Author | BitMEX Research
Compiled by Wu Talks about Blockchain
Original link:
https://blog.bitmex.com/babylon-the-taproot-success-story/
Abstract: We studied Babylon, a staking project that has attracted nearly 24,000 Bitcoins. We compared Babylon to CoreDAO, another BTC staking project, and noted Babylon's unique use of Tapscript. It is worth mentioning that, unlike Ordinals, Babylon does not use Taproot in a trivial way, but is closer to the original intention of Bitcoin developers. We ultimately concluded that no matter what people think about Babylon and emerging Bitcoin staking systems, Babylon's practice supports this view - Taproot is a clever and impressive upgrade for Bitcoin. Despite some people's initial low expectations, Taproot is proving its success.
Overview
Following up on our August 2024 article on Bitcoin’s second layer and CoreDAO, this article focuses on another ostensible Bitcoin “L2”, Babylon. As of this writing, this Bitcoin staking system has even more funds locked up than CoreDAO, at nearly 24,000 Bitcoins. That’s worth over $1.6 billion. Like CoreDAO, Babylon is not actually a Bitcoin layer 2 network, but should be viewed as a system where people can lock up Bitcoin using Bitcoin’s time-locking functionality and, in return, earn yield in other altcoins.
Babylon Labs
Despite 24,000 BTC and a whopping $1.6 billion TVL, the Babylon blockchain or staking system does not yet exist and is still under development. Currently, large holders appear to be staking in exchange for earning reward points. The platform is backed by an impressive group of cryptocurrency VCs and is associated with Binance, which may explain how it has been able to attract so much funding. The platform also aims to position itself as the Bitcoin version of EigenLayer. Babylon wants to be the EigenLayer of Bitcoin. Many of the culture and ideas that Babylon is developing seem to be derived from the Ethereum ecosystem. The core concept of EigenLayer is repeated staking, which allows the same batch of coins to be staked in multiple systems at the same time to obtain higher returns.
We will not be evaluating the re-staking concept itself or Babylon’s staking protocol or the underlying Babylon blockchain, as with our CoreDAO article we will be focusing on the Bitcoin side of things.
Staking Mechanism and Taproot
As with CoreDAO, to stake in Babylon you create a custom complex transaction that essentially sends your own Bitcoin to yourself. You add a custom OP_Return output that provides details about the stake, such as which validator will be used and where the rewards will be sent.
Here is an example of a Babylon pledge transaction:
The contract that turns on staking itself is nothing special compared to CoreDAO. The first output 0.05 BTC is staked, the third output is the change, and the middle output is an OP_Return. The Babylon team informed that many exchanges had to upgrade their Bitcoin wallets to enable customers to send Bitcoin to P2TR outputs with Bech32m formatted addresses.
However, when the staked Bitcoin needs to be redeemed from Babylon, the magic of Taproot begins to reveal itself. The redemption transaction from the same address bc1plwj4z6et3hfn73uvw4gza09xqmc8hwq87fc8z2ntmh9v98q27ftsv5qhux can be viewed here. The redemption process reveals that Babylon exploits multiple spending paths in Tapscript and Taproot trees. The following figure shows the information revealed when "collaborating to exit" from the staking system. It is important to note that to redeem Bitcoin from the Taproot tree, the conditions of exactly one leaf node must be met and the path to the Merkle root must be displayed through the hash value.
Taproot redemption demo for Babylon stakers - the portion visible during a normal collaborative exit
In the redemption scenario above, the two transfer paths are hidden and two additional hashes are required to reach the Merkle root. The selected transfer path requires the signature of the staker and the multi-signature of 6 of the 9 Babylon alliance members. This spending condition is essentially a combination of 1-of-1 and 6-of-9.
By studying Babylon’s protocol specification and analyzing other transactions, we were able to draw a complete Taproot tree graph, including all spending paths. The tree graph below shows three redemption scenarios.
The complete Taproot redemption tree for Babylon stakers
1. Time lock - This scenario requires the staker's signature and the OP_CHECKSEQUENCEVERIFY (OP_CSV) opcode. The time lock period is 15 months. This allows stakers to withdraw funds without relying on the federation. This path is higher in the tree, allowing for more efficient redemptions.
2. Unlock on Demand - This is considered a normal or collaborative redemption scenario and requires the signature of the staker and approval of the federation. This is similar to collaborative exits in the Lightning Network.
3. Slashing - This is the last scenario, which is similar to the unbonding case, but requires an additional signature from the “finality provider”. We will discuss this in detail in the next paragraph.
Slashing Mechanism
In a way, we believe that Babylon has chosen the harder path, although only by implementing slashing can a more sustainable protocol be built that makes its revenue and network security "less fake". However, as we explained, Babylon's revenue generation system does not actually exist yet, so slashing does not exist at present, but there is still a redemption path in the Taproot tree. Therefore, the third redemption path in the Taproot tree is not currently implemented because there is no blockchain or finality agent yet. Babylon's vision is that once the system is online, stakers will need to pre-sign a slashing redemption path, that is, the Bitcoin will go to a Bitcoin address controlled by others or may be destroyed. Who these funds may be sent to has not yet been determined by Babylon Labs. If stakers have pre-signed the third path, then there is real counterparty risk. But while it remains unsigned, Bitcoin stakers can consider Babylon to be "risk-free".
Once the slashing mechanism is live, if the third path is not pre-signed by the staker, then the pledge will not be considered valid and no rewards will be received. We consider this a minor flaw because an observer of the Bitcoin blockchain cannot tell whether it is a valid staking deposit. However, currently, since this is not live yet, such pre-signing is not required. Therefore, ** Currently, babylon is the same as CoreDAO, and staking is counterparty-free. You can always withdraw your bitcoins without relying on anyone (although the lock-up time is longer). ** Therefore, at present, this may be a good place to stake bitcoins before the system goes live, although it is uncertain how much babylon token rewards you can get for this.
Criticism of Bitcoin Core Developers
Bitcoin core developers and protocol engineers have been criticized in recent years, mainly for not implementing new protocol upgrades or adding enough new features to Bitcoin. In addition, some critics claim that Bitcoin developers are out of touch with the crypto industry and that even if new features are added to Bitcoin, no one cares about or uses them.
We believe that Babylon's use of Taproot is a strong counter to the above criticisms. ** In our opinion, Taproot is actually a pretty smart upgrade that enables many new custom spend conditions without increasing downside risk. ** Hiding the unused portion of the tree helps improve privacy and scalability. Additionally, Taproot's adoption metrics are very strong, much stronger than we would have expected a few years ago. As of today, nearly 100,000 Bitcoins are stored in Taproot outputs.
Bitcoin stored in Taproot
Conclusion - Taproot is successful
Who would have thought that the Merkle-ized abstract syntax tree, an idea originally proposed by Bitcoin engineer Johnson Lau on the BitcoinTalk forum in 2013 and formalized in 2016, would actually be introduced into Bitcoin and succeed?
Babylon alone has attracted $1.6 billion in TVL using taproot’s functionality. And it’s not used in a trivial way, like storing Ordinals-related images which some people consider a bit silly, on the contrary, these script paths are actually being used and there is a lot of money involved.
On the other hand, many readers may question the fundamental efficacy of proof of stake (POS), and re-staking is even more difficult to understand. In fact, liquidity staking and re-staking may be manifestations of fundamental problems with proof of stake systems. Some readers may also think that Babylon is a bit like an altcoin, because Bitcoin stakers are being incentivized to earn token rewards that do not yet exist. However, Taproot adoption must start somewhere. Capital needs to be invested to build the Taproot script system, and examples of Taproot script usage are needed for others to follow. Perhaps one day, projects that do not rely on token rewards or build PoS will be able to follow suit.
However, whatever one thinks of Babylon, Taproot is being used and has proven beyond a doubt that it is an ingenious idea and a success. Given the constraints faced by Bitcoin developers, it is admirable that they were able to achieve this.
