How Lorenzo Protocol Tokenizes Bitcoin Staking

A pillar of Lorenzo Protocol’s mission is to leverage liquid restaking to free bitcoin’s liquidity for use across DeFi and beyond.

Lorenzo Protocol offers a much-needed solution, as bitcoin’s liquidity is largely stuck in wallets and exchanges instead of flowing through the digital economy. 

That’s because the bitcoin network’s lack of smart contract compatibility (among other things) precludes it from being able to support the DeFi and Web3 functions that allow for the robust ecosystems currently flourishing on other blockchains. 

By restaking bitcoin into a 1:1 pegged, smart-contract compatible token that can be utilized within the DeFi ecosystem, Lorenzo Protocol is empowering new bitcoin use cases and creating the foundation for a cross-chain bitcoin economy. 

What Is Liquid Bitcoin Restaking?

Liquid restaking can be thought of as an extension of traditional liquid staking.

Liquid restaking allows investors to participate in the staking mechanism—that is, rewards potential—of a proof-of-stake (PoS) blockchain while retaining their liquidity. 

When tokens are staked, liquid staking solutions issue a derivative token that represents the underlying staked asset. The original staked tokens are pooled together and staked on the blockchain to earn yield, and the derivative token can be traded or used for DeFi applications, such as allowing the hodler to use their staked bitcoin as collateral for loans, as one example. 

Liquid restaking takes this concept one step further by allowing users to stake their derivative token across multiple networks and earn yield from multiple blockchains at the same time. 

Our liquid bitcoin staking protocol is designed to allow bitcoin hodlers to migrate their assets onto PoS networks via staked tokens that are pegged to the value of the underlying staked bitcoin. With these staked tokens, investors can stake across multiple PoS networks and earn additional yield from their staked bitcoin.

How Does Lorenzo Tokenize Bitcoin Restaking?

Tokenizing bitcoin restaking is far from simple. It requires a multi-faceted ecosystem of stakers, staking agents, staking projects, and token issuers, and these entities must coordinate seamlessly to ensure transparency, security, and efficiency throughout the process. 

Each participant in the restaking ecosystem plays a critical role:

• Stakers are required, since they’re the ones providing the initial liquidity by locking up their personal bitcoin holdings.
• Staking agents facilitate the locking and the management of stakers’ bitcoin. They are responsible for security of the staked bitcoin and maintaining the integrity of the staked assets. 
• Staking projects serve as the platforms that develops and manages the requisite infrastructure for locking and staking bitcoin, including smart contracts and the frameworks that govern how staking, token issuance, and settlement are conducted.
• Token issuers are responsible for creating and distributing the tokens that represent the value of restaked bitcoin. 

Here’s how it all comes together.

Staking Bitcoin

The process starts when bitcoin hodlers decide they’d like to participate in restaking. They’ll stake their bitcoin with a staking agent. Any amount of bitcoin can be staked, and there are no minimum lockup times.

Delegating Staked Bitcoin

Once the staking agent receives the bitcoin from the user, their role is to delegate that staked bitcoin to a staking project. Lorenzo will be one of multiple staking agents available to users, and staking agents only have access to the bitcoin that was staked directly with them.

The first staking project users will be able to utilize is Babylon, and with Babylon users can stake their bitcoin liquidity to any proof-of-stake blockchain that is integrated with Babylon. 

Upload Staking Proof To Lorenzo 

Once the staking agent delegates the staked bitcoin to a staking project (like Babylon), the agent will then upload the staking proof to Lorenzo. This verifies that the bitcoin has been successfully staked and is generating yield. 

Token Issuance,  Financing Restaking, And Settlement

Once it is confirmed that the bitcoin has been successfully staked, the token issuer will then issue two types of tokens to the original staker: a liquid principal token (LPT) and a yield accruing token (YAT). 

Lorenzo’s approach to token issuance aims to find a compromise between relying on centralized settlement and being held back by the bitcoin network’s limited native programmability, by working with a limited group of trustworthy bitcoin institutions and TradFi giants, to issue and settle bitcoin restaking tokens. 

The LPT represents the right of the staker to reclaim their original staked bitcoin, and the value of the LPT is pegged directly to the value of bitcoin. The LPT that’ll be issued by Lorenzo is called stBTC, which can be thought of as akin to wrapped bitcoin. If one staked 10 BTC, they’ll receive 10 stBTC in return, and stBTC can be used across various proof-of-stake networks for trading, or to earn yield. 

The second token, the YAT, represents the right for stakers to claim their restaking yield once their restaking period is over. When an individual restakes their LPT on a proof-of-stake network, those LPTs will earn yield over time. As they earn yield, that yield is represented by YAT, which are issued to the staker as yield accrues. 

Both the LPTs and YATs can be ported across the crypto ecosystem to be used for centralized finance (CeFi) or decentralized finance (DeFi) applications, including trading, collateral, providing liquidity, or other use cases like structured bitcoin yield products.

When it’s time for the staker to redeem their tokens, the stakers can redeem their LPTs for the equivalent amount in bitcoin, and redeem their YATs to claim the yield earned from staking. 

Why Bitcoin Needs Liquid Restaking

Currently, bitcoin’s native limitations leave its most prominent use cases centered around it being a passive asset, akin to “digital gold.” This means that the asset’s $1.3 trillion of liquidity is largely locked on exchanges and wallets, without there being a simple way to bring that liquidity into DeFi compatible formats.

Lorenzo’s Liquid Bitcoin Restaking Protocol represents essential infrastructure for the scaling of bitcoin and the building of a cross-chain token economy that’s able to take advantage of bitcoin’s liquidity. Bitcoin’s limitations—such as its lack of smart contract compatibility, limited data storage, plus liquidity issues with existing bitcoin staking solutions—make it impossible for bitcoin to reach its potential as the token that can help underpin the entire cryptocurrency ecosystem.

As a liquidity finance layer, though, Lorenzo’s approach helps to improve the usability of bitcoin by introducing a way for hodlers to utilize bitcoin in smart contract compatible formats, and take advantage of bitcoin’s full potential as a true DeFi asset.