcoin. Because in many jurisdictions, if you lose your title of Bitcoin by giving it to someone else, it triggers capital gain tax. And also, there will be some uh complexed um compliance and accounting issue as well. Okay. Then also, there are some uh questions that both Bitcoin holder and financial financial service providers care about. The most important one is called permissioned disposition, which means yeah, you have a collateral to be used in a financial service, and

uh at the end of the uh term, uh the system needs to decide whether the collateral is returned to the Bitcoin holder or is uh liquidated or seized by a liquidator, right? So, this process, this final disposition process should be permissionless. There shouldn't be someone in the middle can press a button say, "Hey, I changed my mind. No liquidation, no settlement." Okay? So, permissioned disposition is the most important thing that both Bitcoin holder and the financial apps care about.

Then the next one, which is closely related, is that the disposition rules should be clear and enforceable. Right? It shouldn't be uh yeah, someone changing their mind. So hey uh yeah, I change the LTV overnight, so that you can not be liquidated. Right? And the next one is unauthorized transfer and rehypothecation. This will make sure the collateral is correctly pledged to serve the precise purpose of that financial service. There's no hidden reuse of the collateral for somewhat something else.

Right? Okay cool. Then, there are also some things that uh Bitcoin holders don't care about, but the financial applications care about. The first one is to make sure each and every single position like the borrowing position is backed by one native Bitcoin. Right? And then, also uh for all of the Bitcoin locked on the Bitcoin chain. So, basically, yeah, smart contract uh can program how Bitcoin will be collateralized and uh disposed at the end.

So, the the idea behind it is that we use cryptographic translations to translate the smart contract decisions into something that the Bitcoin chain can understand and execute to achieve the full programmability. So, it's based on our research from both Babylon Labs, Stanford, and Berkeley. Yeah. So, that Bitcoin locked become programmable collateral for the smart contract. And yeah, I know that one is very technical. So, this is the takeaway. Now, with the Babylon uh Bitcoin collateral vault solution collateralizing native Bitcoin becomes as safe and trustless as collateralizing ETH. No difference.

Okay, so, yeah, this summer we are going to launch the mainnet of our trustless BTC vault protocol alongside with its first application, which is native Bitcoin backed borrowing. What do you buy Aave and Babylon? Yeah, and we are also exploring Bitcoin yield marketplace uh with the work workflow being borrow assets using Bitcoin and deploy to yield strategy. We are also incubating more use cases of native Bitcoin collateral in option and insurance, credit card, etc. and etc.

Yeah, many use cases of native Bitcoin coin collateral. And yeah, that's all. Thank you very much. Do we have time for question? Oh, no. No okay.