How Bitcoin staking works and the leading projects

The Rise of Bitcoin DeFi

Bitcoin's transition from a digital gold to a cornerstone of DeFi highlights its remarkable adaptability and enduring value. Originally celebrated as the first peer-to-peer electronic cash system, Bitcoin has expanded beyond its initial scope to become a key component in the DeFi sector. This shift reflects Bitcoin's flexibility and enduring appeal, establishing it as an influential force in the evolution of decentralized financial services.

Pantera Capital has shed light on Bitcoin DeFi's vast potential. The firm projects that Bitcoin could amass up to $225 billion in DeFi liquidity, highlighting the significant growth and innovation opportunities Bitcoin brings to the DeFi sector. While Ethereum remains the home to stake assets, Bitcoin's foray into this area signals a promising expansion for the cryptocurrency ecosystem.

What is staking

Staking in the context of crypto refers to the process of locking up tokens to support a blockchain network and confirm transactions. By staking your digital assets, you participate in running the blockchain and maintaining its security, earning rewards in return. Staking is a fundamental mechanism that helps secure and maintain a blockchain network, particularly in networks that employ the Proof of Stake (PoS) consensus mechanism. This method is more energy-efficient and sustainable compared to the traditional Proof of Work (PoW) system.

Staking allows users to earn passive income without needing to sell their assets, similar to earning interest in a high-yield savings account. Participants who stake their assets, known as validators or "stakers," play a crucial role in securing the network and are rewarded with additional cryptocurrency coins for their contributions. Staking can take various forms, such as active staking where participants actively validate transactions, or passive staking where tokens are locked to help secure the network. Additionally, there are different types of staking, including delegated staking, pool staking, exchange staking, and liquid staking, each offering unique features and rewards.

Bitcoin Staking

While staking Bitcoin on its PoW blockchain doesn't work, users can stake their Bitcoin on various Layer 2 networks. Bitcoin staking on Layer 2 networks involves the process of locking up Bitcoin tokens to support a secondary layer built on top of the Bitcoin blockchain. This staking mechanism allows users to earn rewards by participating in securing the Layer 2 network and validating transactions.

Bitcoin staking marks a significant shift, enabling Bitcoin holders to generate value beyond trading. It mirrors traditional financial practices of earning through savings but with a decentralized twist. Staking allows Bitcoin to earn rewards, with rates determined by the community, not central authorities. This approach could redefine economic participation, offering a community-driven alternative to traditional interest rates, which have remained low across major economies.

Traditional financial systems rely on fiat currencies, with central banks setting base interest rates that influence savings and investments. These rates are supposed to counteract inflation and reflect an economy's productivity. However, in reality, major economies have experienced persistently low or zero real interest rates, disrupting this balance and disadvantaging savers.

The governance of central banks, often influenced by governmental policies, has led to a detachment of interest rates from their intended economic function, reducing them to tools for political manoeuvring. Bitcoin staking presents a compelling alternative, offering a decentralized model where rates are determined by user participation and the utility of Bitcoin itself. As Bitcoin gains in transaction volume, confidence, and use case scenarios, the interest rates for staking can increase, making it a dynamic, user-driven mechanism.

This paradigm shift, brought on by Bitcoin's L2 enhancements and staking, transcends technical improvements, potentially redefining economic structures. It offers a decentralized alternative to the current, flawed financial system, where rates are shaped by participants, not central authorities, paving the way for a more equitable and autonomous economic future.

Leading projects offering Staking

Stroom Network

Stroom Network is a liquid staking protocol that enables users to leverage their Bitcoin holdings across the Lightning Network (LN) and Ethereum blockchains. Stroom offers a way for users to earn routing fees on the Lightning Network while issuing a wrapped Bitcoin token, lnBTC, on Ethereum for yield opportunities. This allows users to participate in the Lightning Network and Ethereum's decentralized finance (DeFi) ecosystem simultaneously, enhancing the utility of Bitcoin in the DeFi landscape.

Stroom Network operates by bridging the gap between the Lightning Network and Ethereum-compatible blockchains. When users deposit Bitcoin into the Stroom DAO treasury, an equivalent amount of lnBTC is minted on Ethereum through bridging. This lnBTC token can be used in Ethereum's DeFi ecosystem, mirroring other staking derivatives like Lido Finance's stETH. The treasury and bridging process is overseen by a multi-sig federation of trusted entities responsible for lnBTC minting and redeeming or the life cycle of LN channels.

Stroom-enabled Lightning Nodes & Hubs are specialized nodes that adhere to Stroom's requirements. These hubs don't have direct access to the Bitcoin held in their channels. They are connected to a multi-sig federation system managed by validating nodes. Nodes violating protocol rules are slashed and could be removed from the network from the federation.

Social Network

The Social Network is a platform that has introduced a Bitcoin Layer-2 staking protocol, aiming to create an environmentally sustainable staking system for Bitcoin while supporting decentralized social media. This innovative network leverages partnerships with leading technology providers like Arbitrum, ChainSafe, LaunchNodes, ThreeFold, BloXroute, Biconomy, and AltLayer to streamline its Bitcoin staking protocol and enhance its ecosystem.

Imagine a world where your Bitcoin fuels the growth of a new decentralized economy for Earth. That’s Bitcoin Staking – By simply staking your Bitcoin to the Social Network, you receive Staked Bitcoin (eBTC) and become an integral part of a movement that’s redefining the backbone of our digital economy, social networks.

Bitcoin Staking is more than just bitcoin rewards. By reducing transaction fees (sats/byte), eBTC enables the growth of on-chain social networks without overburdening everyday Bitcoin node operators. It minimizes the time to finality, making Bitcoin more suitable for social media use cases, and drastically reduces the energy consumption of Bitcoin transactions by an astonishing 99%, addressing environmental concerns head-on.

Moreover, eBTC lays the foundation for a decentralized and regenerative economic system to grow on the roots of Social Network staking rewards. This high-level overview illustrates how this vision can be realized while maintaining the core principles of decentralization.

Conclusion

The advent of Bitcoin staking, especially through Layer 2 networks offers holders the opportunity to earn rewards and contribute to network security. This innovation not only diversifies Bitcoin's utility beyond mere currency but also challenges traditional financial norms by introducing a decentralized, community-driven interest rate model. As Bitcoin continues to cement its role within DeFi, projects like Stroom Network and Social Network are pioneering pathways that leverage Bitcoin's potential to reshape economic participation.