What is Bitcoin Staking?

Since the launch of Ethereum staking in late 2020, users have deposited over $130 billion in ETH. Similarly, investors have placed $136 billion of total value locked (TVL) into decentralized finance (DeFi). However, most crypto staking has occurred on the Ethereum blockchain network and Proof-of-Stake networks. Bitcoin crypto investors, who hold equally significant crypto assets, have wondered how to participate in similar staking opportunities. 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?

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 emerged, it relied on a consensus mechanism called Proof-of-Work (PoW), also known as mining. In PoW, a miner assembles computer hardware to 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.  

2. 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 certain number of crypto. The staked tokens then verify transactions, and stakers earn staking rewards. Ethereum dominates the staking industry, but other staking-consensus networks, such as Solana and Cosmos, are rising in market share. As Bitcoin relies on mining to validate transactions, it does not support staking in the strict sense. However, many opportunities exist to earn rewards from your Bitcoin investments.

How to Earn Rewards with Bitcoin

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

Bitcoin Staking

“The Bitcoin staking concept is a two-sided marketplace.” - Babylon Capital. Bitcoin staking allows Bitcoin holders to utilize their capital to provide validation services to POS chains. The concept works similarly to Ethereum Restaking, where protocols like EigenLayer enable you to deposit your staked ETH to validate other blockchain projects. Here’s how it works:

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 their key.
4. The Bitcoin holder then earns “staking” rewards.
5. The Bitcoin holder can unlock their Bitcoin by unlocking the contract.

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

Yield Farming

Investors deposit their cryptocurrency holdings into DeFi applications through yield farming and earn yield. Investors then hop on from one platform to the next, generating more yield. Investors may engage with liquidity pools, lending platforms, or 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 several tokens.  Kraken offers staking pools for Proof-of-Stake or Decentralized Proof-of-Stake networks such as Cardano, Polygon, and Solana. Investors earn various staking yields. 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, one must participate in the broader DeFi industry to earn rewards through Bitcoin. To learn how one can earn passive income with Bitcoin, one needs to learn the following terminologies:

Interoperability

Developers created blockchains with different back-end languages and frameworks. Ethereum uses the ERC-20 token standard, while Bitcoin operates on BEP-20. As such, investors cannot directly transfer Bitcoin to Ethereum or vice versa. The problem compounds with more networks and tokens—picture Solana to Cosmos, Polkadot to Sui Network, etc. To address these issues, developers have created technology that allows 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.
• Smart Contracts issue an equivalent pegged crypto 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 blockchain (mainnet).
• Destination Blockchain: Ethereum blockchain (ERC-20 standard).

Users deposit their Bitcoin on the blockchain, and in return, an equivalent amount of Wrapped Bitcoin (WBTC) appears 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?

Whether you're Bitcoin staking, using wBTC in the Ethereum DeFi landscape, or using other methods, you can earn rewards in many ways.

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, 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 nearly USD4 billion in staked Bitcoin.

Curve Finance

Curve is a highly popular Automated Market Maker that allows users to swap (exchange) several tokens. The DeFi platform uses 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 29% annually, 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 need a crypto wallet (such as Metamask) to use the platform. While Uniswap does not offer staking pools, investors may capitalize on the various liquidity pools within the protocol. For WBTC, users can deposit into dual crypto liquidity pools to earn rewards.

What are the Benefits of Bitcoin Rewards?

Bitcoin investors have wondered how to earn rewards on their holdings without a way to stake crypto. Fortunately, the DeFi industry has evolved to cater to these holders. Here are other benefits of putting use Bitcoin to work, whether through Bitcoin Staking or Yield Farming:

Increased Liquidity

Participants in Bitcoin yield farming contribute significantly to the liquidity of decentralized exchanges and protocols. Yield farming also 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. Bitcoin investors may, at least, receive rewards in other cryptocurrencies.

Are Bitcoin Rewards a Safe Investment?

In solo staking, 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. Introducing third-party apps brings additional risks as users may sign malicious transactions.

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 experience impermanent loss. This loss occurs when the value of the liquidity pool assets deviates from that of 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 investors should consider it when providing liquidity.  

Conclusion

With the rise of Bitcoin Staking and DeFi, Bitcoin holders may earn passive income and receive rewards similar to those of Ethereum holders. For example, Bitcoin DeFi through WBTC has garnered $13.6 billion in TVL, nearly 10% of the entire DeFi landscape. Similarly, Bitcoin Staking has now garnered close to $4 billion in staked assets. 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.  

Editor’s Note: This article was originally published in March 2024 but has been updated with new information

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