What Has Changed After Introducing the PoS Mechanism to BTC?

Before discussing the introduction of Proof of Stake (PoS) to the Bitcoin ecosystem, let’s take a moment to review Ethereum’s transition from Proof of Work (PoW) to PoS and understand how this transformation revolutionized the blockchain ecosystem.

• PoS in Ethereum

Ethereum, as the leading global smart contract blockchain, has one of its core successes in its programmability and support for decentralized applications (dApps). However, Ethereum’s early adoption of the PoW consensus mechanism, while providing decentralized security, exposed several issues. The PoW model relies on substantial computational power to verify transactions and generate new blocks, which led to two major problems: network congestion and high transaction fees. Additionally, PoW’s energy consumption sparked widespread environmental concerns, especially as global demands for sustainability have increased.

To address these challenges, Ethereum decided to transition to a PoS consensus mechanism, offering a completely new approach. Unlike PoW, PoS does not rely on vast computational resources to ensure network security. Instead, it grants network participation rights through the holding and staking of a certain amount of cryptocurrency. Users holding more cryptocurrency have a greater chance of validating transactions and generating new blocks. PoS not only significantly reduces energy consumption but also enhances the network’s security and scalability, providing a more efficient, eco-friendly, and sustainable solution.

1.1 Key Transformation Milestones

• Beacon Chain Launch: In preparation for this transition, Ethereum launched the Beacon Chain on December 1, 2020. This was a separate PoS-based blockchain designed to lay the groundwork for the merging of the main Ethereum chain and the PoS mechanism.
• The Merge: On September 15, 2022, Ethereum’s mainnet (PoW) successfully merged with the Beacon Chain (PoS), marking the full transition to the PoS era. This transition also marked the complete departure from GPU-based mining, as Ethereum moved to a staking-based model powered by validators.

1.2 How PoW and PoS Work

Under the PoW mechanism, miners in the blockchain network must solve complex mathematical problems to gain the right to record transactions. Each miner computes the solution, then broadcasts the new block and its solution to other miners over a peer-to-peer network. Other miners verify the transactions, mathematical solutions, and signatures in the block to ensure validity. Once over 51% of miners validate the block, it is confirmed, and the miner receives a reward, followed by the next round of competition.

In contrast, PoS operates quite differently. Under PoS, miners no longer compete to solve mathematical problems for block validation rights; instead, they stake cryptocurrencies to earn the right to validate transactions and generate new blocks. Ethereum’s PoS mechanism uses random selection of validators to propose new blocks. Validators are required to lock a minimum of 32 ETH in the Beacon Chain’s smart contract. Algorithms like RANDAO and VDF randomly choose a validator to propose a new block, packaging transaction data into the block and broadcasting it to other validators. The more ETH staked, the higher the chances of being selected. Other validators then check the validity of the block and its state transition correctness, voting with digital signatures on whether to accept the block. If the block receives over 2/3 of the votes, it is confirmed. Validators who complete the verification receive rewards, while those who behave maliciously may face penalties, including losing their staked cryptocurrency.

1.3 Advantages of PoS

Compared to PoW, PoS significantly reduces the hardware requirements for becoming a full node, allowing more participants to engage in blockchain validation. Moreover, the energy consumption of PoS is far lower than that of PoW since it doesn’t rely on expensive, resource-intensive computational processes. In terms of security, PoS offers notable advantages: in PoW, attackers can launch an attack by controlling 51% of the network’s hash rate and may switch to other public blockchains. However, under PoS, the cost of initiating an attack is substantially higher, as attackers must stake large amounts of cryptocurrency and face the risk of being penalized. This increases the attack’s cost and makes it far less likely to succeed, as the attacker’s interests are closely tied to the network’s success.

• PoS in Bitcoin

Since the inception of Bitcoin (BTC), it has relied on the PoW consensus mechanism. PoW ensures the security and decentralization of the Bitcoin network by requiring miners to solve complex mathematical problems (hash calculations) to verify transactions and generate new blocks. Miners are rewarded with Bitcoin for securing the network. However, with the evolution of blockchain technology and changing needs, the introduction of the PoS consensus mechanism has gradually become an effective solution to address certain challenges.

The Babylon Protocol is an innovative Bitcoin staking protocol that aims to introduce PoS to the Bitcoin ecosystem. It allows users to stake Bitcoin into the network, providing cryptoeconomic security for other PoS-based blockchains, while also earning staking rewards. Built on the Cosmos SDK and compatible with Cosmos IBC, Babylon enables data interaction and communication between the Bitcoin blockchain and other Cosmos-based application chains, thus enhancing Bitcoin’s role and scalability within the cross-chain ecosystem.

While Babylon successfully introduces PoS to the Bitcoin ecosystem, it faces a key challenge: the loss of asset liquidity after staking. When users stake Bitcoin in the Babylon protocol, the staked assets can no longer be used for other purposes, leading to limited liquidity for Bitcoin. To address this issue, the Liquid Staking Token (LST) protocol emerged.

The core idea behind the LST protocol is to provide liquidity to staked users, typically in the form of LST. These tokens represent the staked Bitcoin, and users can still use them for other decentralized finance (DeFi) operations, such as lending or trading. Through the LST protocol, Bitcoin holders can maintain liquidity in their assets while earning staking rewards.

Building on this, a new challenge arises: how to further enhance the utilization of liquidity assets. Specifically, how to allow these liquidity assets to participate in other DeFi protocols or decentralized applications (dApps). This challenge has led to the emergence of a new track — Restaking. Pell Network, for example, as the first omnichain restaking network in the Bitcoin ecosystem, provides Bitcoin stakers with a more efficient capital operation model. The process can be understood as follows:

• Liquid Staking of BTC

Bitcoin holders can convert their BTC into liquid staking tokens (BTC LST) through a liquid staking protocol (such as Lorenzo and Lombard). This process provides Bitcoin holders with similar flexibility to that offered by Lido in the Ethereum ecosystem, allowing them to continue utilizing these tokens in DeFi ecosystems for various operations while still earning staking rewards on their staked assets.

• Staking BTC into Babylon

The BTC staked via the LST protocol is first staked into Babylon. Babylon provides security for PoS chains through a trustless, self-custodial mechanism, and generates stable returns for staking users. This mechanism ensures the security of Bitcoin while offering economic support to other PoS chains. At the same time, users can receive BTC LSTs and participate in restaking.

• Restaking to Pell Network

To further optimize the efficiency of Bitcoin assets, Pell Network offers a restaking feature. Users can restake BTC LSD (liquid staking tokens) into Pell’s decentralized validated services (DVS), further improving capital efficiency and earning additional rewards. DVS provides an extra layer of yield for Bitcoin holders and increases the potential application of their assets within the DeFi ecosystem. DVS is primarily used to provide trust assurance for projects that require validation, such as oracles and cross-chain bridges.

Conclusion: The Impact of PoS on the BTC Ecosystem

The introduction of the PoS mechanism has brought about profound changes to the Bitcoin ecosystem. Firstly, by offering a staking mechanism, it allows Bitcoin holders to participate in blockchain ecosystems beyond Bitcoin, increasing Bitcoin’s use cases and enhancing its value in DeFi. Secondly, PoS optimizes the efficiency of Bitcoin’s asset usage, helping holders maintain liquidity while staking and further participate in DeFi operations, thus maximizing capital efficiency.

Most importantly, the introduction of PoS solves the issues of resource wastage and high energy consumption inherent in the traditional PoW mechanism, providing a more efficient and sustainable verification method for Bitcoin. This transition has paved the way for Bitcoin’s transformation from a “store of value” asset to a “financial tool” asset. This shift not only enhances Bitcoin’s network effects but also opens up new possibilities for future innovative applications.

Through innovative projects such as Babylon, the LST protocol, and Pell Network, the efficiency of Bitcoin ecosystem assets has been significantly improved, driving Bitcoin’s broader adoption within the DeFi ecosystem and providing strong support for future financial innovations.

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