Written by: 0xresearcher

Over the past few years, the crypto market has undergone a significant shift—from pure price speculation to an era of asset efficiency and on-chain returns. Ethereum has been the first to benefit, with its staking economy and LST (Liquid Staking Token) ecosystem maturing. Assets like stETH not only allow ETH holders to earn stable on-chain returns but also allow them to directly participate in DeFi lending, market making, and derivatives trading, creating a multi-layered revenue cycle.

In contrast, Bitcoin's on-chain capital efficiency remains in its early stages. While it remains at the heart of the crypto world—with a roughly 60% market share, a market capitalization of approximately $2.4 trillion, and the world's most stable consensus network—on-chain, BTC is often viewed more as "digital gold": a safe store of value, but lacking composability, profitability, and multi-chain liquidity. Most BTC holders either hold onto their assets for the long term or rely on centralized platforms for limited interest, missing out on the vibrant on-chain financial landscape.

BTC’s composability dilemma

The key to the success of ETH's staking model lies in its deep integration with smart contracts and the DeFi ecosystem, while the BTC mainchain lacks a comparable execution environment. While there are cross-chain wrappers (such as WBTC), sidechains, and bridging solutions, several core pain points remain:

• Lack of native returns - Cross-chain BTC is mostly wrapped assets and cannot generate returns naturally like ETH staking;
• Liquidity is fragmented — cross-chain assets are distributed across different chains and protocols, and the scale is insufficient to support large-scale capital operations;
• High trust cost - whether it is centralized custody or multi-signature mechanism, users need to place additional trust in an institution or multi-party alliance.

These issues have long mired BTC in an awkward position of "high value, low utilization." However, market expectations are shifting. An increasing number of institutions and DeFi teams, particularly in Asia, are driving innovation in BTC liquidity. They hope not only to ensure safe returns for BTC holders but also to establish it as a core asset in on-chain capital circulation, including lending, stablecoins, and derivatives.

The acceleration of the Asian market

Demand for BTC DeFi is growing significantly in the Asian market. This region is home to a large number of long-term BTC holders, along with a high concentration of exchanges, infrastructure projects, and communities. This ensures that new products, once introduced into the right scenarios, are quickly accepted by the market. An ideal BTC DeFi product must meet three criteria:

• Low risk return – avoid high volatility, high leverage strategies;
• Strong composability — can be directly integrated into mainstream DeFi protocols rather than existing in isolation;
• Cross-chain convenience - supports multi-chain deployment and lowers the user entry threshold.

WBTC – BTC Wrapping and Liquidity

WBTC is the earliest BTC-wrapped asset, introducing Bitcoin into the Ethereum ecosystem in the form of an ERC-20 token, enabling BTC to participate in lending, liquidity provision, and derivatives trading. Its advantages lie in its widespread acceptance and high liquidity, with nearly all major DeFi protocols supporting WBTC. However, WBTC inherently relies on centralized custody, requiring users to trust the custodian, which poses security and transparency risks. Furthermore, it does not generate additional returns, providing only composability, a significant limitation for users seeking to fully leverage the value of BTC.

Babylon – Underlying Staking Protocol and Node Operator

Babylon specializes in providing the underlying Bitcoin staking infrastructure for skilled node operators. Its strengths lie in its high security and decentralization, ensuring the safety of BTC staking through strict node management and multi-factor authentication. It supports institutional users, transforming BTC into on-chain, actionable assets. However, for ordinary users, direct access to the Babylon protocol presents a barrier to entry, requiring technical expertise or reliance on derivative packaging products. Babylon's core value lies in providing underlying staking capabilities for the BTC ecosystem, but further development is needed to improve liquidity and usability.

EtherFi – ETH Liquid Staking and Cross-Chain Composability

EtherFi offers a liquid ETH staking service, combining staking returns with the composability of DeFi. Users can easily participate in ETH staking and leverage capital across multiple chains to achieve accumulative returns. EtherFi targets the ETH community, offering a low-barrier experience and cross-chain support. While its model is more mature than the BTC ecosystem, it primarily serves ETH users and does not address the demand for returns and low volatility associated with BTC.

Ethena – Synthetic USD Returns and Strategy Features

Ethena offers stable USD returns (USDe) through perpetual contracts and arbitrage strategies, making it suitable for DeFi users with a lower risk appetite. Users can earn a fixed income on-chain while participating in a portfolio strategy to improve capital efficiency. However, its composability is relatively limited, primarily focused on stablecoin pools and synthetic assets, which lacks flexibility for investors who want to use BTC for a wider range of DeFi applications. While Ethena demonstrates the potential for on-chain income diversification, it still requires a dedicated BTC solution to meet core market needs.

Lombard – LBTC: A representative example of BTC on-chain income

Against this backdrop, Lombard's LBTC is a prime example. Positioned as an institutional-grade, yield-generating Bitcoin, it's 100% backed by BTC and generates passive income by staking the underlying BTC on the Babylon Bitcoin Staking Protocol. BTC holders retain core exposure while receiving stable on-chain returns.

Market performance:

• Just 92 days after going online, TVL exceeded US$1 billion;
• Over 80% of LBTC is active in DeFi, used for lending, liquidity provision, and re-staking strategies;
• Attracted over $2 billion in new liquidity, accounting for 40% of the Babylon staking protocol market share;
• Deep cooperation with Finality Providers such as Galaxy, Figment, Kiln, and P2P;
• It has been included as an institutional-grade collateral asset by Aave, Maple, Spark, Morpho, etc.

In terms of security, Lombard has built multiple layers of protection: institutional alliances, multiple approvals, time locks, audits, and on-chain PoR (proof of reserves). Since its launch, no de-anchoring incidents have occurred, and it is close to the traditional financial "AAA" security standard.

In terms of cross-chain layout, LBTC has been launched on chains such as Base, Sui, Katana, and BNB Chain, and the SDK is connected to Binance and Bybit, opening a direct BTC DeFi channel for Asian users.

The emergence of LBTC solves the core issue of BTC's on-chain yields. While ETH's LST model has proven viable, direct application to BTC requires considerations of security, liquidity, and cross-chain deployment. LBTC will initially provide a foundation for staking returns through Babylon, then leverage multi-chain deployment and SDK integration to unlock liquidity, enabling it to achieve economies of scale in the short term. If it is accepted as core collateral by more DeFi protocols, or enters complex on-chain markets like stablecoins and derivatives, BTC's on-chain capital efficiency could see a significant leap forward. LBTC could become an accelerator of this wave of innovation.

Overall market trends and future prospects

Overall, BTC on-chain capitalization is still in its early stages, but it holds enormous potential. As the market shifts from price speculation to asset efficiency and on-chain returns, more and more projects are attempting innovation in various directions:

• Multi-chain scalability and interoperability: With the cross-chain deployment of more DeFi protocols, the use cases of BTC assets are becoming more diverse;
• Growth of low-risk yield products: Investors have a strong demand for stable returns, and yield-oriented BTC products are expected to become mainstream;
• Increased institutional and compliance participation: Asian and global institutional investors are actively exploring on-chain BTC allocations, driving the maturity of the ecosystem;
• A testing ground for innovative strategies: Derivatives, re-staking, arbitrage, and combination strategies continue to emerge, improving BTC on-chain liquidity and capital efficiency.

Bitcoin is gradually transforming from "digital gold" to a viable on-chain asset. Various innovative projects are driving the development of the BTC ecosystem, allowing long-term holders and DeFi users to more efficiently unlock the potential of their assets. LBTC is just one example, demonstrating the path and approach it demonstrates, suggesting the future direction of BTC on-chain financialization: diversified, low-risk, composable, and cross-chain. With more technological innovations and product launches, BTC will become not only a store of value but also a key node in on-chain capital operations.