No More Just HODLing: Restaking Now Comes to Bitcoin DeFi

Over a decade has passed since Bitcoin emerged as the trailblazer of digital money, igniting a burgeoning industry centered around the notion of decentralized finance and introducing innovative concepts such as non-fungible tokens and tokenized real-world assets. 

As the undisputed king of cryptocurrency, Bitcoin has had to weather some insane market volatility over the years, as well as intense regulatory scrutiny. It has overcome numerous technological hurdles, too, while brushing off the endless criticism of crypto naysayers. 

Overcoming all of these challenges, Bitcoin has made unprecedented gains in the last year, demonstrating its incredibly resilient nature and redefining its future potential. 

No longer just a store of value

In 2024, several key developments took place that reinforced Bitcoin’s value proposition and boosted demand for the asset. There were regulatory breakthroughs such as the approval of the first Bitcoin exchange-traded funds, or ETFs, and the highly anticipated halving event that cut the supply of newly minted Bitcoins in half. These evolutions propelled Bitcoin into uncharted territory, sending it breaking through the $100,000 barrier for the first time, leading to significant increases in adoption and integration with traditional finance. 

Bitcoin’s underlying technology has also seen significant advances in the last few years. Innovations such as the Lightning Network helped to address some of its scalability problems, allowing faster transactions at lower costs. We also saw the arrival of the Taproot upgrade in 2021, enabling developers to bring smart contract functionality to Bitcoin via “Layer-2 networks” such as Stacks and Merlin Chain. 

These changes set the stage for the emergence of Bitcoin DeFi, adding to the utility of the world’s most valuable digital asset. Up until recently, the only real use cases for Bitcoin were for payments and for “HODLing” it as a store of wealth. Not anymore. 

For instance, Babylon is pioneering new staking functionality for Bitcoin holders. It enables BTC holders to stake their tokens to secure third-party proof-of-stake blockchains and earn rewards for doing it, similar to the way Ethereum is secured. Its key innovation is that it uses an exact one-time signature that enables staked BTC to be slashed in case validators engage in malicious behavior. By combining this with Bitcoin’s native time-lock functionality, Babylon can incentivize staking while reserving the right to punish anyone who tries to cheat. 

Bitcoin Restaking

Bitcoin’s native DeFi ecosystem has grown to encompass many of the same kinds of services found in Ethereum-based DeFi, with possibilities for lending, borrowing, liquidity provision, and yield farming. With the arrival of SatLayer, Bitcoin holders now have the opportunity to engage in “restaking,” a concept first pioneered on Ethereum that makes it possible for investors to retain liquidity when staking crypto and increase their rewards. 

SatLayer wants to be to Bitcoin what EigenLayer is to Ethereum, so it created “Bitcoin Validated Services,” or BVSs, similar to Ethereum’s “Actively Validated Services,” or AVSs. 

With SatLayer, Bitcoin holders can increase their rewards beyond traditional staking by “restaking” their staked assets to provide security for decentralized services running on the Bitcoin blockchain. 

SatLayer sets up a group of smart contracts on the Babylon network to get people who hold BTC to protect decentralized apps or protocols that use BVS for security. It’s a novel mechanism that allows dApps to tap the foundational security of Bitcoin itself, providing full, Turing-complete programmability and minimizing trust. It’s a win-win for both dApps and restakers, helping the former to get around the need to bootstrap security for themselves while increasing yield opportunities for Bitcoin holders. 

How does it work?

To understand how SatLayer’s restaking works, let’s look at the different roles within its ecosystem. The most important participants are the Bitcoin restakers, who provide economic security to BVS by depositing and restaking BTC. In the process, they delegate these tokens to operators, who do the job of running each BVS. 

Then, BVS developers utilize SatLayer to circumvent the “cold-start” issue in cryptocurrency, which refers to the initial insecurity of new dApps due to a lack of capital. By launching their dApps through SatLayer, developers can leverage a BVS to obtain security through staked BTC. The BVS developers are required to maintain the on-chain smart contracts as well as the off-chain operating software and must also oversee reward distribution. 

The BVS smart contracts describe the “slashing conditions” for each BVS. Should these conditions be met as a result of an operator acting maliciously, then a portion or all of the stake backing that BVS will be confiscated by SatLayer. BVS developers decide how to use confiscated funds—they can be redirected to the protocol to generate revenue or permanently “burned” to a non-existent Bitcoin address. 

These slashing conditions incentivize operators, who are tasked with deploying and running each BVS, to behave responsibly. They’ll earn rewards by acting honorably, but they risk losing their collateral if they try to game the system in any way. This also motivates restakers to look for trustworthy operators and monitor the network for any misbehavior. 

While restakers are also subject to the possibility of having their assets slashed, they’re compensated for this risk with the prospect of regular rewards, based on the amount of BTC they stake to the BVS. The BVS developer determines the rewards, which may be original BVS tokens or other assets. In addition, because SatLayer is Babylon’s official restaking platform, stakers can also earn Babylon points. 

To deploy and run a BVS, the operators must provide the necessary hardware to ensure a stable connection to the network and offer a secure execution environment. In return for providing this hardware and their time and expertise, they can earn a greater proportion of the rewards as compensation. 

The operators are free to choose which BVS applications they want to secure and which they’d rather ignore. SatLayer does not specify a minimum stake. Rather, market forces dictate these dynamics, ensuring that the most competitive BVSs will gain more support and win the trust of Bitcoin’s restaking community. 

Strengthening Bitcoin’s value proposition

By relying on a combination of rewards-based incentives to promote security and risk mechanisms to deter malicious activity, SatLayer stands out as one of the most innovative players in Bitcoin’s nascent DeFi ecosystem, bringing fresh utility to the protocol. 

Designed as the first restaking platform specifically for Bitcoin, it introduces fully programmable slashing conditions—a feature that was previously unavailable. In this way, it transforms Bitcoin into a more productive asset, unlocking idle capital and providing economic security for a new ecosystem of Bitcoin-native dApps. 

SatLayer is creating more opportunities and value for Bitcoin holders, and in doing so it will help to ensure that BTC remains the leading crypto asset for many years to come.