On The Brink with Castle Island - David Tse (Babylon) on Bitcoin Staking (EP.535)

Episode Date: June 10, 2024

In this episode, Wyatt sits down with Babylon founder David Tse to cover: Restaking/shared security and how it works Why shared security is a valuable use case for Bitcoin Bitcoin's structural limitations and their impact on Bitcoin innovation Bitcoin innovation broadly and Bitcoin L2's

Today on the podcast, I was joined by David Say, engineering professor at Stanford and founder of Babylon. Babylon lets Bitcoin holders earn yield on their Bitcoin by using it to secure other blockchain systems. I enjoyed this conversation. I hope you do too. Matt Walsh and Nick Carter are partners at Castle Island Ventures. All of these expressed by them or the guests on this podcast are solely their opinions and do not reflect the opinions of Castle Island Ventures. Guest and hosts may maintain positions in the assets discussed in this podcast. You should not treat any opinion expressed by anyone on this podcast as a specific inducement

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couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called the Bitcoin. Bitcoin. My name is Wyatt Kazashai from Castle Island Ventures and it's a pleasure to have David Say from Babylon joining us on the podcast today. David, thanks for coming on. Hey, why? So great to be here. It might be easy as just to start with introduction. So I would love to hear a bit more about you, personal background, how you got into crypto and how you arrived at building a crypto company. So I'm a researcher about training. I go into the crypto space about, I would say, six years ago now. Before then, I do research in primarily wireless communication. So my invention goes into some of the cell phones that we are all using

for better or for worse. So the wireless industry is one of the bad rock of the communication infrastructure that we have today. And over about two decades, it revolutionizes the world, from about a few million people having cell phones to a few billion people having cell phone. So I worked in this space about 10, 15 years. By the mid-2015 timeframe, it became quite mature. So as a researcher, you always want to, especially an infrastructure researcher, which I am doing, you always want to work in a technology, which is early, early in adoption, so that you can shape the infrastructure.

So I was looking for a new direction to do research in, and I came across the technology. Nakamoto's white paper. And that's how I got into the space. And I am a professor at Stanford University. And I started a research group there, focusing on blockchain infrastructure research. In fact, I think our group is the only group at Stanford, which does full-time blockchain research. So we got many new research ideas there at Stanford. So over the years, we published papers and so forth. But at some point, you want to really impact the industry. But to impact crypto industry, I believe, is to do a startup. So that's how I got into Babel. Do you see any parallels between your password and your work in blockchain when you're talking

about the work that you did in cell phones and mobile? So you think about the development of technology, of the information technology. So first you have to have some underlying infrastructure to allow people, devices to communicate with each other. So that's like the basic, basic thing. If you can't communicate, you can't cooperate. Okay. Now with the advancing technology in the past 20 years, we have built that infrastructure.

everybody anywhere can communicate to whoever you want at any time basically that's what we accomplished however after you be able to communicate now we are worried about a second set of problem which is in some sense how do these folks coordinate in a way that you do not need to necessarily go through a centralized trust you do not need to believe in a single centralized trust and that's the next step of the evolution which is how to do decentralization because we can now communicate So we can do it distributedly. But from distributedly to decentralization, there's a big step. And that's what blockchain is all about.

Makes sense. I think there's a great connection there. In mobile, you have the ability to contact anyone, and blockchain is providing a system where you can pay anyone or have a monetary system where you can access any individual in a similar way. If you wouldn't mind, tell us more about Babylon and how it works and give us an overview of what it is exactly. Over the years, you remember I told you that I was starting to,

point in our blockchain research is the Nakamoto's Bitcoin paper. So Bitcoin is our first love. From a research point of view, it's such a beautiful protocol, very simple protocol, but yet very powerful. And indeed, it's the first blockchain protocol. So it has a special place in my mind. However, what we find out in the past few years is that the research action, the innovation action, has shifted from Bitcoin to new chains, and particularly new proof of stick chains. So there's a shift from proof of work, which is the consensus technology that powers Bitcoin, that consensus participants have to do a lot of computation to certify the work. In it shifted to proof of stake where the security is maintained by the capital.

For example, Ethereum validators have to stake 32Eath to provide collateral to secure the blockchain. So our research also shifted to proof of stake. in the back of our mind, we think about Bitcoin. It's like your first love, right? You never forget your first love. It's always there when you have dreams, then you start dreaming her or him. So this relationship with me and Bitcoin. So one day, we came to this idea. Say, hey, you know what? This Bitcoin is such a beautiful protocol. It's the most secure blockchain. But you know, it's just sitting there by itself, lonely. Where all these other proof of stick chains are cropping up left and right. So why is it this very strange situation? Is that why can we, you know, you know, you know,

We can neutralize it better. So our idea was just to take this Bitcoin as a source of security and share it with the rest of the crypto world. Now, security is in some sense central to the Web 3 narrative. Because the difference between Web 2 and Web 3 is what? It's decentralization. But decentralization, you need security because it's no longer maintained by the Googles of the world. So security is central.

However, security is something also people do not think too much about because, you know, security only matters when it's broken. So it's, I would say, underappreciated, but very important. So our project is also very low-key in the sense that we start from this, underappreciated but very important feature of security, and use that to connect Bitcoin with the rest of the world, particularly proof of stick chains. So that's the project. So Babylon, the general thesis is to connect Bitcoin security and use it to power the proof of state ecosystem. So that's the direction. Now, you think about it, it's an interesting direction because proof of stake was invented primarily to replace Bitcoin. But over the years, what happened is that

we see a mutual coexistence. I don't know whether it's happy coexistence or unhappy coexistence, but the reality is a coexistence. That is, proof of stake chain is not going away. Ethereum, two years ago merged and became proof of stake, rather successful merge, I would say. and there are many other chains, Solana, Avalanche, etc. They're all proof of stake. However, Bitcoin also did not go away. And in fact, the Bitcoin asset is just getting bigger and bigger. And now it's over 50% of the entire crypto ecosystem. So there's now a equilibrium, so to speak, where both proof of work and proof of state exists. So we take that as a given, that none of them is going away anytime soon. And in that case, why not take this proof of work security and use it to enhance

the whole crypto ecosystem. So that's the genesis of the project. Can you explain why there hasn't been more native innovation on Bitcoin? I think people who are very involved in crypto in a day-to-day will have answers for this, but I think it would be helpful because you guys are in groundbreaking work doing extensions in Bitcoin technology that haven't been done ever or attempted for a long time. It would be great to have some more information on that. So the Bitcoin innovation is is constrained by several factors. Number one is the fact that it doesn't have a touring complete smart contract language. So therefore, it's very hard to program a Bitcoin. It's not that it doesn't have a language, it has a language called a scripting language,

but it's very hard to program on Bitcoin and innovation. Programming is of course the core to innovation in computer science. So that's number one. Number two is also the block space in Bitcoin. It's very constraint. One block every 10 minutes and the blocks are not that huge either. So the block space is constrained. So both are very big silver factor for Bitcoin. So our innovation takes a different direction. It's say that, hey, you know, the block space is constrained. So let's not worry about writing a huge amount of stuff onto Bitcoin. The scripting language is constrained. However, maybe, just maybe, you can use some clever cryptography to combine with that limited scripting language. You do something interesting. And number three is at this

of securing proof of stake chain, I think is pretty innovative because Bitcoin, the proof of stake chain is really relatively recent development in the past few years. The merge itself only happens a year and a half ago, actually. So we're taking a bunch of this innovation to essentially try to revitalize Bitcoin again. Can you give an example of how Babylon would be used to restake a system? So over the past two years, we've done, built quite a few different protocols to achieve this goal of security sharing. But the protocol that we're most excited about, which is we're focused our energy on, is called Bitcoin Staking. So maybe at this point I should explain a bit

what Bitcoin Staking is. I love this name because it's so contradictory, because Bitcoin, each of two names are very familiar in the crypto industry, Bitcoin and Staking. But putting them together, I believe we're the first to put them together. Yeah, it's an oxymoron. It's an oxymoron, and we love oxymoron. Somehow we have this weird sense of humor, perhaps. that people may or may not appreciate, but Bitcoin is proven work, staking is proof of stick. So what's going on here? So you think about Ethereum. Euthorium evolved from proof of work to proof of stake. So this is a change of security model. So this is the basic change. However, it becomes also a new industry. So a new staking industry

spawned up with the move from proof of work to proof of stake. For example, you see very big projects like Lido, like eigenlayer, now liquid restaking. All these projects cannot come into existence if there were no staking in the first place. So this is not only a change of security model, it's also spawning a whole new industry of very successful projects. So observing this, what we said is, hey, this is actually bad for Bitcoin because now Bitcoin is losing out, because Bitcoin is proof of work. So it doesn't have this core primitive of stake. So basically, our protocol gives it this primitive. That is, you can use Bitcoin to do staking. Now, Bitcoin is proof of work. So therefore, the staking is not for it.

for Bitcoin itself, but it's for any other proof of stick system in the world. So any proof of stick chains, row-ups that require proof of stick security, our protocol allows you to use Bitcoin as a staking asset. And that's the core innovation. So basically, we give Bitcoin the competitive edge with Ethereum so that Bitcoin doesn't lose out. We love Bitcoin, so we just keep on trying to keep Bitcoin competitive. I think it's really important to think about ways to, like you said, create these new use cases for Bitcoin that allow users to earn interest. Lending and borrowing would be another use case. In that vein, how did you guys land on staking being the thing that you wanted to allow Bitcoin to do? Are there other things that you could

see as being use cases that you'd like to build into Bitcoin? How do you think about other things that people could go out and seek to build? I would say the two reasons why we come to this Bitcoin-staking concept in this protocol that we're building. One is that we are primarily consensus security people. So we always think from a consensus from a security point of view. So we're layer one, people, so to speak. We are not Defi-A-M-M-type people. So we come from that angle.

Okay, so that's one. That's an honest answer. Now, the second one, though, is that what we also observe is that while there are a lot of yield-earning opportunity in Defi, Sticking has a very special place. Sticking is like the analogy to perhaps risk-free investments in the Tread firewall. Why? Because sticking has a very interesting security yield trade-off,

which is that the safety of the fund that you stick is actually very high. It's very hard to lose money, stolen money, or losing money by sticking, because there's no market risk. There's no counterparty risk. The only risk is the so-called slashing risk, and the slashing risk is a controllable risk. The slashing risk is you go to an Airbnb, you put a deposit down, and you are under full control of this deposit.

In other words, if you don't trash the Airbnb, then you should be able to get the deposit back. Staking is very much of that nature. So we like this trade out very much because it is a core primitive that all assets wants to have this opportunity to do. So it became a core D5 primitive, so to speak. And we are very infrastructure, very core people. So we like to build very core primitive that can be used in combination with many other things. But it's a core, for example, if you think about projects like Lido,

Lido would not have been able to exist without this core staking primitive. But Lido is now giving this stick, more usage, but it's built on top of the staking. So that's how we view ourselves as the very core primitive that many other people could use and composed with. And actually, that's what we're seeing right now. Many projects are actually now built up on Babylon as we speak. Liquid staking protocol, liquid restaking protocol, etc. Maybe you can help me use Bitcoin for my Airbnb deposit next time. That would be a great new use case for Babylon. Do you think overall with restaking innovation, you guys, ring it for Bitcoin is obviously a very major piece of that. Do you think that crypto systems are

getting more secure over time because of these innovations? Yes, that's our goal. So crypto industry has been hampered by every now and then they're hacks. That's the, and funds are lost. So if you want to scale crypto industry to billions of people and not tens of millions of people, which is roughly the scale we're in right now, then you have to have the trust of people to use these systems. So security to us is the core.

And Bitcoin, $1.4 or $1.5 trillion, depends on when you're going to replay this recording, is such a huge asset that using it as a collateral to provide security for any innovations that people want to build is a dream. That makes sense. What other innovations would you like to see for Bitcoin if you can speak to the ones you're seeing in real life for ones that you would like to see in the future? So we are researchers in addition to building a system. So we don't want to just like to see. We actually actively do research to make things happen.

So I can say a few words about what the research directions we're looking at. So one direction is bridging. So to use Bitcoin to provide security to approval of the chain is security. But there's another aspect of Bitcoin, which is liquidity. Security and liquidity go hand in hand. Because if you have a system which is unsecured, then nobody will give you liquidity. But if you have a system very secure, but no liquidity is also not very useful. Now, the biggest source of liquidity is Bitcoin itself, again, another $1.4 trillion. So being able to bridge Bitcoin to other chains that obtains security from the Bitcoin, so you can see the parallels of here. First, Bitcoin Steakin provides security, and then Bitcoin bridging gives you the liquidity. Building a reliable bridge on far with

the security infrastructure is our dream as well. And that is the direction that we're actually working on. Now, this is a direction that many people are working on. It's a direction. So we don't claim that we're the only ones working on this, but we are actively collaborating with key players in this direction. For example, Robin Linus is our collaborator, and he's the inventor of this new technology called BitVM, which is a rather promising direction to achieve trustless bridging. So we've been actively collaborating with someone in this direction.

So bridging is one thing. A data availability is another thing. And we are interested in the problem of, I mentioned earlier, that Bitcoin lacks block space. and data availability is a way to increase the block space and yet maintaining the security of Bitcoin itself. So that's a challenging problem, but we're also actively working in that direction. So a lot of people would say that one of the things that makes ETH valuable is its ability to be used as a staked asset. Do you think the ability to use Bitcoin and potentially

other assets in the future also as staked assets reduces the value of ETH or the value proposition of ETH in any way? The hope is that the value of ETH is that the value of ETH in any way? The hope is that the value of the entire crypto ecosystem, the TVL, to the speak, is growing. So then it becomes not a zero-sum game, not if Bitcoin gets more value than ETH goes down in value. If there are no good applications or limited applications, then the whole industry is stuck. The TVL is fixed. So if Bitcoin get more, that ETH gets less. I agree with that.

But the hope is that I have a growing economy, and the growing economy is powered by this security layer that we're So that's the hope, yes. Obviously, there have been a lot of Bitcoin layer two's and new layers being built to transact in Bitcoin. Do you find yourself working with those players a lot? And how do you think they're impacting how people use Bitcoin today and in the next six to 12 months? So one very important narrative of Bitcoin layer two is that they borrow security from Bitcoin.

So Bitcoin staking fits very naturally into this narrative because Bitcoin sticking is a way to borrow security of any system from Bitcoin. In particular, Bitcoin Layer 2, which is strongly aligned to the Bitcoin chain, very naturally would like to use the Bitcoin security. So we're collaborating with quite a few L2 projects to build such Bitcoin staking for the Layer 2. Now, depending on what's the realization of Layer 2 looks like, we have different versions of our technology.

For example, if the Layer 2 is, say, a cosmos chain, then we have a technology for that. If the layer two is a row up, then we're also building a technology for that. So we have multiple integration efforts going on as we speak. And if you have, say, 10 Bitcoin layer two's, how much Bitcoin does it take to secure 10 Bitcoin layer twos? Do you think we'll have too much Bitcoin that wants to be restaked or do you think we'll have not enough?

Or how do you look at the supply and demand dynamic here? Oh, the supply is vast. The supply is $1.4 trillion. So I think hitting the supply limit will be at least about worry in this moment. It's about the partners. So even 1%, even if you can get 1% of all Bitcoin to stake on these L2, think about it. 1% of 1.5 trillion is, I'm calculating right now, is it 150 billion or is it 15 billion? 15 billion.

1% of 15, yep. So that's really a huge amount of security. Even split between 10L2 is quite a lot. Now, there's also re-staking opportunity. So in other words, you can use the asset to secure multiple such L2 simultaneously. So that's another way of having multiplication effect on the security for these L2s. Whether it's on the topic of the L2s on Bitcoin staking or Bitcoin more broadly, given your research background along with the rest of your team,

do you have any broad fears or concerns for Bitcoin or things that you think should be on people's radar when it comes to Bitcoin? So Bitcoin has a long-term issue, which is called the security budget problem. So maybe just explain to your audience a little bit. So Bitcoin, an event happens every four years. In fact, one just happened a few weeks ago, which is Bitcoin halping. So every four years, the block reward is halved.

So it just went down from 6.25 Bitcoin to 3.125 Bitcoin, just a few weeks ago. And four years later, it will become half of that. So 1.5, whatever the division is. lost track of so many decimals. So it will keep on going down. What does that mean? It means that the miners' reward from Block is reduced by half every four years. Now, miners has cost to pay, electricity, infrastructure, so forth. So now if the reward goes down, what will happen? Well, if there are no other sources of revenue of the miners compared to that, to replace that or to compensate for that, then many miners will go to business. And then there will be fewer

mining power supporting Bitcoin. So this is a security budget problem. So you can think of in some sense, our project, in a way, is going towards the direction of trying to compensate for the reduction of block reward. Because what is block reward? Block reward is really the reward for the effort to secure Bitcoin. And now what we're saying to the miners is that your effort of security Bitcoin is not just a block reward, but also the security you provide to these proof of stake systems. So therefore, you should also get reward not only from Bitcoin itself, but also from these other proof of stick system. So that is a source of income for them to compensate to some extent, this reduction of block reward. So sometimes our effort, and many people's effort in general of adding use cases

to Bitcoin is to help solve this security budget problem. And on the flip side, what are the reasons that you think we should be more excited about Bitcoin than we have been in the past? So there's a lot of debate about whether Bitcoin ETF is a good development or not so good development for Bitcoin. In my mind, it's good development because it just gives a more general, broader awareness of this asset and associate with it the technology. So our goal here is to broaden the appeal, broaden the use cases of this technology. So more people know about it, the better. More people have stake in the game, the better. So I think Bitcoin ETF is not a technological innovation. It is a financial innovation in some sense. I think it's a net positive for Bitcoin.

Yeah, I think it gives people so much more access than they would have otherwise as well. And there's an adoption curve here if people buy the ETF, people buy Bitcoin on Coinbase, they buy it in a non-custodial wallet, and then hopefully they're using Babylon for restaking. Oh, okay. So that's a long-term goal of ours, which is to combine our technology with Bitcoin ETF. That's a long-term goal. Monshot, shall we see? Yeah, I would love to see that one day.

Well, David, thank you for coming on. I've really enjoyed the discussion and appreciate you. you sharing everything that you guys are working on and really looking forward to hearing about what's ahead for you guys. Thanks, Lyme, having me here. Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visit castle island. Visit Castle Island.V.C. To listen to all of our podcast episodes, please go to On the Brink dashpodcast.com or just click on the tab in our website. Thanks for listening.