Babylon chain may be the most undervalued Bitcoin DeFi bet: Nansen

Bitcoin’s DeFi ecosystem may finally be ready to take on the big players, as a new project leverages Bitcoin’s inherent security.

Bitcoin’s DeFi ecosystem has gained a new player, Babylon, that could shape its future. In a recent report, Nansen called the project potentially one of the most undervalued plays on Bitcoin’s DeFi ecosystem.

Critically, Babylon enables users to earn staking rewards in Bitcoin terms without relying on wrapped assets or cross-chain bridges. In doing so, the protocol leverages Bitcoin’s inherent security and decentralization, offering a safer and more native alternative for staking.

The process, dubbed Bitcoin restaking, involves locking BTC into a script on the Bitcoin blockchain. The Babylon protocol then uses a Cosmos SDK transaction to verify whether the funds are on-chain. Once verified, the Babylon chain distributes rewards to BTC stakers in proportion to their holdings.

Where Bitcoin restaking rewards come from

Since Bitcoin itself does not offer staking rewards, these incentives come from the Babylon chain, primarily via BABY token inflation. Its annual inflation rate of 8% is split evenly between Bitcoin and BABY stakers.

This means BABY token stakers are betting that the token’s growth will exceed the 8% inflation rate. For Bitcoin holders, however, the protocol creates a new revenue stream without giving up custody of their assets—protecting them from third-party risks such as hacking or rug pulls.

Over the past year, Bitcoin’s DeFi ecosystem has seen substantial growth. Its ecosystem reached an all-time high of nearly $8 billion in December of last year. Even after a subsequent correction to $5.27 billion, it still experienced more than 500% growth year over year.

Developers and entrepreneurs are increasingly betting on Bitcoin DeFi due to its strong name recognition and vast user base. At the same time, they see decentralized finance as a way to unlock new use cases for the Bitcoin network.