Clayton Menzel on Babylon's native Bitcoin staking without bridges

0:01I'm Ashton Addison from the Cryptocoin Show and today on blockchain interviews we have Clayton Menzel, head of business development at Babylon here to talk Bitcoin, Bitcoin ecosystem, staking uh and much much more. Clayton, thank you for taking the time. Thanks for having me. Nice to be here. Yeah, you're very very welcome. I'm excited to dive more into the Bitcoin

0:23ecosystem. And you know, Bitcoin is uh the gold standard for uh blockchains right now. Um and there's a lot more functionality that's being tapped into than just, you know, storing your Bitcoin in cold storage for the rest of eternity. Um and I I don't know if it's controversial, but you know, some people are uh seeing a lot more functionality being tapped into and and and I think a

0:48lot of people don't understand the potential yet. and maybe the institutions as well. I'd love to get your take on that in the future here on on how interested they might be to be able to earn or actually do something with their assets, which I think a lot of people uh could capitalize on that as an opportunity cost. So, um let's dive into all of that. I'd love to start out

1:07with, you know, a little bit on what you and your team have been building at Babylon, how it relates to Bitcoin, what can it all do, and then we can dive into everything. Yeah. Yeah, definitely. Um so at at our core uh you know Babylon is three things. U so we're a staking security and liquidity layer uh for for Bitcoin. Um the the main thing that we've been

1:30building over the past two years is a staking functionality uh for Bitcoin that sits natively on the Bitcoin network. Um, and so, uh, if you're looking at like native use cases for Bitcoin right now, um, you know, it's store value obviously, um, and send and receive. Um, those are kind of like the base functions, uh, that, you know, you can, uh, use Bitcoin for on the Bitcoin

1:52network. Uh, what we've created is a staking functionality, uh, for Bitcoin that sits natively on the Bitcoin network. So um if you've ever staked an asset in the past whether it's you know staking ETH or or staking Salana where you're securing a network and then in turn receiving rewards for that network security uh that's what we created for Bitcoin. Um I think an interesting uh

2:14aspect of the staking functionality that we've built is that it is uh non-custodial in nature. Uh so there is no bridging or or pegging of this bitcoin that exists. Um and it doesn't leave your wallet uh when staking. Um so it is a very familiar uh experience if you've like you know delegated an asset on on Salana or Ethereum in the past. Um and in turn u you know the goal is to

2:37offer a reward rate for for that uh bitcoin. Um and then the uh second element is the security element right so you know because it's being staked obviously someone's going to be paying for this security um and we have a a chain that we launched oursel um a couple weeks ago called Babylon Genesis. uh that's the the first Bitcoin secured network or or BSN uh within the Babylon

3:00ecosystem. Um but over time we'll allow additional um protocols to to connect to this Bitcoin security. Um and then the third thing that we think is interesting is the fact that you know this staking functionality is being used to mint representations of these staked positions on uh other ecosystems. um uh whether they be consuming Bitcoin security themselves or they just want

3:22the liquidity benefit of um you know this Bitcoin that we're kind of unlocking through the technology that we've built. Um but but yeah, you know, ultimately um building native use cases for Bitcoin, getting more Bitcoin activity on decentralized rails is is the ultimate goal at Babylon. Yeah. No, it's really exciting. I'd love to dive into all three of those. Starting with

3:44the first one again a little deeper with the Bitcoin staking you mentioned people are probably used to you know you can stake Ethereum as it's proof of stake also centralized exchanges you know you could go and stake your stable coin or Ethereum or Bitcoin um but as we've seen in the past you know you have to rely on third party and in the case of some of

4:04these staking networks in the last cycle you know they they were using your funds and they weren't actually there and then you lost your Bitcoin which is the worst thing that can happen Um, so when you mention it's non-custodial and you're staking, how is this different than what people had seen in the past? How does it actually work? Yeah, definitely. So, I I think it's

4:24good to distinguish um you know what we're what is staking and then what other people may like co-op that term for uh that are more uh DeFi related practices. Um not necessarily saying that they're wrong by by using that word, but you know, staking can mean a couple different things. um you know depending on what layer you are uh in the in the stack. Um but what we're uh

4:46building is is uh protocol staking. So you know these uh staking positions are being used to provide additional security guarantees uh to other protocols. Um so the the risk for that right is uh slashing risk right so you know if you are staking ETH uh whether you're running your own validator or you know leveraging a service that that runs validators for people u the main risk

5:12that you're going to have right is like if that validator does some malicious activity on the network um a portion of your your funds would get slashed as punishment for that that um obviously like at the DeFi level you know people talk about staking taking an asset. Um that's when you come into risk that goes beyond that, right? So like you have like u smart contract exploits. Um you

5:34have counterparty risk that you know you hinted at like with you know BlockFi or or potentially a centralized exchange like you know not necessarily staking what they said that they were going to stake. Um but yeah the main difference for us right is like we are building this protocol sort of staking solution. Um and uh there's no counterparty risk uh in that regard. Definitely.

5:56So, walk me through I had some Bitcoin in in a cold storage or maybe I have on a mobile wallet. How do I get it from there into the staking system? Yeah. So, the good thing is that it it doesn't leave your wallet, right? So um you are locking it uh the same way that you would you know kind of lock your asset uh by you know delegating or or staking uh on Ethereum or or Salana

6:22again for example uh where there is an unbonding period right so um when it is staked it is in that staking position you can't necessarily use that for other things um but uh we leverage UTXO transactions as well as tap routt uh on the bitcoin network that uh you know effectively locks that. Um and so then when you are uh doing that within your own wallet um you know it is locked. You

6:50are receiving rewards uh when it is staked. Um but you know as long as it is staked uh you are uh quote unquote like tying um you know yourself to that node operator, right? So if that node operator does do something malicious um then a portion of that bitcoin will be slashed. Yeah. What's your take on the the appetite for uh staking and an expanded BCO Bitcoin ecosystem from the

7:19big players that have you know billions of dollars in Bitcoin as we've seen over the last uh year and a half now you know Black Rockck Micro Strategy institutional investors getting Bitcoin and of course you know they they love gains but if there's a way to utilize that on top of it is this something that institutions are interested in exploring right

7:40Yeah. Yeah, definitely. I I mean, we've spoken to a wide range of institutions. Um, you know, obviously a lot of these institutions have Bitcoin. They likely have, you know, higher holdings in Bitcoin than any other asset. Um, but if you're looking at these other assets, um, you know, a lot of those assets may be staked already, right? So um at least uh

8:03on the educational front when talking about staking uh they're very much familiar with that right you know ETH has been stakeable for like four years um a lot of other staking tokens are in these you know large asset managers portfolios um the main difference right is that like you know there hasn't been a native uh staking um you know experience for Bitcoin yet um so I I

8:25think that's the the main uh difference is like kind of like not necessarily educating people on staking but re-educating them for for Bitcoin as an asset. Um that being said like you know the addressable market for for Bitcoin compared to you know any other asset in the space is significantly higher right. Um if you're looking at um Ethereum for example like 28% of ETH is staked um uh

8:49the amount of Bitcoin that's just in ETFs alone uh if looking at dollar value which is you know 5% of Bitcoin and ETFs um has a higher market cap than the entire you know security budget I mean the amount of E that's staked on Ethereum right now right so um even if uh you know 5% of of Bitcoin ends up being staked via Babylon um you know you'll have more USD value of Bitcoin

9:13staked compared to to Ethereum within short order, right? Um obviously, you know, you need to understand the risk and reward, but you know, if you are that person who has been having this Bitcoin and in cold storage for like, you know, 5 years, 10 years, maybe um earning like a baseline reward rate on that, if you are planning to hold it for for 10 more years, um you know, it kind

9:35of makes sense as long as you understand the risk. Definitely. And in terms of that risk and reward, you know, with centralized exchanges, they were trying to tout higher rewards, higher APYs to to attract people to put Bitcoin there versus the other exchange. How does the, you know, the APY economics work in a a non-custodial version? And how does that

9:57percentage get determined? Is it a some kind of supply and demand? Yeah. Yeah. Yeah. So, it's supply and demand. So right now uh the Babylon Genesis chain is is the only BSN uh that's you know consuming Bitcoin security currently. Um you know we just launched uh our protocol uh around 3 weeks ago. Um and so the the reward that you're receiving for staking Bitcoin is

10:19in the form of of the Babylon Genesis chains native token. Um once uh we the protocol allows additional BSNs to connect to the network that will not be the only reward token that these bitcoin stakers are receiving. Um and any sort of protocol that's consuming this security can can pay in any asset they see fit right you know whether it be their own native asset um stable coins

10:42ETH even like a bitcoin denominated asset like a WBTC or CBTC or uh an LST that can be issued through the Babylon protocol can be used as payment. Um, and yeah, so it we we expect like a basket of tokens to be received uh for this uh uh security over time. That's always cool for on on the speculative side if you're if you're receiving uh more uh newer newer tokens and newer platforms

11:09that have the potential to grow really large. I know there's been a lot of growth in in Babylon already. I'd love to learn more about that that Genesis chain and the BSN and that relationship in ST you're you're staking your Bitcoin and then the the the BSN is actually utilizing that security and that's where the reward is coming from. Yep. Yep. Correct. Um so yeah, we

11:34leverage a dual staking model. Uh so our own native token is is stakable as well. Um but uh we do want uh a portion of uh security coming from Bitcoin right so um I think it's uh good to differentiate uh our solution to maybe other shared security protocols that are in the the market today um right using like Ian layer for example because we get compared to to them a lot um the main

12:01difference is is the security that we're offering is is only offered to other execution layer environments uh so other blockchains as well as rollups. Um and uh where I layer for example it's is only securing other middleware services. Um and one of the the the key differences there is uh the liquidity aspect of of what is being unlocked through these staking positions

12:26becomes much more attractive uh to these BSN uh to the point where we see like them willing to pay for it because the proposition goes beyond just security, right? like we're combining security and liquidity. Um, and I think the ultimate goal for a lot of these uh, you know, future BSN's is not just additional security guarantees, but like a deeper connection to Bitcoin as a network, uh,

12:47Bitcoin as a community and and Bitcoin as an asset uh, to where they ultimately want to see a lot more of this Bitcoin DeFi activity happening within their execution layer environment. Um, and they see, you know, connecting to the security as a way of doing so. Yeah. No, it's really interesting. And with the the the Genesis chain launched, is it like uh a a side chain or is there a

13:14term in in how Bitcoin actually expanded and how it fits under the umbrella of the Bitcoin ecosystem? Yeah. So, uh the the Babylon Genesis chain is its own layer 1 blockchain. So, it's uh consuming uh Bitcoin security. Um but really uh what we're doing with the protocol in general, right, is like exporting the value of Bitcoin security and uh exporting Bitcoin liquidity onto

13:41you know sovereign chains that are ultimately more expressive than the base layer of Bitcoin today, right? So um it's not necessarily a side chain per se. Um it's its own um you know sovereign uh blockchain. Um but you know it doesn't like hinder the fact that you know there is a scenario in in the future to where a lot of these you know transactions ultimately get settled on

14:05on the bitcoin network in the future once you know there is technology in place that allows for these uh you know more exotic transactions to be you know settled on bitcoin. Yeah that's really interesting. I think uh I've spoken to another project that you know they're they're al they're trying to tap into the Bitcoin uh blockchain security and there there is no comparison to any

14:26other blockchain. Bitcoin is the strongest most secure uh blockchain in in ever. So I think that uh being able to tap into that of course is going to really help uh with the security of the chain which is of utmost importance. Yeah. I mean and ultimately right like um Bitcoin volume and and activity has lagged uh compared to you know other assets in the space currently. Um you

14:56know there's likely a lot of different reasons for that but I I would say that the main reason is is that you know the base layer does not offer um you know a place to per perform like you know trades and things like that. Um, and really if if you're going to be, you know, doing transactions in ETH, um, or doing transactions in Salon and Soul, um, you're likely going to be doing

15:18those on the Ethereum network or Salana respectively, right? Because like those assets are in turn securing your transactions that you're, you know, using that asset with, right? So um if we do get more uh Bitcoin activity on decentralized rails like our um you know thesis is that the majority of that activity is going to be on Bitcoin secured networks right so um it's not

15:44necessarily like our plans to eat um market share so to speak of like WBTC or CBTC or that sort of like trading volume. It's to bring more of this like centralized trading volume on chain and and then get them on uh execution layer environments that are secured by bitcoin as a whole. And you mentioned uh iigen layer earlier. I know there was a big thing

16:09around liquid staking and liquid restaking and people that are really into defi they really get into it because you can stake then you get more tokens and you can stake that for further APY and on and on and on. um which can get complex but you know if you maybe there's more risks there but there's more reward. Uh you mentioned with with Bitcoin you you can stake it

16:30and then you're also getting the the BSN token and you can stake that. Is this a form of kind of restaking or is there a something coming where the native Bitcoin can be rest or liquid or is that really not in the works? Yeah. So, a lot of uh our staking positions on the network today are in the form of these LSTs, right? So, you know, I think uh if you're looking at uh

16:59the difference between like, you know, LSTs and LRTs on Ethereum and and the LSTs that exist via the Babylon protocol, right? Um the the main difference is like you know none of this Bitcoin was expressed um in the form of of an asset on Ethereum to begin with um or you know some other execution layer environment. So um I I would say like 75 to to 80% of our TVL is is through these

17:25LST issuers right now because like the value of this like just liquid Bitcoin existing on the protocol um you know goes beyond just like the reward rate that you're being offered. um it would be similar. Um I would say from a staker perspective, this uh comparison to like restaking versus what we're doing is is a little similar. Uh but there are nuances, right? Like you know the

17:47Bitcoin hasn't been staked yet. Uh so it's not uh restaking. Uh but you are you know in the future going to be receiving multiple different rewards for these staking positions. Uh you know once additional BSNS get onboarded. Um I mean obviously there's going to be you know additional risk associated with that. I feel like like you're you're adding, you know, multiple uh you know,

18:08reward sources uh through a single position, especially if they're slashing for for every single one that you're doing. Um but I would say like, you know, from you know, historical data points like maybe like 500 slashing events have existed on Ethereum. Generally, those are like one ETH per slashing event. So like 500 ETH. um if you're looking at like exploits and

18:28smart contract hacks and you know counterparty risk um that's in like the hundreds of billions of dollars right so um I I think uh people are always going to be looking for additional reward sources obviously staking poses its own risk um but you know counterparty risk like you know BlockFi and FTX and Celsius or like you know exploits uh whether they be malicious or just you

18:52know mistakes at the smart contract level um go beyond it being like you know at least historically like much more uh uh larger of a problem uh compared to like slashing events on chain. Definitely I think making it as easy as possible uh that was I think one of the reasons that people were inclined to use these third party providers because they were touting that you know

19:17it's easy just give it to us and we'll do all the you know staking you get your reward. So, is there a uh lowering the barrier to entry for Babylon to make it easy? You know, people are I think when people have their coins in cold storage, they're uh they're they're afraid to do something wrong, you know, and and and lose them or transfer them and you're

19:40saying it's still in your wallet. But how are you guys making it as easy as possible for the user experience to understand this is safe, secure and you know an Amazon experience less clicks as possible to get it done and get a reward. Yeah. I mean it's through the technology that we've created right so you know we are uh you know trying to build the most

20:02similar experience we can for for staking Bitcoin compared to staking another asset right so um there are UIs um you know getting this embedded into non-custodial wallets and you know getting this embedded into you know UIs that people actively use to stake other assets is important um but yeah having like a single click to stake button um that's you know similar to to delegating

20:23another asset whether it be like Ethereum or Salana or another proof ofstake protocol um is you know what we're striving you know the ecosystem to build um and then just like having a lot of education right like making sure that people are aware of the risk um you know there are still risk um but you know they're obviously not the same as you know counterparty risk because it is

20:42non-custodial in nature definitely and are you guys partnering with wallets and exchanges to you know make it so that people don't actually have to search out the the Babylon platform. They just it's right there in your wallet. Yeah. Yeah, definitely. So, I I mean, we have probably around like 20 different Bitcoin wallets now that support the the Bitcoin staking functionality. Um we do

21:08have a couple qualified custodians as well for for institutionals. So um Anchorage, Hextrust, uh Bitco um we do have some exchanges that are supporting it although you know there are like centralized exchanges uh but you know not necessarily an issue especially if it's like you know a prominent exchange supporting that um but but yeah the the goal is to get this um you know staking

21:30functionality embedded into every place that people already hold Bitcoin um just so there isn't like that you know additional speed bump of like oh I have to move my asset over. I mean anytime you move like an asset in crypto like there's its own risk attached to that as well and so um making sure that you know there's less friction within the system

21:49as possible is important. Definitely. And I'm curious a little bit more on the on the institutional side and the ETF side. I've seen uh other uh assets like like Ether, you know, there's discussion and proposals around having these ETFs with staking you integrated in it natively. Do you think uh there could be a Bitcoin Babylon ETF or some way that really uh warms up institutional

22:17investors who are used to just buying the ETF? You know, they don't want to buy uh spot Bitcoin because, you know, they're used to buying stocks for the last 30 years. How can we get them to have the custodian of those ETFs staking in Babylon? Yeah, definitely. Um I I mean, again, it just becomes like an educational thing. uh and if the the rewards outweigh the

22:40risk or at least like the risks are understood. Um but yeah, we we have been talking to you know larger ETF and and ETP issuers. Um obviously you know for some depending on jurisdiction uh it requires um you know changes and and legal regulation and and you know approvals on on these um you know ETF vehicles. Um but but yeah, I mean personally I I expect to see you know

23:05east staking within ETFs uh approved uh in the US uh likely later this year if not sometime early next year. Um and that does, you know, pave the way uh for for Bitcoin staking to be embedded in and these Bitcoin ETFs in the future for sure. But you know, I'm not like none of this is like legal advice or anything. Yeah, for sure. No, I I would expect it.

23:28I think things just take time especially with the other assets you know that I saw there some delays in the ETF decisions. Uh but it looks like uh the crypto market is now turning around again and at least Bitcoin is going strong back over 100,000 which is always good news probably for Babylon as well. Um and you mentioned the the BSN launched you know within the last month.

23:50Can you talk about that launch like the success so far? Is it going as expected or or better than expected? Yeah, it's been going well. So, you know, obviously, uh, we're fairly conservative in and how we launch things, uh, just because a lot of the stuff that we're building does sit on the Bitcoin network and, you know, we're obviously like no one is in a place to

24:11roll back that chain. That's why the chain is so valuable. Um, but yeah, the the Genesis chain is now consuming this Bitcoin security. Um, you know, our ultimate goal in the future is for to be this like large, you know, layer 1 protocol to where a lot of this Bitcoin activity uh does take place, right? So um it is a smart contract enabled blockchain. Uh we will be building an

24:31EVM instance on that blockchain uh with the goal of bringing you know large um you know uh solidity based uh DeFi applications within uh the layer 1 um and um you know having it as like a safe secure place for people to to do Bitcoin related stuff uh if they wanted to. Um so we launched that chain last month. Uh the launch went smooth. Um the goal now

24:56is to add additional features and and um you know use cases for Bitcoin on top of that uh as we grow later this year. Yeah. No, that's that's really exciting to hear and yeah, I would love to see some EVM compatibility and make it easier for people where all the TVL is on these EVM chains to be like, hey, you know, I can jump into Bitcoin and it's probably the the TVL there is

25:17undervalued in comparison u because it hasn't been around for as long and and see that grow. So, I'm looking forward to that. and um and those updates in the rest of the year. And you mentioned this potential to have like other chains um or other platforms or other developers build on um more on the with the BSN. Is there u the developer documents are

25:39ready for that or you know is there a timeline in sort of opening the floodgates to others beyond growing the the Genesis chain? Yeah. So, uh, allowing other folks to to connect, um, will likely happens sometime in in Q3 or Q4. Obviously, we want to make sure that everything's running smoothly. Um, but, you know, once we're we're confident in that, uh, you know, we we'll likely, you

26:03know, allow people to do that um, later this year. Um, but but yeah, uh, any chain would be able to connect, um, pending, uh, tech support. So right now any like Cosmos chain as well as arbitrop and uh OP stack rollups uh can can connect uh we did make an announcement with uh last month. Uh so um they're planning on becoming a Bitcoin secure network as well. So so um

26:32our reach goes beyond like you know just um app chains and rollups so to speak but even like large layer ones are interested in what we're offering. Yeah, I feel like there's a symbiotic relationship there because on one hand these other chains, they want to be secured by Bitcoin because it's the strongest, most secure chain and at the same time expanding Bitcoin into the EVM

26:53ecosystem where the TVL is right now. It's a win-win situation for more interoperability and and growing the liquidity of of DeFi. Yeah. Um yeah, I mean obviously like you know there's this renaissance happening with like you know BTC in general. Um so you know I think a lot of these uh protocols are looking at what we're offering and you know they're they're

27:16attracted to the you know security aspect of it but um you know this like dual value proposition of security plus liquidity is is really attractive to them because you know they want to be this hub for Bitcoin activity as well right um you know obviously these native tokens are valuable, ETH is valuable, stable coin is valuable um the most like pristine collateral um you know is

27:38Bitcoin and so everyone is interested in that, right? Um, you know, there may be reasons that like people are not interested in, you know, certain stable coins or other assets, but it's really hard to be in this um space in general um and not have like some positive viewpoints on on Bitcoin and and wanting that, you know, liquidity within your ecosystem. Definitely. All very

28:01interesting. Clayton, what is the best way to like if I have some Bitcoin, start testing it out, start staking it, and like experiment with the Babylon Genesis chain? Yeah. So, I mean, you can look at um our documentation um on how to, you know, get familiar with with some of the the tech that we've built. Um so, you can go on bablonabs.io um and get some more information there.

28:27Uh but yeah um you know anyone uh with a you know non-custodial wallet um you know can likely be staking Bitcoin today. Um but definitely recommend reading the documentation first. Yeah, sounds great. Yeah, the the more informed especially non-custodially that you are, the better off you are as we're taking finance into our own hands. Uh, I appreciate your insights into, you know,

28:48Bitcoin and the BTC FI ecosystem expanding and it sounds like a great early success for Babylon in the Genesis launch this month. I'm looking forward to seeing how Bitcoin price plays out, more institutional adoption and eventually getting that into more staking and uh, DeFi with Bitcoin from, you know, the greater uh, institutional ecosystem, which will bring billions of

29:13dollars in. So, um I would love to follow up in in the near future as the coming months uh roll out with the Genesis chain getting stronger and more secure and those updates and um I appreciate your insights Clayton into everything with Bitcoin Babylon and uh thank you so much for taking the time. Yeah, thank you sir.