Babylon, a new upcoming project co-founded by renowned Stanford professor and cryptographer David Tse, wants to flip the crypto world on its head by using Bitcoin to secure other Proof of Stake chains. In a recently published litepaper, it has unveiled the technology that will make this possible.
Proof of Stake (PoS) is a consensus mechanism that allows securing a blockchain through the value of bonded tokens, usually the ones of the network itself. Its proponents maintain that PoS is far more efficient and secure than Proof of Work (PoW), the original consensus mechanism developed for Bitcoin.
Hardcore Bitcoin proponents will usually argue strongly against Proof of Stake, largely because of concerns that it is “self-referential” and doesn’t use “hard resources” like electricity in PoW mining. While PoS gradually became the norm in crypto over the years, the Bitcoin community remains staunch proponents of PoW and are unlikely to ever implement it.
Babylon, instead, wants to use Bitcoin to be the staking asset for other chains, flipping the entire concept on its head.
Using external assets to secure protocols, referred to as shared security or re-staking is a relatively novel concept in blockchain. It is spearheaded by projects such as EigenLayer, whose founder is an advisor to Babylon, or Cosmos and Polkadot.
The benefit over classical Proof of Stake is that the self-referentiality aspect is much less pronounced. For example, securing a newfangled blockchain with ETH will make it as safe as it could be because of how widespread ETH is. And there have been real cases where such a system would’ve potentially saved a blockchain, such as the crash of Terra and UST, where hyperinflation of the staking token LUNA compromised the security of the blockchain itself.
Where Babylon is unique is in what it’s trying to use for re-staking: while other projects are focusing on Ethereum, Cosmos and other blockchains with smart contracts, Babylon wants to use BTC. This is surprisingly hard to do because Bitcoin doesn’t have Turing-complete smart contracts — instead it has a very limited language called Bitcoin Script, which can only be used to define certain spending rules for BTC.
The researchers at Babylon focused on solving the most important aspect of a staking protocol: slashing. This term is used to describe the penalty of a staker backing multiple proposed versions of the next block, which would guarantee that whatever they choose, they will get rewards. This is the so-called “nothing at stake” problem, which many PoS designers believe is a key problem to solve for a workable consensus protocol.
The solution adopted by Babylon and its researchers is really quite clever: if a staker backs multiple blocks at the same time, their private key will be exposed and all the money potentially taken.
This happens because of a quirk of how cryptographic signatures work. Each signature is unique and can be proven to have originated from a particular private key, which is very useful to create unique transactions. Signatures involve creating certain parameters, and if two different signatures share the same value for one of them, malicious actors can reconstruct the private key.
This is normally a huge vulnerability: the popular bridge Multichain got hacked in 2021 because of such an oversight. But Babylon has adopted this concept with Expendable One Time Signatures, or EOTS, which leverage the same concept to punish misbehaving stakers.
Bitcoin is the number one crypto asset in the world with a staggering $570 billion capitalization. But because its technology is somewhat limited, it has lagged behind in new interesting trends in crypto, such as decentralized finance and NFTs.
Some recent “accidental innovations” have revitalized the chain, with Ordinal NFTs contributing at one point over half of the Bitcoin block reward as fees — a level of activity not seen since the highs of the 2017 bull market.
Ordinals rely on a quirk of the recently introduced Taproot upgrade, and the project has used this to make Bitcoin a storage layer for all kinds of data, including both fungible and nonfungible tokens.
Despite requiring “cryptographic tricks” to build interesting new things, Bitcoin is seeing a renaissance of activity. With Babylon’s Staking protocol, Bitcoin’s utility as an extremely liquid, well-capitalized and secure crypto asset can further be leveraged to secure the rest of the blockchain ecosystem.
This could be a huge benefit for Bitcoin’s long-term roadmap and sustainability, as the upcoming 2024 halving is once again prompting questions about what will happen when block subsidies run out.
Image by Arek Socha from Pixabay