Liquid Staking and Restaking of Bitcoin: The Next Yield Frontier

By CryptoCompound, Translated by Shaw Jinse Finance

A quiet revolution is underway in the crypto world

For years, staking primarily involved Ethereum and proof-of-stake chains—a way to lock up assets to maintain network security and earn a yield. But the concept has evolved dramatically. First, liquid staking emerged, allowing stakers to earn yield while still using their tokens for other purposes. Then, restaking emerged, transforming staked assets into collateral while simultaneously providing security for multiple networks.

Now, a new wave is emerging—one that could reshape Bitcoin's role in the digital economy: native Bitcoin staking and restaking.

What's happening isn't just another DeFi experiment, nor is it a passing fad in yield farming. This is the beginning of Bitcoin's transformation from a "store of value" to an active participant in the security and power of decentralized infrastructure—without ever leaving the Bitcoin chain. From Ethereum to Bitcoin: The Shift in Staking Models Liquidity staking solves a major friction problem. Traditionally, if you stake your tokens (like ETH or SOL), they become illiquid—you can't use or trade them while earning yield. Liquidity staking protocols like Lido or Rocket Pool change this by issuing Liquidity Staking Tokens (LST) (like stETH), which represent your staked position but can still be used in DeFi. This innovation has been so successful because it enables composability of returns. Investors can stake, earn yield, and borrow simultaneously. Restaking takes this a step further. The ETH you stake doesn't just secure the Ethereum network; you can "restake" it to help secure other networks or decentralized services. In return, you'll earn additional rewards. EigenLayer has become the flagship of this movement, creating a market for shared security—one in which protocols can essentially rent trust from stakers. But here's the key: until now, Bitcoin has been largely excluded from this revolution. Why Bitcoin is entering the era of staking: Bitcoin was designed not as a proof-of-stake chain, but as a proof-of-work chain. This means you can't "stake" BTC like you can ETH. You can mine it, hold it, and mint it on other chains, but you can't natively lock it up to secure the protocol. Until recently.

New protocols like Babylon and BounceBit now support native Bitcoin staking and re-staking—without wrapping, bridging, or moving Bitcoin off-chain. This development could open up entirely new use cases for Bitcoin holders, institutional custodians, and DeFi protocols.

How Bitcoin Native Staking Works

To understand this breakthrough, it's worth examining Babylon, a protocol designed to put Bitcoin's massive market capitalization to use while remaining completely trustless.

In simple terms, it works like this:

• BTC can be locked directly in a time-locked vault on the Bitcoin blockchain.

• The locked BTC can then be used as economic collateral to secure other proof-of-stake networks or applications.

• This protocol ensures your BTC never leaves the Bitcoin network—it's simply cryptographically referenced by other networks.

• You earn yield from these networks as compensation for providing security.

Essentially, Babylon exports Bitcoin's economic influence to the rest of the crypto ecosystem.

It's an ingenious bridge—not an asset transfer in the traditional sense, but an extension of security. This makes it more resilient and less risky than wrapped Bitcoin (like wBTC) that relies on centralized custodians.

In June 2025, Kraken announced plans to integrate Babylon's staking mechanism, signaling institutional confidence in the model. This marks a turning point—the point at which exchanges, custodians, and funds will be able to offer Bitcoin yield products without exposing users to bridging risks or regulatory gray areas. BounceBit and the "BTC Restaking" Layer While Babylon is dedicated to exporting Bitcoin's security, BounceBit does something slightly different—it brings Bitcoin's liquidity into an EVM-compatible environment built specifically for financial products. BounceBit is a dual-token restaking chain that combines Bitcoin with its native token to secure the network. Users can deposit BTC, participate in restaking, and directly access DeFi yield opportunities—all within a system designed specifically for Bitcoin funding. Think of it as a CeDeFi (centralized-decentralized) hub for Bitcoin holders seeking yield, liquidity, and composability without completely leaving the Bitcoin ecosystem. The chain integrates RWA (real-world asset) projects, institutional treasury, and yield strategies. While Babylon and BounceBit take different approaches, they both aim for the same goal: making Bitcoin productive—a yield-generating collateral asset that powers decentralized systems. Why This Narrative Matters Bitcoin accounts for over 50% of the total cryptocurrency market capitalization, yet most Bitcoin sits idle. Holders—from retail investors to multi-billion dollar corporate crypto treasuries—are largely passive. In contrast, staking protocols on Ethereum have transformed billions of dollars into active economic engines. If Bitcoin staking gains traction, it could mobilize significant amounts of idle liquidity into the DeFi and infrastructure economies, extending Bitcoin's utility beyond speculation. In short, Bitcoin will no longer be just "digital gold"; it will become a productive reserve asset. Beneath the Surface: This innovation isn't without risk. In fact, staking and re-staking introduce new technical and economic risks: Slashing Risk - When you re-stake, you agree to abide by certain uptime or performance conditions. Failure to meet these conditions could result in the loss of some of your collateral. Properly assessing this type of risk is complex, especially for Bitcoin. Smart Contract Risk - Even if your Bitcoin remains on-chain, interacting with off-chain systems through cryptographic commitments still relies on protocol security. Vulnerabilities or attacks in these layers could lead to consequential losses. Liquidity and Redemption Risk - If a liquid Bitcoin-collateralized token like LRT trades below its Bitcoin peg, users could face redemption queue congestion or decoupling under market pressure—the same issues facing stETH in 2022. Concentrated Governance - Like Lido's dominance in Ethereum liquidity staking, Bitcoin staking could potentially concentrate power in the hands of a few large validators or custodians, undermining the spirit of decentralization. Regulatory Uncertainty - If Bitcoin staking products generate predictable returns, some jurisdictions may classify them as securities or interest-bearing deposits, triggering compliance obligations. Crucially, Bitcoin's brand is built on a foundation of trust minimization. If these models introduce new dependencies, they need to be mathematically and operationally proven to not undermine this principle. Institutional Interest is Growing - Despite the risks, institutional demand is already building. Money managers and crypto funds holding large Bitcoin positions are eager to find ways to generate returns without liquidating or bridging assets. Kraken's participation, along with venture investments in Babylon and BounceBit from firms like Binance Labs, Polychain, and OKX Ventures, demonstrates growing market confidence. Mainstream custodians are exploring "staking-as-a-service" models, which guarantee asset security while maintaining cold storage. If 1%-2% of the global Bitcoin supply (approximately $25-50 billion) were staked, this would create a new market for institutional-grade returns built on Bitcoin's credibility. First-mover advantage: This presents a rare asymmetric opportunity for investors and researchers. The mechanisms are complex, the protocols are immature, and the revenue streams are still developing. However, history shows that in new market cycles, the narratives that gain traction first—such as DeFi in 2020 or NFTs in 2021—tend to create outsize winners. The playbook here is simple:

• Focus on growth in Bitcoin’s re-staked total value locked (TVL)—Babylon, BounceBit, and related projects.

• Track exchange integrations—institutional infrastructure is driving adoption faster than retail market hype.

• Prioritize trust-minimizing design over high annualized returns. Aim for long-term growth, not short-term gains.

A New Phase for Bitcoin

If Bitcoin’s re-staking succeeds, it will mark a philosophical shift as well as a financial one. The world’s most secure, most decentralized asset will begin securing other networks—transforming their idle capital into active trust infrastructure. This could blur the lines between Bitcoin and the rest of the crypto ecosystem, paving a path for Bitcoin to generate sustainable on-chain returns without sacrificing its core integrity. This story isn't about "DeFi on Bitcoin," but about Bitcoin as a secure collateral in a multi-chain world. Final Thoughts: The evolution of cryptocurrency has always been marked by cycles of utility. The next cycle may not be defined simply by new tokens or protocols, but by how the world's hardest currency becomes the backbone of shared security and on-chain returns. Liquidity staking redefined Ethereum. Restaking is reshaping the securities market. Now, Bitcoin has joined the fray—not as an outsider, but as a major player.

If Babylon, BounceBit, and their successors prove reliable, the concept of idle Bitcoins could become a thing of the past.

Bitcoin doesn’t just store value—it earns value.