Tokenized staking is a rather new paradigm in bitcoin, as bitcoin staking itself was only recently made possible by the introduction of Babylon. Now that Babylon exists as a basic infrastructure tool for bitcoin staking, separate protocols can be used to tokenize that stake and provide stakers access to the liquidity that is tied up at the Babylon layer.
Lorenzo Protocol is leading this sector, introducing the novel concept of dual staking deposit tokenization with its Liquid Principal Token (LPT) and Yield Accruing Token (YAT) standards, setting the stage for diverse yield earning opportunities for BTC holders.
Let’s dive into how the system works.
Bitcoin Liquid Staking Plans And Their Liquid Staking Tokens
The first step towards bitcoin staking tokenization in Lorenzo Protocol is choosing a bitcoin liquid staking plan (BLSP), as the parameters of the tokenization will depend on the chosen BLSP. At its core, a BLSP is simply the staking plan that has been chosen by a bitcoin staker in Lorenzo Protocol. Different plans involve different agreements in terms of properties such as where the user’s bitcoin will be staked and the staking duration period.
https://medium.com/@lorenzoprotocol/what-is-a-bitcoin-liquid-staking-plan-blsp-0785bef6ee45
Once a plan has been chosen and the bitcoin has been staked, the relevant LPTs that represent the underlying collateral that has been staked will be created on the Lorenzo Appchain. A secondary token, known as a YAT, is also issued alongside the LPT to separate the right to collect the yield associated with the stake from the underlying collateral itself.
It should be noted that YATs are only fungible with other tokens issued via the same BLSP. While there is no requirement for LPTs to be issued as stBTC tokens, that particular LPT is promoted to avoid fragmentation in the bitcoin decentralized finance (DeFi) ecosystem. This separation of the tokenization of bitcoin staking into LPTs and YATs allows more flexibility in terms of using staked bitcoin liquidity in DeFi applications, in addition to avoiding a situation where the value of bitcoin liquidity tokens are altered by their associated yield.
Creating Liquid Staking Tokens On The Lorenzo Appchain
To begin the process of creating LPTs and YATs via Lorenzo, the user must first log into the Lorenzo decentralized application (dApp) with a wallet that is compatible with both the Bitcoin base layer and the Ethereum Virtual Machine (EVM). Some cryptocurrency wallets are compatible with both networks, but separate wallets can also be used. The EVM portion of the wallet must be connected to the Lorenzo Appchain network, as that is the relevant cryptocurrency network for the creation of LPTs via the Lorenzo dApp.
Once a user has logged in with their wallet of choice and selected a BLSP, they will be able to send bitcoin to an address displayed during the staking process. The user is able to choose the amount of bitcoin they wish to stake via Lorenzo, and the deposit transaction includes the user’s associated Lorenzo Appchain address in the OP_RETURN field. Once the transaction has been made, a Lorenzo relayer verifies the deposit transaction on the Bitcoin network before minting the associated LPT on the Lorenzo Appchain in the form of stBTC tokens. In addition to enabling access to staked bitcoin on the Lorenzo Appchain, stBTC also acts as the native cryptocurrency for gas fees on the network. On top of the stBTC, the user is also issued YATs that correspond to the BLSP they have chosen.
Later on, if a user wishes to convert their stBTC back to base layer bitcoin, they can also complete that conversion process in the Lorenzo dApp. In this process, the user will burn their stBTC via Lorenzo, which will be confirmed by the Lorenzo Monitor. The Lorenzo Monitor then sends the relevant transaction data to the Lorenzo vault wallet system for a final confirmation and signature before the underlying bitcoin is sent to the user by the Lorenzo Monitor.
For YAT redemption, the process works a bit differently. Once a YAT has reached its full maturity, it can no longer be transferred freely throughout DeFi. The only use case for YATs at that point is redemption of the rewards they have accrued during the staking period. Once those rewards have been redeemed, the YATs are burned.
In the future, Lorenzo users will also be able to gain access to stBTC via deposits of WBTC and other forms of tokenized bitcoin that already exist.
Who Controls The Bitcoin Backing stBTC?
Of course, a liquid staking tokenization protocol like Lorenzo is only as secure as the system that governs the bitcoin that backs the stBTC token. While the eventual goal is to make this underlying treasury management system as decentralized as possible, Phase One of Lorenzo involves a mixture of centralized and decentralized solutions in a CeDeFi structure.
The Lorenzo Vault Wallet is ultimately in control of the bitcoin deposited at the base Bitcoin layer by Lorenzo users. This vault system is controlled by a multi-signature address where the relevant private keys are held by vault partners from both the bitcoin and traditional finance ecosystems on different hardware devices — Lorenzo Protocol never holds users’ bitcoin directly. These devices must collaborate to sign transactions involved in the bitcoin redemption process.
In the future, the further decentralization of the Lorenzo Vault Wallet is vital to the success of Lorenzo, as too much centralization would open up attack vectors in terms of trust in Lorenzo itself, potential attacks from hackers, and the threat of regulation. For now, the lack of programmability found on Bitcoin’s base blockchain layer is holding back the level of decentralization that can be found in Lorenzo’s vault management; however, this could change with the introduction of new opcodes to Bitcoin.
Expanding Bitcoin’s DeFi Utility
Lorenzo Protocol introduces a novel approach to tokenizing bitcoin staking by leveraging BLSPs and a dual-token model with LPTs and YATs. This framework provides users with the flexibility to stake bitcoin while maintaining liquidity and earning yield with a simple and secure user experience.
While Lorenzo currently relies on a combination of centralized and decentralized mechanisms for managing the underlying bitcoin collateral, future plans aim for greater decentralization to enhance security and trust. As the ecosystem evolves, Lorenzo’s approach to tokenized bitcoin staking could play a significant role in expanding the utility of bitcoin within DeFi, especially via Bitcoin Layer 2 networks.
