Staking Bitcoin? Billions in Bitcoin Bridged as Merlin Brings DeFi to BTC

12 Jun 2024

Bitcoin investors now have new options to earn yield on their holdings through Merlin Chain, a Layer 2 blockchain protocol built for Bitcoin. The platform's proof-of-stake consensus allows users to stake wrapped bitcoin (M-BTC) and earn staking rewards, similar to how Ethereum users can stake ether.

After bridging BTC to the Merlin network, users lock it on Layer 1 and receive M-BTC, which can then be staked. The staked M-BTC generates rewards akin to staked ether (stETH) on Ethereum. From there, Merlin provides integrations with leading decentralized finance (DeFi) protocols for lending, borrowing, supplying liquidity, and accessing derivatives markets.

Everyone knows bitcoin has been one of the best performing assets over the past decade, but holders have missed out on yields that other ecosystems provide.

said Jeff, founder of Merlin Chain.

In addition to staking, Merlin allows users to supply M-BTC as liquidity to earn yields, explore lending and borrowing markets using BTC as capital, and bridge assets to other Bitcoin Layer 2 networks like Linea. The platform has seen significant activity, with over $13 billion worth of BTC bridged to and from the network in the past 45 days alone.

While Bitcoin's security and scarcity are valuable traits, the lack of incentives beyond price appreciation has been a drawback compared to blockchains enabling DeFi applications. Merlin Chain aims to bring the mature DeFi ecosystem of Ethereum to Bitcoin by unlocking similar use cases powered by BTC.

The platform has partnered with major crypto custodians and institutions like Fireblocks, Cobo, Ceffu, and Bitmain's Antalpha to bolster security and decentralize its validator set. However, some analysts caution that layering additional protocols and smart contracts on top of Bitcoin may introduce new risks and complexities.

One way to understand Merlin Chain is to think of it as a special "money market" that allows Bitcoin holders to deposit and earn a return on their BTC, similar to a bank account earning interest. However, instead of a traditional bank, it is a decentralized protocol utilizing blockchain technology and crypto-native financial instruments.

Just as one could deposit dollars into a bank's savings account, Merlin lets users deposit ("bridge") their BTC and earn rewards through staking and DeFi activities. The key difference is that Merlin operates without any central authority controlling user funds.

Final Thoughts

Merlin Chain represents an innovative effort to enhance Bitcoin's functionality and utility by integrating DeFi opportunities that have largely been limited to other blockchain ecosystems until now. As the crypto ecosystem expands, platforms bridging established assets like BTC to new financial services could gain traction among investors seeking yield.

However, introducing additional layers and smart contracts does create new potential risks. Only time will tell if projects like Merlin can execute on their vision of bringing DeFi to Bitcoin in a secure, decentralized manner that aligns with the core tenets of Bitcoin itself.

For long-term Bitcoin investors accustomed to a "hodl" mentality, the ability to earn yields on their holdings is an attractive proposition that Merlin aims to fulfill. But they will need to weigh the rewards against the inherent risks and complexities. Nonetheless, Merlin is pioneering an intriguing new intersection of Bitcoin and DeFi.

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Vested Interest Disclosure: This author is an independent contributor publishing via our business blogging program. HackerNoon has reviewed the report for quality, but the claims herein belong to the author. #DYOR.