What is Bitcoin Staking?

Since the launch of Ethereum staking in late 2020, users have deposited approximately $65 Billion of ETH in staking. Similarly, investors have placed $90 Billion of total value locked (TVL) into the DeFi space.   However, most crypto staking has occurred on the Ethereum blockchain network and Proof-of-Stake networks. Bitcoin crypto investors have been left wondering how to participate in similar staking opportunities, despite holding the biggest of crypto assets.   Fortunately, the DeFi industry provides numerous opportunities for Bitcoin holders to receive rewards.   In this article, we answer the following:  

• Can Bitcoin network participants participate in staking?
• How to earn Bitcoin rewards
• What are the benefits and risks of earning rewards in Bitcoin?

  Continue reading to explore Bitcoin staking.   Can You Do Bitcoin Staking? A person cannot directly engage in Bitcoin staking in the strict sense. However, many opportunities exist to earn rewards from your Bitcoin investments.   It is essential to understand how blockchain networks operate and verify transactions. Network participants typically engage in two types of consensus mechanisms:

1. Crypto Mining

When Bitcoin first came out, it relied on a consensus mechanism called Proof-of-Work (PoW), otherwise known as mining. PoW requires a miner to assemble computer hardware that will solve complex mathematical equations to validate transactions. Miners then earn block rewards and network fees.   As the difficulty of solving these mathematical puzzles increased, so did the hardware computational power and investment cost. Over time, mining became a costly operation and fell into the hands of a few players, defeating blockchain decentralization.    

1. Crypto Staking

To counter the issues of crypto mining, blockchain developers created Proof-of-Stake and Decentralized-Proof-of-Stake. Otherwise known as PoS and DPoS, respectively, these consensus mechanisms require stakers to deposit a required number of crypto. These staked tokens then verify transactions, and stakers earn staking rewards.   Ethereum dominates the majority of the staking industry. Other staking-consensus networks such as Solana, Cosmos, and Celestia round out the industry.     As Bitcoin relies on a different way to validate transactions, it does not support staking.

How to Earn Rewards with Bitcoin

With the innovation in the space, developers and companies have figured out ways to unlock the capital held by Bitcoin investors.   Here are a few of the methods to earn rewards with Bitcoin:

Remote Bitcoin Staking

“The Bitcoin staking concept is a two-sided marketplace.” - Babylon Capital

  Remote Bitcoin staking allows Bitcoin holders to utilize their capital to provide validation services to POS chains. Here’s how this is executed:  

1. A Bitcoin holder locks their cryptocurrency on a contract on the Bitcoin network.
2. A POS network then chooses which Bitcoin deposit to adopt.
3. The holder validates transactions on the POS chain using his or her key.
4. The Bitcoin holder then earns “staking” rewards.
5. The Bitcoin holder can unlock his or her Bitcoin by unlocking the contract.

As Bitcoin mining does not require Bitcoins to validate the transactions on the network. On the other hand, POS chains require native token capital to perform validation services. Remote puts unutilized Bitcoin to work.

Yield Farming

Through yield farming, investors deposit their cryptocurrency holdings into DeFi applications and earn rewards called yield. Investors then hop on from one platform to the next, generating yields. Depending on the platform, an investor may engage with liquidity pools, lending platforms, or even NFT Staking.   Investors may earn rewards in the DeFi protocol’s native token or from the liquidity pool that the investor deposits into.   While mining and staking contribute to validating transactions on a blockchain, yield farming mainly supports the operations of a DeFi platform.    

Bitcoin Rewards on Centralized Exchanges

Various exchanges provide staking rewards for a number of tokens.    Kraken offers staking pools for Proof-of-Stake or Decentralized-Proof-of-Stake networks such as Cardano, Polygon, and Solana. Investors earn staking yields of 3% to 8% per annum, depending on the blockchain. Bitcoin investors can deposit their assets and receive rewards through similar pools. While Bitcoin staking is not supported, exchanges generate rewards through other activities, such as lending and trading fees.

What Technology Makes Bitcoin Rewards Possible?

A Proof-of-Stake or Decentralized-Proof-of-Stake blockchain offers staking rewards as a product of its consensus mechanism. Meanwhile, to earn rewards through Bitcoin, one must participate in the broader DeFi industry.   To learn how one can earn passive income with Bitcoin, one needs to learn the following terminologies:

Interoperability

Developers made blockchains with different back-end languages and frameworks. Ethereum uses an ERC-20 token standard, while Bitcoin operates on BEP-20. As such, investors cannot directly transfer Bitcoin to Ethereum and vice versa. The problem compounds with more networks and more tokens. Picture Solana to Cosmos.   To address these issues, developers have created technology that will allow blockchains to communicate with one another.

Wrapping

To enable blockchain interoperability, users wrap their digital assets.   Blockchain wrapping involves the representation of an asset from one blockchain to another blockchain, often in the form of a token. The process involves the following:  

• A user locks the original crypto asset on the source blockchain.
• An equivalent or pegged crypto is issued on the destination blockchain. 
• Users utilize the wrapped token on the target blockchain, taking advantage of its features, applications, or functionalities.

  Here’s a specific example involving Bitcoin:  

• Token: Wrapped Bitcoin (WBTC)
• Source Blockchain: Bitcoin (BTC) on the Bitcoin blockchain (mainnet).
• Destination Blockchain: Ethereum blockchain (ERC-20 standard).

  Users deposit their Bitcoin on the Bitcoin blockchain, and in return, an equivalent amount of Wrapped Bitcoin (WBTC) is minted on the Ethereum blockchain. WBTC is widely used in the Ethereum DeFi ecosystem, allowing users to access decentralized finance applications with their Bitcoin.   A DeFi participant may wrap their Bitcoin on a trusted crypto exchange such as Coinbase.

Where to Earn Bitcoin Rewards?

Once one has obtained WBTC, the Ethereum DeFi landscape provides many avenues for earning rewards.

Babylon Chain

Babylon Chain is a Bitcoin staking protocol that allows Bitcoin holders to earn yield from their idle Bitcoin. Holders lock their Bitcoins through a self-custodial contract and earn the right to validate PoS chains and earn yield in return.  Through this innovative new model, stakers skip bridging and wrapping, and deal directly with the Bitcoin network.    Babylon Chain’s Bitcoin staking protocol has attracted 430,000 on its waitlist as users anticipate its launch. The company has raised USD18 Million to date.

Curve Finance

Curve is a highly popular Automated Market Maker that allows users to swap (exchange) several tokens. The DeFi platform makes use of liquidity pools to support its operations. Users may take advantage of Curve’s tri-crypto liquidity pools, which consist of WBTC and other token pairings. Investors receive up to 10.86% per annum rewards when including CRV rewards (the DeFi protocol’s native token).  

Uniswap

Uniswap is the largest decentralized trading protocol where users can swap and earn rewards from their crypto. The platform supports a large number of tokens throughout the Ethereum blockchain network.   Investors just need a crypto wallet (such as Metamask) to use the platform. While Uniswap does not offer any staking pools, investors may capitalize on the various liquidity pools within the protocol. Specifically for WBTC, users can deposit into dual crypto liquidity pools to earn rewards.     What are the Benefits of Yield Farming Bitcoin? Without a way to stake crypto, Bitcoin investors have been left without means to earn rewards on their holdings. Fortunately, the DeFi industry has evolved to cater to these token holders.   Here are other benefits of Yield Farming Bitcoin:

Increased Liquidity

Participants in Bitcoin yield farming contribute significantly to the liquidity of decentralized exchanges and protocols. This fosters smoother operations within the DeFi ecosystem.    Consider the example of providing liquidity to a decentralized exchange. Adding your Bitcoin to a liquidity pool on platforms like Uniswap enables users to trade more efficiently while you receive rewards from the trading fees.    This liquidity provision is essential for the overall health and functionality of DeFi platforms.  

Diversification

Yield farming allows Bitcoin holders to diversify their cryptocurrency portfolio by exploring alternative DeFi investments. Ethereum token holders are fortunate in this aspect.    Innovations like Liquid Staking have allowed Ethereum token holders to diversify their cryptocurrency staking. For Bitcoin investors at least they may receive rewards in other cryptocurrencies.

Are Bitcoin Rewards a Safe Investment?

In the solo staking process, stakers connect directly to blockchain projects to support the network. Meanwhile, earning Bitcoin rewards requires users to navigate multiple third-party applications such as crypto wallets and DeFi platforms. This introduces additional risks.

Smart Contract Risks

Smart contracts (self-executing code) make up many DeFi protocols. They automate various processes, including yield farming strategies. However, smart contracts are not immune to vulnerabilities or bugs.  Coding errors, security flaws, or unforeseen issues in smart contracts can lead to financial losses for users. It's crucial to conduct due diligence before depositing crypto into any DeFi platform.

Impermanent Loss

Liquidity providers in decentralized exchanges may face impermanent loss. This occurs when the liquidity pool assets' value deviates from holding those assets individually.  If the price of the tokens in the pool changes significantly, liquidity providers may experience losses compared to holding the tokens. This risk is inherent in automated market maker protocols and should be considered when providing liquidity.  

Conclusion

Despite the absence of cryptocurrency staking, Bitcoin holders may earn passive income and receive rewards throughout the DeFi landscape.   To give an example, Bitcoin DeFi through WBTC has garnered $6.6 Billion in TVL, nearly 10% of the entire DeFi landscape.   Bitcoin rewards opportunities present a range of benefits. By strategically engaging in these, investors can optimize their earnings while actively contributing to the growth and functionality of the broader DeFi ecosystem and POS network validation.   At the very least, reflect on your personal risk tolerance.

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