Staking, liquid staking assets, and vault strategies

Recently, the Bitcoin market capitalization has crossed the $2 trillion mark, with over 50 million bitcoin addresses showing a balance, highlighting the cryptocurrency’s growing significance. Unlike conventional currencies such as the dollar or euro that yield interest on deposits, Bitcoin does not inherently reward holders. Nevertheless, two emerging strategies have surfaced that may alter this landscape:

1. Bitcoin “staking” – lock your BTC within the Babylon protocol to earn transaction fees.
2. Liquid-Staking Tokens (LSTs) – create a tradable receipt, like LBTC, to maintain staking rewards while ensuring liquidity.

These methodologies allow Bitcoin holders to explore ways to generate steady returns on their investments. Let’s explore how this works.

Transitioning from Proof-of-Stake to Proof-of-Bitcoin

Launched on its mainnet in late 2024, Babylon enables Bitcoin holders to time-lock their assets on the chain and delegate them to Bitcoin-Secured Networks. These networks currently provide a yield ranging between 1% and 2%.

The concept has quickly gained traction, with Babylon reporting over $4 billion in BTC staked on the platform since its inception.

Key features

• No wrapping or bridges: BTC remains on its original chain.
• Primary risks: potential protocol vulnerabilities or penalties if a validator behaves improperly.
• Limitation: Staked coins are locked until the designated unbonding period concludes.

Liquid Staking: LBTC Restores Flexibility

For many traders, lock-up periods can be a deal-breaker. Liquid-staking tokens address this by creating a transferable asset that represents both the underlying stake and its anticipated rewards.

An instance of such a liquid staking token is LBTC from Lombard Finance

• 1:1 minting: Stake BTC through Lombard’s Babylon contracts to receive LBTC on an EVM chain.
• Seven-day exit: Users can burn LBTC to initiate the same unbonding period as native Babylon staking, approximately one week, although they can also trade LBTC on decentralized exchanges.
• True liquidity: Daily on-chain transaction volumes surpass $200 million, with sufficient liquidity to handle exchanges of up to $30 million without significant slippage.
• Custodial trade-off: Users must place trust in Lombard’s mint-and-burn smart contracts and the Babylon validator framework.

While LBTC incorporates the fundamental staking rewards, its true advantage lies in its capital efficiency: users can leverage LBTC as collateral, invest in DeFi pools, or sell it on a DEX while their original BTC remains actively earning.

Maximizing Yield Potential

While these options are appealing, achieving significant returns with Bitcoin LSTs can be intricate. Retail users need to grasp complex DeFi dynamics related to risk and rewards across various protocols and approaches.

Even those with a basic understanding still need to actively manage their investments, as returns can change based on market fluctuations. Maintaining a substantial annual percentage yield (APY) may require periodic strategy adjustments to keep investments profitable.

Fortunately, Lombard offers several vaults designed to simplify this process, making the pursuit of yield on Bitcoin as seamless as possible. One notable product is the recently introduced Sentora DeFi vault.

Sentora, formed from the merger of IntoTheBlock and Trident’s Digital, recently unveiled a BTC Yield Vault on Lombard that accommodates either wBTC or LBTC, aiming for an APY of about 6%, notably higher than standard staking yields.

Strategies for Earning the Spread

This vault employs several distinct strategies based on market conditions, all automated and requiring no human intervention. Some strategies include:

1. Over-collateralized lending – lending BTC-derived assets on platforms like Aave for interest gains.
2. Pendle yield trading – splitting and selling future yield streams to secure upfront returns.
3. Delta-neutral borrowing – borrowing other assets, such as stablecoins, to engage in delta-neutral high-yield strategies.

All of these strategies are connected to Sentora’s real-time DeFi risk engine, which utilizes institutional-grade data to assess risk exposure across DeFi. Positions that exceed specified thresholds are automatically rebalanced.

Evaluating Risk and Reward

• Native staking: presents a narrow risk profile with modest returns, suitable for those who prefer cold-storage and can accept lock-ups.
• LBTC alone: offers similar basic yields, but with tokens remaining liquid, at the expense of exposure to smart contracts and bridges; users can enhance yield through DeFi interactions.
• Sentora Vault: involves broader risks due to the engagement of multiple DeFi platforms, yet risks are mitigated through automated risk management and hedging.

Looking Ahead

Holding Bitcoin is becoming a feasible source of income beyond mere price appreciation. With various options catering to different needs and risk profiles, Bitcoin holders can take advantage of advancements in DeFi. The recent rise in LBTC transaction volumes is likely making it feasible for institutional trading desks to adopt these strategies, potentially fostering further innovation in Bitcoin staking solutions.