Babylon Report

Babylon offers a suite of security protocols designed to enhance and scale Bitcoin's capabilities. The core idea behind Babylon is to tap into the capital locked in Bitcoin and use it to secure Proof-of-Stake (PoS) chains.

One of the fundamental issues that Babylon addresses is the vulnerability of PoS chains with less capital. The lesser the capital securing a PoS chain, the more susceptible it becomes to attacks. This presents a significant security risk for these chains. Moreover, attracting capital for staking in PoS chains can be a costly affair, often requiring high native token inflation, as exemplified by tokens like ATOM. However, this high inflation rate can paradoxically be counterproductive, as it may deter long-term holding of the token due to its diminishing value.

Babylon offers a solution to this problem by making it more economical for a chain to direct its yield or rewards to Babylon stakers who contribute to securing their PoS chain. This approach not only reduces the need for high native token inflation but also addresses another issue: the often centralized distribution of a new PoS chain's native token.

Another critical aspect that Babylon Chain solves is the underutilization of Bitcoin's market capital, valued at $1.3 trillion. This vast amount of capital, in the form of BTC, typically does not yield any returns for its holders. Babylon taps into this idle capital, providing Bitcoin holders with the opportunity to earn yields by securing PoS chains.

By enabling hybrid PoS-PoW chains, Babylon effectively inherits the strengths of both systems. It combines the security advantages of Proof-of-Work (PoW), as demonstrated by Bitcoin's robustness but hampered by long confirmation times, with the efficiency of PoS, known for its quicker processing and social consensus mechanisms, albeit with issues like long unstaking periods. Therefore, Babylon Chain not only enhances the security and functionality of PoS chains but also broadens the scope and utility of Bitcoin, presenting a comprehensive solution to several pressing challenges in the blockchain world.

Babylon Chain

At the heart of the Bitcoin Staking and Timestamping protocols is Babylon Chain, a purpose-built blockchain based on the Cosmos-SDK. As Babylon Chain uses Cosmos SDK, it is compatible with the Inter-Blockchain Communication (IBC) protocol, allowing for native integration and swapping of assets and ecosystems within the Cosmos.

Babylon Chain’s main purpose is to act as the control plane between Bitcoin and PoS chains, and facilitate intermediation to ensure that PoS chains can benefit from Bitcoin’s security guarantees and robustness.

Timestamping

One of Babylon Chain’s primary roles is the Bitcoin Timestamping Service, which records the block hashes and staker set votes of PoS chains on the Bitcoin chain. This service is essential for accurately reflecting and timestamping the state of PoS chains on the more secure and immutable Bitcoin blockchain. Timestamping refers to the process where PoS chains use Bitcoin as a timestamping service.

This involves PoS validators posting information onto the Bitcoin network, thus leveraging its security features. In simple terms, PoS chains periodically checkpoint their state to the Bitcoin blockchain.

By adding the security of Bitcoin timestamps, proof-of-stake chains no longer need long unbonding periods or social consensus. In traditional PoS systems, like the Cosmos Hub, unbonding times are lengthy (generally 21 days) because they require broad agreement to prevent long-range attacks, where attackers create a parallel chain after unbonding at no cost. However, such attacks on PoW chains like Bitcoin are expensive due to the high energy requirements to form an alternative long fork. By integrating the unbonding request into the Bitcoin chain in this protocol, removing that transaction becomes prohibitively expensive. Therefore,  PoS can have much shorter unbonding times, new chains can bootstrap more securely, and important transactions get additional protection.

Bitcoin Staking

Another core responsibility of Babylon Chain is to act as a marketplace, aligning the interests of Bitcoin stakeholders, who provide security, with the needs of PoS chains that require this security. This primarily involves Babylon Chain matching the stakes of Bitcoin with the security needs of various PoS chains, i.e. matching the amount of BTC necessary for PoS chains to be economically secure. This primarily relates to Babylon’s Bitcoin Staking offering, which allows Bitcoin holders to stake their bitcoins, thereby bolstering the security of PoS chains while also earning yields.

As part of their staking offering, Babylon Chain is tasked with tracking all relevant staking and validation information, such as the registration and refreshment of Extractable One-Time Signatures (EOTS) keys. EOTS are used to ensure the accountability and integrity of the BTC stakers (in Babylon Chain) in the PoS chains. For example, if a staker acts maliciously (e.g., participates in a double-spend attack on a PoS chain), EOTS ensures that their private key is leaked as a result of their actions. Additionally

Lastly, the Babylon Chain records the finality signatures for PoS chains, which are crucial for the added layer of security and finalization that the Babylon protocol brings to the blockchain ecosystem. Finality signatures are cryptographic proofs that a block on the PoS chain has reached finality, meaning that the block is now irrevocably a part of the chain’s history, and cannot be altered. These signatures are crucial in the additional layer of security and finalization provided by the Babylon protocol, as they ensure that once a block is finalized, it's recognized as such by both the PoS chain as well as the Bitcoin network.

Staking Mechanics

Babylon Chain accomplishes these tasks without the need to bridge assets to PoS chains, which helps maintain a trustless environment. Instead, users can stake their Bitcoin by sending a staking transaction to the Bitcoin chain, through Babylon. This locks their Bitcoin in a self-custodian vault, which can only be accessed using the user’s private key. Since Bitcoin does not have smart contracts, the protocol employs remote staking using unspent transaction output (UTXO) outputs written in the Bitcoin script. UTXO refers to a transaction output that can be used as input in a new transaction.

Following their staking, the user starts to validate blocks for the PoS chain using their key, in return for validator rewards from the PoS chain. If the user acts honestly, they can unstake by issuing an unbonding transaction, which returns their BTC after 3 days. If the user acts dishonestly,  such as executing a double-spend attack on the PoS chain, the staking protocol makes the user's private key public, allowing anyone to use the key to issue a slashing transaction to the Bitcoin chain, leading to the burning of the user's staked Bitcoin. This mechanism serves as a deterrent against malicious behavior in the network.

Validating Babylon

Babylon’s validation infrastructure is a modified version of CometBFT, which itself was an evolution and fork of Tendermint Core, which is used extensively throughout the Cosmos ecosystem. Babylon’s security is enhanced through a unique Bitcoin staking protocol, which introduces an additional voting phase, known as the finality round, beyond the primary CometBFT consensus mechanism. In this finality round, entities known as finality providers, which function as validators and accept Bitcoin for stake delegations, play a crucial role. These providers utilize their EOTS keys to vote on the validity of blocks produced by the CometBFT process. A Babylon block achieves BTC-finalization status once it garners finality votes exceeding two-thirds from the pool of active finality providers.

The current hardware requirements for a Babylon node are as follows:

• Quad Core or larger AMD or Intel (amd64) CPU

• 32GB RAM

• 1TB NVMe Storage

• 100MBps bidirectional internet connection

Finality providers play a critical role in the additional finality round that complements the CometBFT consensus mechanism. Functioning akin to traditional PoS validators, these providers can be delegated voting power by Bitcoin stakers. In return for their services, finality providers earn a commission, which is paid out in Babylon tokens, from the staking rewards.Without the need for specialized hardware, Finality providers are compatible with standard mid-tier machines that use a UNIX-based operating system. It includes several key components:

1. Babylon Full Node: This is an instance that connects to the Babylon network. While running a full node is not strictly necessary, it is advisable for enhancing security, as it avoids reliance on third-party RPC nodes.

2. EOTS Manager: This program acts as a secure keeper of the finality provider's private key. It is tasked with generating extractable one-time signatures.

3. Finality Provider Daemon: This daemon oversees the operations of the finality provider. It interfaces with the EOTS manager to produce EOTS public randomness and to create finality votes for Babylon blocks. These votes are then submitted to the Babylon network via the node connection.