Bitcoin Liquidity Staking and Re-Staking: The Next Yield Frontier

Author: CryptoCompound, Compiler: Shaw Bitcoin Vision

A revolution is quietly taking place in the encryption field

For years, staking has primarily involved Ethereum and proof-of-stake chains — a way to secure the network and earn revenue by locking up assets.But that concept has changed dramatically.The first is the emergence of liquid staking, which allows stakers to earn income while still using the tokens for other purposes.Then came the emergence of retaking, which converts pledged assets into collateral and provides security for multiple networks at the same time.

Now, a new wave is taking shape — one that could reshape Bitcoin’s role in the digital economy:Native Bitcoin staking and re-staking.

What is happening is not another DeFi experiment, nor is it a passing yield farming craze.This is the beginning of Bitcoin’s transformation from a “store of value” to an active participant in securing and powering decentralized infrastructure—without ever leaving 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 (such as ETH or SOL), they become illiquid – you cannot use or trade them while earning yield.Liquidity staking protocols like Lido or Rocket Pool change this by issuing Liquidity Staking Tokens (LST) (e.g. stETH) that represent your staking positions but can still be used in DeFi.

This innovation has been so successful because it enables combinability of benefits.Investors can pledge, earn income, and borrow money at the same time.

Re-pledge goes one step further.The ETH you stake isn’t just used to secure the Ethereum network, you can “re-stake” it to help secure other networks or decentralized services.In return, you will receive additional rewards.EigenLayer became the flagship of this movement, creating a marketplace for shared security—where protocols essentially rent trust from stakers.

But the key is this:Bitcoin has been largely excluded from this revolution so far.

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 the same way you can stake ETH.You can mine it, you can hold it, and you can package it on other chains, but you cannot natively lock it to ensure the security of the protocol.

Until recently.

New protocols such as Babylon and BounceBit now support native Bitcoin staking and re-staking—no need to encapsulate, bridge, or move Bitcoin off-chain.This development could open up entirely new use cases for Bitcoin holders, institutional custodians, and DeFi protocols.

How Bitcoin native staking works

To understand this breakthrough, it’s worth looking at Babylon, a protocol designed to make Bitcoin’s massive market capitalization work while remaining completely trustless.

Simply put, it works like this:

• BTC can be locked directly in time-locked vaults on the Bitcoin blockchain.

• Locked BTC serves as economic collateral to protect other proof-of-stake networks or applications.

• This protocol ensures that your BTC never leaves the Bitcoin network—it is just cryptographically referenced by other networks.

• You can earn revenue from these networks as compensation for the security provided.

In essence, Babylon exports Bitcoin’s economic influence to the rest of the entire crypto ecosystem.

It’s a clever bridge—not a transfer of assets in the traditional sense, but an extension of security.This makes it more resilient and less risky than wrapped Bitcoins such as wBTC that rely on centralized custodians.

In June 2025, Kraken announced plans to integrate Babylon’s staking mechanism, demonstrating the institution’s confidence in the model.This is a tipping point – when exchanges, custodians and funds will be able to offer Bitcoin income products without exposing users to bridging risks or regulatory gray areas.

BounceBit and the “BTC Re-Staking” Layer

While Babylon focuses on exporting Bitcoin’s security, BounceBi does something slightly different – ​​it imports Bitcoin’s liquidity into an EVM-compliant environment built specifically for financial products.

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

Think of it as a CeDeFi (centralized-decentralized) hub for Bitcoin holders who seek yield, liquidity, and composability, but don’t want to completely disconnect from the Bitcoin ecosystem.The chain integrates RWA (Real World Assets) projects, institutional vaults and yield strategies.

Although Babylon and BounceBit take different approaches, they both aim at the same goal: making Bitcoin productive—a yield-generating collateral asset that powers decentralized systems.

Why this narrative matters

Bitcoin accounts for more than 50% of the total cryptocurrency market capitalization, yet most Bitcoin sits idle.Holders—from retail investors to billions of dollars in corporate crypto treasury reserves—are mostly passive.In contrast, the staking protocol on Ethereum has turned billions of dollars into a vibrant economic engine.

If Bitcoin staking gains momentum, it could mobilize vast amounts of idle liquidity into the DeFi and infrastructure economy, extending Bitcoin’s utility beyond speculation..

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

Risks below the surface

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

1. Forfeiture risk– When you re-stake, you agree to abide by certain uptime or performance conditions.Failure to meet these conditions may result in the loss of a portion of the collateral.Properly assessing such risks is complex, especially for Bitcoin.

2. Smart contract risks— Even if your Bitcoins remain on-chain, interacting with off-chain systems through cryptographic commitments still relies on protocol security.Vulnerabilities or attacks in these layers may result in consequential losses.

3. Liquidity and redemption risk– If liquid Bitcoin-collateralized tokens (such as LRT) trade below their Bitcoin peg, users may face redemption queue congestion or decoupling under market pressure – the same problem faced by stETH in 2022.

4. Centralized governance— Like Lido’s dominance of Ethereum liquidity staking, Bitcoin’s staking could also undermine the spirit of decentralization by concentrating power in the hands of a few large validators or custodians.

5. regulatory uncertainty— If a Bitcoin pledged product generates predictable returns, some jurisdictions may classify it as a security or interest-bearing deposit, triggering compliance obligations.

The point is, Bitcoin’s brand is built on trust minimization.If these models introduce new dependencies, they need to demonstrate mathematically and operationally that they do not violate this principle.

Institutional interest is heating up

Despite the risks, institutional demand has developed.Money managers and crypto funds holding large Bitcoin positions are eager to find ways to earn returns without liquidating or bridging assets.

Kraken’s participation, coupled with venture investments in Babylon and BounceBit from the likes of Binance Labs, Polychain, and OKX Ventures, are indicative of growing market confidence.Mainstream custodians are exploring the “pledge-as-a-service” model, which not only ensures the security of assets, but also keeps assets in cold storage.

If 1%-2% of the global Bitcoin supply (approximately $25-50 billion) is pledged, then this will be a new institutional-grade income market built on the credibility of Bitcoin.

first mover advantage

This is a rare asymmetric opportunity for investors and researchers.The mechanism is complex, the agreement is not yet mature, and the revenue sources are still being formed.But history shows that in new market cycles, the narratives that gain traction first—such as DeFi in 2020 or NFTs in 2021—tend to create huge winners.

The script here is simple:

• focus onThe growth point of Bitcoin re-hypothecation total locked value (TVL)——Babylon, BounceBit and related projects.

• trackTransaction integration status— Institutional infrastructure drives adoption faster than retail market hype.

• PrioritizeTrust-minimized design, rather than high annualized returns.The goal is long-term development, not short-term gain.

Bitcoin’s new phase

If Bitcoin’s re-staking succeeds, it will mark a philosophical shift as well as a financial one.The world’s most secure, decentralized asset will begin to protect other networks—turning its idle capital into active trust infrastructure.

This could blur the lines between Bitcoin and the rest of the crypto ecosystem, and also open a path for Bitcoin to generate sustainable on-chain yields without sacrificing its core integrity.

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

final thoughts

The development of cryptocurrencies has always been accompanied by cyclical changes in utility.The next cycle may be defined not just by new tokens or protocols, but by how the world’s hardest currency becomes the backbone of shared security and on-chain yield.

Liquidity staking redefines Ethereum.Rehypothecation is reshaping the securities market.

Now, Bitcoin has joined the fray—not as an outsider, but as a heavyweight.

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

Bitcoin doesn’t just store value – it earns value.