Bitcoin as the Future of DeFi: Lombard Finance’s Vision for LBTC as Premier Collateral

A transformative shift in the decentralized finance (DeFi) landscape is on the horizon, as competition heats up for on-chain market dominance. The pivotal question remains: what will be the leading collateral in the burgeoning DeFi economy? According to data from DeFiLlama, protocols across all ecosystems have locked in nearly $126 billion in value, approaching the 2021 pinnacle of $175 billion. Currently, the majority of these funds are pledged in the form of ether (ETH) and its derivatives, like staked ether liquid tokens (stETH) and wrapped ether (weETH), with wrapped bitcoin (wBTC) and stablecoins trailing closely behind.

The Rise of LBTC: A New Era for Bitcoin in DeFi

Enter Lombard Finance, a Bitcoin-centric DeFi protocol that aims to disrupt the status quo with its innovative liquid bitcoin token, LBTC. Lombard’s co-founder, Jacob Philips, envisions dethroning ETH and stETH to establish bitcoin as the primary collateral in the on-chain economy. “On centralized venues, bitcoin is the prime collateral. There’s no question about this. Why is it not the case in DeFi?” Philips emphasized in an interview with CoinDesk. “Bitcoin only does one thing well, and it’s being a rock-solid store of value. It is the perfect collateral. There’s no reason that we shouldn’t be building DeFi on top of bitcoin.”

Bitcoin’s Impressive Performance in 2023

Bitcoin has experienced a remarkable year, soaring 124% since the beginning of January, fueled by favorable political developments in the U.S. and the successful launch of its nearly year-old spot exchange-traded funds (ETFs). In contrast, ether has lagged behind, gaining only 48% during the same timeframe, despite its smaller market cap. As demand for bitcoin continues to escalate—and with ongoing discussions around a potential U.S. strategic bitcoin reserve under the incoming Trump administration—the prospects for bitcoin’s role in the on-chain economy appear increasingly promising.

The Next Big Source of Liquidity in DeFi

Philips predicts that bitcoin will become the next significant source of liquidity for every DeFi protocol across all chains. “It’s just a massive influx of net new capital,” he stated. With a market cap nearing $1.9 trillion, he argues that even a fraction of that could inject substantial activity into the ecosystem, enhancing DeFi’s efficiency and potentially rivaling the liquidity found on centralized exchanges.

Introducing Yield-Bearing Bitcoin: The LBTC Token

One critical distinction between bitcoin and ether is the capability of staking on the Ethereum network, allowing users to lock in ether to secure the blockchain and earn interest in return. At present, staked ether offers an annual yield of 3.19%, according to CoinDesk’s composite ether staking rate (CESR) index. While the Bitcoin network lacks such staking capabilities, Lombard Finance seeks to bridge this gap by introducing a yield-bearing bitcoin token through its Babylon protocol.

The process is straightforward: users deposit bitcoin with Lombard, which then stakes these coins via Babylon, minting one LBTC token for each BTC staked. These LBTC tokens conform to the ERC-20 standard, allowing for seamless integration across Ethereum and its diverse protocols. According to Philips, the interest generated on LBTC will be funded by the blockchains secured through Babylon.

Growing Interest in Babylon’s Blockchain Development

So far, nine distinct projects—Corn, BOB, Cosmos Hub, Nubit, Fiamma, Manta, LayerEdge, Chakra, and Pell—have begun or completed integration with Babylon’s development environment. Coleman Maher, the growth lead at Babylon, revealed that these integrations are expected to go live next year, following the launch of Babylon’s own layer-1 blockchain. Interestingly, while Babylon currently does not offer staking rewards, the protocol has already amassed $5.4 billion in locked value, positioning it as the 10th largest protocol across all of DeFi, as per DeFiLlama.

Why Users Are Opting to Lock Bitcoin on Babylon

The eagerness to lock bitcoin on Babylon might stem from the anticipation of a points program, hinting that early depositors could be rewarded with airdrops in the future. However, the Babylon team has not confirmed whether any tokens will eventually be issued. As it stands, over $1.4 billion of the $6 billion staked on Babylon has come through Lombard to create LBTC tokens, even though these tokens currently do not yield returns.

Competition in the DeFi Space: The Case for LBTC

While it’s essential to note that DeFi users can use bitcoin as collateral—albeit without earning yield—via wrapped bitcoin (wBTC), which boasts a market cap of $12.9 billion, the competition remains fierce. WBTC accounts for approximately $5.7 billion worth of collateral in leading DeFi protocols, compared to $14.5 billion in ETH and $11.1 billion in stETH. Even wrapped ether (weETH), a newer liquid token offering users the chance to earn EigenLayer restaking rewards alongside native ETH staking yield, has contributed $5.8 billion in collateral.

As highlighted by ARK Invest, the entire DeFi economy appears to be reorganizing around stETH and the benchmark yield from staked ETH. Other tokens, such as Solana’s SOL and Avalanche’s AVAX, provide higher staking interest rates, implying a higher level of risk due to their volatility. Additionally, stablecoin lenders are feeling the pressure from stETH’s rise, prompting platforms like Sky (formerly MakerDAO) to increase interest rates on locked DAI, while lending rewards on Aave and Compound have also seen hikes.

Lombard’s Strategy: Yield and Adoption

Despite the competition, Philips remains optimistic about LBTC’s potential to excel where wBTC has faced challenges, primarily due to the added incentive of yield. “Staking yields will be generated in time. The LBTC yield is expected to be in the range of the ETH staking rate,” he noted. Lombard’s overarching goal is to entice users to withdraw their bitcoin from the depths of cold storage, taking the initial step into on-chain finance. “We’ll show you the battle-tested protocols, safer than your bank, that exist out there,” Philips added, reinforcing the appeal of LBTC.

Investor Confidence and Future Prospects

The interest in LBTC is palpable, with Lombard having successfully raised $16 million this summer from various prominent investors, including Polychain Capital, Franklin Templeton, and Nomad Capital. Philips pointed out that those already familiar with DeFi have been particularly receptive to the concept of bitcoin staking, indicating a growing momentum within the community.

The Future of Bitcoin in DeFi

As the DeFi ecosystem continues to evolve, the potential for bitcoin to play a pivotal role as the collateral of choice grows stronger. With initiatives like Lombard Finance and its LBTC token aiming to enhance bitcoin’s utility in the DeFi space, the future looks promising. Whether through yield-bearing assets or innovative staking solutions, the integration of bitcoin into DeFi could reshape how investors engage with decentralized finance.

For those interested in exploring the world of cryptocurrencies, resources on how to buy Bitcoin, Ethereum, and other altcoins can be found on platforms like The Bitcoin Bulletin.

The journey of Bitcoin within the DeFi landscape is just beginning. Will it succeed in becoming the collateral of choice? Only time will tell, but with significant backing and innovative ideas, Lombard Finance is poised to make a mark in this exciting arena.