A war may be brewing for dominance of the chain market. The question: What will be the collateral of choice in the decentralized finance (DeFi) economy?
As of press time, DeFi protocols across ecosystems have amassed a value of nearly $126 billion, according to data from DeFiLlama, moving closer each day to their 2021 high of $175 billion. Most of those pledged funds take the form of ether (ETH) and derivatives such as yield-producing liquid staked ether tokens (stETH) and wrapped eETH (weETH), with wrapped bitcoin (wBTC) and stablecoins as a whole competing for the fourth and fifth place. place.
But the team behind Bitcoin-based DeFi protocol Lombard Finance intends to change things with LBTC, a new liquid bitcoin token. The idea, according to Lombard co-founder Jacob Philips, is to dethrone ETH and stETH and install bitcoin as the collateral of choice across the entire on-chain economy.
“In centralized places, bitcoin is the main guarantee. There is no doubt about this. Why is this not the case in DeFi? Philips told CoinDesk in an interview. “Bitcoin only does one thing well: being a rock-solid store of value. It is the perfect guarantee. “There is no reason why we shouldn’t build DeFi on top of bitcoin.”
Bitcoin has had a tremendous year, up 124% since January 1 thanks to political tailwinds in the US and the massive success of its nearly year-old spot exchange-traded funds. Ether, for its part, has significantly underperformed, increasing “only” 48% in the same time period, despite being four times smaller in terms of market capitalization. With demand for bitcoin increasing by the day (and growing rumors about a possible strategic bitcoin reserve in the US under the incoming Trump administration), it is not unreasonable to think that the asset could play a larger role in the chain.
That, in turn, could transform the way DeFi operates as a whole.
“Bitcoin will be the next big source of liquidity for every DeFi protocol, on every chain. “It’s just a massive influx of net new capital,” Philips said. Noting that Bitcoin has a market capitalization close to $1.9 trillion, he said: “Even if we only got a fraction of that, it would still put a ton of new activity into the ecosystem and make DeFi more efficient; maybe we’ll even get to the point. where DeFi protocols, through passive liquidity, rival the liquidity of centralized exchanges.”
Bitcoin with performance?
A big difference between bitcoin and ether is that you can lock the latter asset on the Ethereum network (a process called staking) to help secure the blockchain and earn interest, paid in ETH. As of press time, staked ether is offering an annual return of 3.19%, according to CoinDesk’s Composite Ether Staking Rate (CESR) index.
The Bitcoin network does not offer such capabilities, but Lombard aims to provide a profitable bitcoin token through Babylon, a protocol designed to allow users to stake bitcoins to secure other blockchains.
It goes like this: users give Lombard some bitcoins, Lombard stakes these coins through Babylon, and then mint one LBTC token for each BTC staked. These LBTC tokens follow the ERC-20 standard, meaning they can be used on Ethereum and all its protocols.
That interest rate on LBTC will be paid by blockchains secured through Babylon, or so the theory goes. Nine different projects (Corin, BOB, Cosmos Hub, Nubit, Fiamma, Manta, LayerEdge, Chakra and Pell) have started or completed integration into Babylon’s blockchain development environment, or devnet, so far, lead Coleman Maher told CoinDesk. Babylon growth chart. . These integrations should go live next year, after Babylon’s own Layer 1 goes live.
Babylon isn’t offering any staking rewards right now, but that hasn’t stopped the protocol from accumulating $5.4 billion in value, making it the 10th largest protocol by value locked in all of DeFi, according to DeFiLlama. So why are people so eager to store their bitcoins in Babylon? Possibly because it is running a points program, meaning early depositors could eventually receive an airdrop. The Babylon team did not comment on whether a token would ever be issued.
Fierce competition
Of the $6 billion staked in Babylon, over $1.4 billion was connected through Lombard to create LBTC tokens. In the absence of staking rewards issued by Babylon, these tokens do not yet provide any returns.
“Users do not choose to hold ether or bitcoin based solely on staking performance,” Philips said. “There are much broader reasons why they choose one or the other,” such as the potential US bitcoin reserve and regulators’ views on the two assets. “And the performance is a bit of a cherry on top.”
It is important to note that DeFi users can already use bitcoin as collateral (albeit without any yield) thanks to wrapped bitcoin. At press time, wBTC’s market capitalization stood at $12.9 billion. That’s just 22% off its 2021 all-time high, despite concerns that wBTC issuer, cryptocurrency trading and custody firm BitGo, is sharing custody of the underlying bitcoin with BiT Global, a partially owned by TRON founder Justin Sun. Sun has been accused of fraud and market manipulation in the US.
Still, as of December 6, wBTC alone accounted for $5.7 billion in collateral across some of the largest DeFi protocols, according to data from Lido, while $14.5 billion in ETH and $11.1 billion in stETH were being used. Even “wrapped ether” or eETH, a relatively new liquid token that allows users to benefit from EigenLayer recovery rewards at the same time as native ETH staking returns, provided $5.8 billion in collateral.
In fact, stETH and weETH have been slowly eating away at other coins’ market share, to the point that ARK Invest stated in a recent report that the entire DeFi economy was reorganizing around stETH and the benchmark performance provided by ETH. bet. Other tokens, such as Solana’s SOL or Avalanche’s AVAX, offer higher interest rates for staking, meaning that these assets, being more volatile, are riskier to hold long-term.
Stablecoin lenders have also felt pressure from the rise of stETH, ARK Invest said, with Sky (SKY) (formerly MakerDAO) increasing the DAI locked interest rate, while rewards for lending stablecoins on Aave (AAVE) and Compound (COMP) have grown, because users prefer to lend stETH and borrow stablecoins than lend them directly.
Not to mention the various tokenized money market funds being developed by financial giants like BlackRock and Franklin Templeton, which could end up allowing DeFi users to gain exposure to US Treasury bills and use those tokens as collateral.
Therefore, LBTC faces tough competition. But Philips says the token can succeed where wBTC has struggled thanks to that little extra boost its performance provides. “Betting returns will build over time. The LBTC yield is expected to be in the range of the ETH staking rate,” he said.
“Lombard’s initial goal is simply to get people to take their bitcoins out of the coldest cold storage and just take the most primitive step towards on-chain finance. And then we’ll show you the battle-tested, safer-than-your-bank protocols that exist,” Philips added. “Performance may dry up. LBTC as an asset, producing any amount of return, would still be an attractive asset.”
Without a doubt, the speech has sparked interest. Lombard raised $16 million this summer from several heavyweights, including Polychain Capital, Franklin Templeton, and Nomad Capital. Philips said entities already familiar with DeFi had been the most enthusiastic. “Anyone who has already dabbled in cryptocurrencies, it is easy to get them on board with bitcoin betting. Or at least they are very open to conversation.”
