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The Ultimate Guide To Bitcoin Liquid Staking Protocols
December 6, 2024
Lorenzo Academy
Read this blog in Indonesian, 中文, ΕΛΛΗΝΙΚΑ, Russian, and Vietnamese.
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Bitcoin mining is the engine driving the world’s largest decentralized financial network. But how does it work, and why does it matter? This article dives into the intricate process of mining, detailing how miners validate transactions, secure the blockchain, and introduce new bitcoin into circulation. From the evolution of mining hardware to its environmental controversies, we explore the pivotal role mining plays in Bitcoin’s ecosystem and its implications for the future of global finance.
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Bitcoin has reshaped our understanding of currency, transactions, trust procedures, and value systems at large. The backbone of this new trustless cryptographic exchange is a process known as " mining." But what exactly does mining mean in this context, and why is it so crucial to the innovation of the bitcoin network?
This article elaborates on the world of bitcoin mining, expanding on its mechanisms, significance, and controversies.
After a bitcoin transaction is initiated, it must be verified and added to the decentralized ledger.
In a traditional financial system, some authority verifies transactions and updates its central ledger. In this new decentralized system, there is no authority to manage the ledger of transactions; therefore, a novel method for recording transactions is required. This is the duty of miners.
After passing initial verification, a bitcoin transaction enters a pool where it waits to be picked up by a miner and included in a block—a digital record of recent transactions. Miners can't include every pending transaction in the block they submit, therefore they pick the transactions offering the highest fees.
With transactions selected, miners seek to add their block to the blockchain, aka the bitcoin universal ledger.
This happens through a process called mining, hence the participants are called “miners.” Let's break down this process in more detail.
The process of adding a block to the blockchain is called mining because it involves work on the miner’s’part, and they are rewarded for this work with bitcoin. This is a bit like “discovering” or “unearthing” the bitcoin because it is the only way for new bitcoin to be minted.
The "work" of mining is a competition of solving complex computational puzzles. By solving these puzzles, miners verify “blocks" and link them to a chain of previous transaction entries, earning the fresh bitcoin and transaction fees for their work.
The competition among miners is as much about computational power as it is about speed. The process is essentially a brute-force guessing game. Miners attempt to find the correct hash—a specific string of characters—through trial and error. The miner with the most computational resources typically has a better chance of discovering the correct hash first.
The first miner with the correct hash wins the right to add their block to the blockchain. This method is known as the proof-of-work consensus mechanism.
Consensus mechanisms enable network participants to agree on the current state of the ledger. Different mechanisms use various methods to decide who gets the privilege of adding a new block to the blockchain. In the proof-of-work system, this right is granted to the miner who first solves the mathematical puzzle by finding the correct hash.
After finding this hash, they broadcast their solution to the entire network. If everything checks out, the new block is added to the blockchain, and the successful miner receives a reward in the form of newly minted bitcoin, plus any transaction fees.
The Mining Process Step-by-Step
Visualize miners continuously adding blocks of data to an ever-growing chain, each agreeing on which block is correct—this is the essence of proof-of-work security. To further clarify, it helps to break down the mechanisms of mining that keep the network secure.
The puzzles miners solve involve hash functions—mathematical algorithms that convert input data into a fixed string of characters. The hash for each block is generated based on both the transactions within that block and the hash of the preceding block.
This means that altering any transaction in an earlier block would change the hashes of all subsequent blocks, which would be immediately noticeable to the network of miners who previously agreed on the correct chain. All nodes in the network accept the longest valid chain of blocks as the true blockchain.
The only way a malicious actor could attack such a network would be by controlling 51% of the hash rate. The hash rate represents the total computational power of the bitcoin network. With over half the hash rate, the attacker can mine blocks faster than the rest of the network combined.
Because bitcoin nodes follow the longest valid chain, by consistently adding blocks, the attacker can make their version of the blockchain the longest, causing the network to accept it over others. A higher hash rate, therefore, increases network security, making it more resistant to attacks.
The bitcoin network is the largest and most distributed blockchain in the world; acquiring sufficient mining equipment to exceed 50% hash rate involves astronomical costs. Further, once such an attack is carried out, the value of bitcoin would plummet due to it being compromised.
Mining, therefore, secures the bitcoin network by making an attack almost completely impossible computationally, and always impractical economically.
In bitcoin's early days, mining could be performed using a regular computer's CPU. New hardware soon became needed because the bitcoin network adjusts the mining difficulty every 2,016 blocks (targeting approximately every two weeks as the intended average) to ensure that blocks are added roughly every 10 minutes.
If miners collectively are solving puzzles too quickly, the difficulty increases; if too slowly, it decreases.Due to this, as the bitcoin network becomes more popular, the computational resources needed to compete in mining grow alongside it.
Today, mining is predominantly conducted using ASICs (application-specific integrated circuits), specialized hardware designed explicitly for mining bitcoin, offering significantly greater efficiency and higher hash rates.
Due to the increasing hardware costs of running a mining operation, mining pools have sprung up to continue allowing everyday bitcoin users to participate in network security.
Solo mining involves a miner working independently to find blocks, which is akin to winning a lottery. Mining pools allow miners to combine their computational resources, providing more consistent and predictable rewards. Participants in a mining pool contribute their hash power and receive a portion of the rewards equivalent to their computational contribution.
Bitcoin mining is energy-intensive due to the computational power required as the mining difficulty increases. Estimates suggest that bitcoin's annual energy consumption rivals that of some small countries. The exact figure fluctuates based on the hash rate and energy efficiency of mining hardware.
Environmental concerns are the main controversy behind bitcoin mining. Environmental activists argue that this extreme energy can lead to significant greenhouse gas emissions because most electricity for mining comes from fossil fuels.
Bitcoin advocates typically respond to these concerns by pointing out three things:
Bitcoin mining is a foundational component of the bitcoin network, ensuring security, validating transactions, and introducing new bitcoin into circulation. While it presents opportunities for profit and technological advancement, it also poses significant challenges, particularly concerning its environmental impact.
As mining moves forward, the balance between reaping the benefits of this groundbreaking technology and mitigating its drawbacks will define the trajectory of bitcoin and its role in the global financial system.
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Dive into the groundbreaking convergence of the Move ecosystem and Bitcoin DeFi.
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Move is one of the more interesting developments in the cryptocurrency space over the past few years, as it addresses some of the key security issues with digital assets that have been found in previously existing blockchain programming languages.
While Sui and Aptos are the two key Layer 1 cryptocurrency networks that have integrated the Move programming language, there are also rising attempts to bring this technology to the Ethereum and Bitcoin ecosystems. While Ethereum has always tended to quickly adapt any new blockchain technology as it appears, this new Move ecosystem is emerging around the same time as various bitcoin liquidity layers on top of bitcoin, which makes it possible for Bitcoin Finance (BTCFi) to join in on these new capabilities.
So, who are the key players in the Move ecosystem, and how will bitcoin make its way into this emerging area of DeFi? Let’s take a closer look at Move and how it can merge with BTCFi.
The Move programming language was originally developed by Meta for the Diem (formerly Libra) project. It is built to support secure asset handling in digital transactions. Inspired by Rust, Move offers a resource-based type system where assets behave as unique, non-clonable resources, ensuring that they have a single owner and are protected from duplication, which is a common vulnerability in blockchain environments. With these capabilities, Move addresses many limitations faced by existing blockchain languages, particularly Solidity, which underpins Ethereum and has a number of known security vulnerabilities such as reentrancy attacks.
Although Diem was discontinued due to regulatory pressures, Move’s foundational elements survived and found new life in new cryptocurrency projects like Sui and Aptos. Move also includes an efficient virtual machine, known as MoveVM, which is optimized for high performance, parallel execution, memory management, and compiler optimizations to enhance transaction speeds and throughput. Additionally, it provides modularity and composability, making it a straightforward tool for developers to create, connect, and deploy smart contracts.
Move’s strong type system and formal verification also make it particularly appealing for developers prioritizing asset security. By integrating these features with a modular design, Move empowers developers to create sophisticated decentralized applications on multiple layers of blockchain environments. Additionally, Solidity-based contracts can be deployed alongside Move-based contracts without any modifications, which enables seamless compatibility between the two ecosystems.
While still somewhat nascent, a number of projects built around the Move programming language have already been deployed, and many others are in the works. These projects include Layer 1 cryptocurrency networks like Sui and Aptos, an Ethereum Layer 2 network called M2, and Sui’s liquidity protocol known as Navi.
Sui is a Layer 1 blockchain designed for seamless, high-speed digital asset transactions. Initially contributed to by Mysten Labs, whose team members include former Meta engineers from the Diem project, Sui reflects lessons learned from Diem’s development.
The architecture of this cryptocurrency network enables sub-second finality and low transaction costs by processing transactions in parallel. This approach not only improves scalability but also allows Sui to handle complex on-chain assets, as its object-based model, which includes improvements over Move’s original design, supports more dynamic digital asset management. In fact, Sui has extended the Move language into Sui Move, which notably enables new features specifically for NFTs.
Sui’s consensus mechanism is rather complex and uses a combination of delegated proof of stake (DPoS), Byzantine fault tolerance (BFT), and directed acyclic graph (DAG) to make sure all nodes are on the same page with transaction ordering in a way that maximizes low latency and high throughput. The BFT-based protocol consensus is known as Mysticeti and is the main vehicle for consensus generation, while DAG and DPoS are used for specific tasks. The key innovation here is to use a combination of different consensus mechanisms for different needs in order to maximize efficiency.
Since its mainnet launch, Sui has shown notable growth with millions of active accounts and billions of transactions. In particular, the gaming niche has been a key area of focus for this network’s growth.
NAVI is the main liquidity protocol on the Sui blockchain, which enables users to borrow assets or provide liquidity in return for yield in a manner similar to the well-known DeFi app Aave.
While it has many similarities with Aave, NAVI also comes with additional features and goes beyond what other liquidity protocols have offered in the past. For example, NAVI is designed with advanced features like automatic leverage vaults, which enable users to automate strategies related to their leveraged positions, and “Isolated Market,” which limits the risk associated with newly listed assets. Additionally, it offers dynamic collateralization ratios that move based on market demands.
Aptos is another Layer 1 blockchain aimed at delivering high-speed, scalable, and developer-friendly solutions for decentralized applications. Launched on October 12, 2022 by Avery Ching and Mo Shaikh, Aptos is capable of reaching up to 160,000 transactions per second with under one-second finality. Much like Sui, this efficiency stems from the use of the Move programming language.
A key attribute of Aptos is its Parallel Execution Engine (Block-STM), which allows multiple transactions to be processed concurrently and avoids delays caused by single transaction failures. This further increases transaction throughput and reduces latency. Aptos’s consensus mechanism is somewhat similar to Sui’s, using a combination of BFT and proof of stake (PoS); however, Aptos uses traditional PoS as opposed to Sui’s use of DPoS.
Since launch, Aptos has rapidly grown, attracting strong community engagement and significant institutional support, including over $350 million in funding from investors like a16z, FTX Ventures, and Coinbase Ventures.
Cetus stands out as the leading DEX in the Move ecosystem, renowned for its concentrated liquidity protocol that enhances trading efficiency while delivering a seamless user experience. By fostering a flexible and robust liquidity network, Cetus accommodates a wide array of assets and use cases. Its permissionless architecture further empowers users, developers, and applications to easily integrate and leverage its protocols.
Key Features include:
Blockchain development firm Movement Labs has raised funding from the likes of Polychain Capital and Aptos Labs to accelerate the integration of Move solutions within Ethereum’s ecosystem. With its Ethereum Layer 2 network known as Movement, Movement Labs aims to enable a theoretical transaction capacity of over 160,000 transactions per second while simultaneously improving smart contract security.
Movement uses its own Move-EVM (MEVM), which allows users from both MoveVM and EVM-based systems to use the Layer 2 network. This feature significantly reduces the risk of attacks such as reentrancy and arithmetic errors, which have plagued many Ethereum-based protocols. The Movement network’s infrastructure will also offer the flexibility to launch custom rollups that are secure and compatible with Ethereum.
Through their specific approach to developing with Move, Movement Labs hopes to merge the massive Ethereum user base with the power of the Move programming language.
Lorenzo Protocol is at the forefront of integrating Bitcoin and BTCFi into the Move ecosystem as the first omnichain Bitcoin liquidity layer within the MoveVM landscape. This innovation allows Bitcoin liquidity to seamlessly flow through the Move ecosystem while leveraging liquid staking solutions to enhance potential returns for Bitcoin holders.
By collaborating with key projects featured in this article, Lorenzo bridges Bitcoin’s history of decentralization and security with Move’s advanced architecture, tailored to meet DeFi’s evolving demands. While Bitcoin remains a cornerstone cryptocurrency, its legacy technology and limited scripting capabilities hinder its application in modern decentralized systems. Lorenzo overcomes these limitations by unlocking Bitcoin’s potential for use in DeFi.
The simultaneous rise of Move-based DeFi platforms and Bitcoin’s integration into this ecosystem, driven by projects like Lorenzo, represents a significant evolution in blockchain technology. Platforms like Sui, Aptos, and Movement are merging Move’s enhanced security features and efficient processing capabilities with Bitcoin’s established market presence.
This convergence showcases how blockchain technology continues to evolve, combining Bitcoin’s reliability with Move’s cutting-edge features to create a more secure, efficient, and interconnected DeFi landscape. As Bitcoin liquidity becomes more accessible and Move’s ecosystem expands, we are likely witnessing the foundation of a more interoperable and widely adopted decentralized financial future.
This union of Bitcoin’s trusted asset status with next-generation blockchain technology could be pivotal in driving mainstream DeFi adoption.
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An overview of the world's top Bitcoin holders, spanning individuals, companies, and countries.
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True ownership is the core value proposition of cryptocurrencies. Without a decentralized solution to ownership, property can only owned via a trusted third party such as the government.
Bitcoin, the first cryptocurrency, was created to bring ownership out of the hands of a central authority and back into the proverbial hands of the owners themselves. Since its inception, owning bitcoin has become the gold standard of self-custody, and millions of people around the world have clamored to hoard some themselves.
Bitcoin has attracted a diverse range of investors, from individuals to corporations to governments. Bitcoin ownership, however, is far from evenly distributed. A small number of wallets hold a large portion of the total supply, which could have serious implications for the market.
For this reason, the question of who owns the most bitcoin has always been a topic of great intrigue, especially considering bitcoin’s role in the future of decentralized finance and the world at large. This article will categorize the major global bitcoin holdings and elaborate on the entities that control them.
No discussion on bitcoin ownership can begin without mentioning Satoshi Nakamoto. Nakamoto is believed to have mined around 1.1 million bitcoin in the early days of the network.
Mysteriously, these coins have remained untouched since Nakamoto disappeared from the public eye in 2010.
Holding about 5% of the total supply, Nakamoto is estimated to be the largest bitcoin owner, controlling coins worth over $30 billion, as of November 2024. Despite this massive fortune, Nakamoto has never spent nor transferred these coins a single time, adding to the enigma surrounding bitcoin’s creator.
This immobility of Nakamoto’s stash reassures the cryptocurrency community that these holdings won’t suddenly flood the market, an undeniable risk when a single entity controls so much of the supply.
Cameron and Tyler Winklevoss, famously known for their legal battles with Mark Zuckerberg over Facebook, became some of bitcoin’s earliest and most vocal proponents. Their belief in the long-term potential of bitcoin has cemented their position as some of the most influential figures in the digital assets space.
The twins reportedly bought 70,000 BTC in the early 2010s, and their holdings have grown substantially since then. This investment helped them establish Gemini, a regulated cryptocurrency exchange that is one of the largest in the world.
Venture capitalist Tim Draper is another significant individual holder. Draper is the founder of Draper Fisher Jurvetson, Draper Venture Network, and Draper Associates, just to name a few.
He purchased 30,000 BTC in 2014 from the U.S. Marshals auction, following the Silk Road seizure, and invested in over 50 cryptocurrency companies, including Coinbase, Ledger, Tezos and Bancor. His initial bitcoin investment alone has grown substantially, making him one of the richest bitcoin billionaires.
Michael Saylor, CEO of MicroStrategy, has become one of the loudest proponents of bitcoin. His company’s decision to use bitcoin as its primary reserve asset has led to the accumulation of 279,420 BTC, the largest amount held by any publicly traded company (more on this below).
Outside of his company, Saylor also has stated that he personally holds around 17,000 BTC, making him one of the largest individual holders. Saylor is a bitcoin evangelist in the strongest sense and sees bitcoin as the best (if not only) long-term store of value.
As the founder of Binance, the world’s largest cryptocurrency exchange by trading volume, CZ is another core deity in the cryptocurrency pantheon.
While his personal bitcoin holdings aren’t publicly known, his net worth is estimated at roughly $96 billion. At a minimum, CZ’s early investment in bitcoin (when he sold his apartment to buy bitcoin in 2014) is publicly known, and alone makes him a billionaire.
Although many large whale wallets are anonymous, none are more infamous than “Mr. 100.”
Since November 2022, after the collapse of FTX, this wallet has consistently received 100 BTC, almost daily, amassing 52,996 BTC (valued at over $3.5 billion) as of 2024. This accumulation spree has made the wallet the 14th-largest holder of bitcoin globally — one of the largest held by an individual, if “he” is one. Blockchain intelligence suggests that the wallet may be used for managing Upbit’s cold storage, although this has not been officially confirmed.
When investigating the largest corporations that hold bitcoin, it is important to divide between those who invest in bitcoin and those who hold it on behalf of users, such as cryptocurrency exchanges.
MicroStrategy has led the corporate adoption of bitcoin as a treasury reserve asset. The company holds 279,420 BTC, which represents a significant portion of the company’s balance sheet. CEO Michael Saylor has convinced his investors that bitcoin is the ultimate store of value and has continually raised money to make large bitcoin purchases. This bold strategy has positioned MicroStrategy as the penultimate institutional holder of bitcoin.
In early 2021, Tesla made a significant move by purchasing $1.5 billion worth of bitcoin. As of 2024, Tesla holds 10,500 BTC, valued at around $698 million. Tesla’s decision to invest in bitcoin was part of its broader strategy to diversify its holdings and provide liquidity for future transactions. Tesla even briefly accepted bitcoin as payment for its vehicles. However, the company suspended this initiative, citing environmental concerns related to bitcoin mining.
Galaxy Digital, founded by former hedge fund manager Mike Novogratz, is a financial services firm with three operating businesses: Global Markets, Asset Management, and Digital Infrastructure Solutions. Galaxy currently holds 17,518 BTC, worth over $1 billion, and plays a key role in institutional bitcoin adoption by supporting businesses and infrastructure.
A major bitcoin mining company, Marathon Digital holds 13,716 BTC, primarily obtained through its mining operations. Marathon focuses on becoming the largest bitcoin mining operation in North America, leveraging low-cost energy sources to fuel its massive bitcoin mining infrastructure. Although Marathon occasionally sells bitcoin to pay for operations, it keeps a significant amount of its balance sheet as an investment vehicle.
Coinbase, one of the most popular cryptocurrency exchanges in the U.S., is the largest custodian of bitcoin. Coinbase is a core entry point for both retail and institutional investors, it even helps manage funds for the U.S. government. The company now holds approximately 1 million bitcoin as part of its operational reserves and user assets.
Binance is the world’s largest cryptocurrency exchange by trading volume and holds significant amounts of bitcoin in custody on behalf of its users. As of 2024, Binance controls 643,546 BTC, spread across several wallets. These holdings are managed as part of its trading and exchange operations. Binance’s size and global reach make it the international key player in the bitcoin ecosystem.
Bitfinex, one of the oldest advanced cryptocurrency exchanges, retains a loyal user base of retail and institutional investors. The company has been reported to hold approximately 204,338 BTC as of 2024. Despite past regulatory challenges and security breaches, Bitfinex remains one of the largest bitcoin custodians, providing liquidity to the market and facilitating large scale trading.
Robinhood, the popular U.S.-based trading platform, reportedly holds 118,300 BTC in a single wallet, making it one of the largest custodians of bitcoin. Robinhood’s bitcoin custody includes assets held on behalf of its users, many of whom are retail investors who prefer the convenience of using a traditional brokerage platform for cryptocurrency trading.
Since the creation of bitcoin ETFs, much of bitcoin has fallen under the control of institutions that provide these products. Many of these entities are traditional banking giants positioning themselves as safe points for entry into the cryptocurrency world.
The largest BTC holders among the ETF titians are:
BlackRock: 357,548 bitcoin
Grayscale: 221,841 bitcoin
Fidelity Investments: 174,926 bitcoin
Ark Invest / 21Shares: 45,008 bitcoin
The United States government holds the largest amount of bitcoin, totaling 213,297 BTC, valued at approximately $14.82 billion. These assets were primarily obtained through cryptocurrency seizures related to criminal activities. For example, a significant portion, about 69,000 BTC, came from the dismantling of the Silk Road alone.
Despite its ban on cryptocurrency trading and mining, China remains a significant holder of bitcoin. The Chinese government holds approximately 190,000 BTC, valued at around $13.2 billion. Most of these funds were seized from the PlusToken Ponzi scheme, one of the largest cryptocurrency frauds.
The United Kingdom has also accumulated a substantial bitcoin reserve through law enforcement seizures, amounting to about 61,000 BTC. Much of this bitcoin was confiscated as part of a money laundering operation involving cryptocurrency exchanges operations in bad faith on U.K. territory.
Unlike other countries that primarily hold bitcoin through seizures, El Salvador has proactively purchased bitcoin as part of its national financial strategy. El Salvador became the first country to adopt bitcoin as legal tender and has been regularly purchasing bitcoin since. The country holds 5,800 BTC, valued at approximately $400 million.
Ukraine has received a significant amount of bitcoin through donations to support its defense against Russia during the ongoing conflict. So far, the government has received 651.3 BTC, while the Come Back Alive Foundation has received 685.1 BTC. These donations are actively used to fund war efforts, leaving a current balance of 186.18 BTC.
After detailing all the major holders of bitcoin, its important to put these holding in the context of the current total supply.
40% of bitcoin ownership falls into the above categories of identifiable participants such as individuals, companies, miners, governments, and dormant supply.
14% of the total supply is dormant, assumed to be lost or inaccessible. This includes Satoshi Nakamoto’s mined coins, comprising 5.2% of the total BTC supply.
Exchanges control 11% of the total supply, with Binance and Coinbase leading the pack at 3.12 and 4.51% respectively.
Mining companies alone control about 9%, with Marathon being the largest holder.
ETFs compose 3.63% of the total, led by BlackRock and Greyscale.
Public companies control only 1.18%, the top being MicroStrategy and Tesla.
Governments control only 1.16% of the total supply. The U.S. is by far the largest holder with a 0.92% share in the total supply.
Whale wallets of individuals control about 20% of the total supply, although this number is difficult to calculate. None of the top identifiable holders even reach half a percentage point of the total supply
Although the bitcoin supply may seem to be controlled by only a few powerful wallets, the data shows that the picture is not so bleak. No single entity controls more than 5% of the supply, and even these companies are not beholden to the wishes of a single person. At the end of the day, the bitcoin network is likely safe from the massive sales that would send the price into a tailspin, and the core holders of bitcoin are resolute holders, if not dedicated to the cause.