Liquidity staking and re-staking of Bitcoin: The next frontier of yield

Author: CryptoCompound, Translated by: Shaw Golden Finance

A quiet revolution is happening in the field of cryptocurrency.

For many years, staking primarily involved Ethereum and proof-of-stake chains—a method of securing the network and earning rewards by locking up assets. However, this concept has undergone significant changes. First, there emerged liquid staking (liquid staking), allowing stakers to earn rewards while still using their tokens for other purposes. Then, there was the emergence of re-staking (retaking), which transforms staked assets into collateral while providing security for multiple networks.

Now, a new wave is forming - it may reshape the role of Bitcoin in the digital economy: native Bitcoin staking and restaking.

What is happening is not another DeFi experiment, nor is it a fleeting craze for yield farming. This marks the beginning of Bitcoin's transformation from a “store of value” to an active participant in securing and driving decentralized infrastructure—without having to detach from 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 cannot use or trade them while earning rewards. Liquidity staking protocols like Lido or Rocket Pool have changed this by issuing liquid staking tokens (LST) (such as stETH), which represent your staked position but can still be used in DeFi.

The reason this innovation has achieved great success is that it enables yield composability. Investors can stake, earn yields, and borrow simultaneously.

Re-staking takes it a step further. The ETH you stake is not only used to secure the Ethereum network, but you can also “re-stake” it to help secure other networks or decentralized services. In return, you will receive additional rewards. EigenLayer has become the flagship of this movement, creating a shared security market—where protocols can essentially rent trust from stakers.

But the key point is: so far, Bitcoin has basically been excluded from this revolution.

Why Bitcoin is Entering the Staking Era

The design of Bitcoin itself is not a proof-of-stake chain, but a proof-of-work chain. This means you cannot “stake” BTC like you stake ETH. You can mine it, hold it, or wrap it onto other chains, but you cannot natively lock it to secure the protocol.

Until recently.

New protocols such as Babylon and BounceBit now support native Bitcoin staking and re-staking—without the need for 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 Native Bitcoin Staking Works

To understand this breakthrough, it is worth studying Babylon, a protocol designed to make the vast market value of Bitcoin useful while maintaining its completely trustless characteristics.

In simple terms, its working principle is as follows:

• You can directly lock BTC in a time-locked vault on the Bitcoin blockchain.
• Locked BTC can be used as economic collateral to protect the rights in other proof of stake networks or applications.
• This agreement ensures that your BTC will never leave the Bitcoin network—it is merely referenced in an encrypted manner by other networks.
• You can earn rewards from these networks as compensation for providing security.

Essentially, Babylon exports the economic influence of Bitcoin to other parts of the crypto ecosystem.

This is a clever bridge - not a traditional asset transfer in the conventional sense, but an expansion of security guarantees. This makes it more resilient and lower risk than wrapped Bitcoin (such as wBTC) that relies on centralized custodians.

In June 2025, Kraken announced plans to integrate Babylon's staking mechanism, indicating institutional confidence in this model. This is a turning point—by then, exchanges, custodians, and funds will be able to offer Bitcoin yield products without exposing users to bridging risks or regulatory gray areas.

BounceBit and “BTC Re-staking” Layer

While Babylon is dedicated to enhancing the security of Bitcoin, BounceBi does something slightly different - it brings Bitcoin's liquidity into an EVM-compatible environment specifically built for financial products.

BounceBit is a dual-token re-staking chain that combines Bitcoin with its native token to ensure network security. Users can deposit BTC, participate in re-staking, and directly access DeFi yield opportunities—all within a system designed specifically for Bitcoin funds.

It can be regarded as a CeDeFi (Centralized-Decentralized) hub for Bitcoin holders who seek yield, liquidity, and composability, but do not want to completely detach from the Bitcoin ecosystem. This chain integrates RWA (Real World Asset) projects, institutional treasuries, and yield strategies.

Although Babylon and BounceBit take different approaches, they both aim for the same goal: to make Bitcoin productive—a collateral asset that can generate returns and power decentralized systems.

Why this narrative is crucial

Bitcoin accounts for more than 50% of the total market value of cryptocurrencies, but most of the Bitcoin is idly held. Holders—from retail investors to billion-dollar corporate treasury reserves—are mostly in a passive state. In contrast, staking protocols on Ethereum have turned billions of dollars in funds into an active economic engine.

If Bitcoin staking gains momentum, it could mobilize a significant amount of idle liquidity into the DeFi and infrastructure economy, thereby extending Bitcoin's utility beyond speculation.

In short, Bitcoin will no longer be just “digital gold”; it will become a productive reserve asset.

Risks Beneath the Surface

This innovation is not without its risks. In fact, staking and re-staking can introduce new technical and economic risks:

1. Forfeiture Risk - When you re-stake, you agree to comply with certain uptime or performance conditions. Failing to meet these conditions may result in partial loss of collateral. Accurately assessing such risks is very complex, especially for Bitcoin.
2. Smart Contract Risks – Even if your Bitcoin remains on the chain, interacting with off-chain systems through cryptographic commitments still relies on the security of the protocol. Vulnerabilities or attacks at these levels may lead to indirect losses.
3. Liquidity and Redemption Risk — If the trading price of liquidity Bitcoin staking tokens (such as LRT) is lower than their Bitcoin peg price, users may face redemption queue congestion or decoupling under market pressure — similar to the issues faced by stETH in 2022.
4. Governance Centralization - Just like Lido's dominance in Ethereum liquid staking, Bitcoin staking may also concentrate power in the hands of a few large validators or custodians, undermining the spirit of decentralization.
5. Regulatory Uncertainty - If Bitcoin staking products generate predictable returns, some jurisdictions may classify them as securities or interest-bearing deposits, triggering compliance obligations.

The key is that Bitcoin's brand is built on a foundation of minimal trust. If these models introduce new dependencies, they need to mathematically and operationally prove that they do not violate this principle.

Institutional interest is heating up

Despite the risks, institutional demand has already formed. Fund managers and crypto funds holding large positions in Bitcoin are eager to find ways to earn returns without the need for liquidation or bridge assets.

The participation of Kraken, along with venture capital investments from companies such as Binance Labs, Polychain, and OKX Ventures in Babylon and BounceBit, demonstrates the growing confidence in the market. Mainstream custodians are exploring a “staking-as-a-service” model, which ensures asset security while keeping assets in cold storage.

If 1%-2% of the global Bitcoin supply (approximately $25-50 billion) is staked, it would create a new institutional-grade yield market built on the credibility of Bitcoin.

First-mover advantage

For investors and researchers, this is a rare asymmetric opportunity. The mechanisms are complex, the protocols are still immature, and the sources of returns are still forming. However, history shows that the narratives that gain attention earliest in new market cycles—such as DeFi in 2020 or NFTs in 2021—often create massive winners.

The script here is very simple:

• Focus on the growth point of the total locked value (TVL) of Bitcoin re-staking — Babylon, BounceBit, and related projects.
• Track trading integration - Institutional infrastructure is driving adoption faster than the retail market speculation.
• Prioritize trust-minimized design over high annual returns. The goal is long-term development rather than short-term gains.

The New Phase of Bitcoin

If the re-staking of Bitcoin is successful, it will signify a philosophical shift as well as a financial transformation. The world's safest and most decentralized asset will begin to protect other networks—transforming its idle capital into active trust infrastructure.

This may blur the boundaries between Bitcoin and other cryptocurrency ecosystems, and it opens a path for Bitcoin to generate sustainable on-chain revenue without sacrificing its core integrity.

This story is not about “DeFi on Bitcoin,” but rather about Bitcoin as a secure collateral in a multi-chain world.

Final Thoughts

The development of cryptocurrency has always been accompanied by cyclical changes in practicality. The definition of the next cycle may not only be about new tokens or protocols, but rather how the hardest currency in the world becomes a pillar of shared security and on-chain yield.

Liquid staking redefines Ethereum. Re-staking is reshaping the securities market.

Today, Bitcoin has also joined the competition—not as an outsider, but as a heavyweight contender.

If Babylon, BounceBit, and their subsequent products prove to be reliable, the concept of idle Bitcoin may become a thing of the past.

Bitcoin is not just a store of value—it can also earn value.