Lombard Finance is working to introduce a new yield-bearing Bitcoin token, potentially unlocking significant liquidity for the DeFi (decentralized finance) ecosystem. As the race for on-chain market dominance intensifies, a key question emerges: Which asset will become the preferred collateral in the DeFi space?
Currently, DeFi protocols have over $126 billion in total value locked (TVL), nearly reaching their 2021 peak of $175 billion, according to data from DeFiLlama. The majority of these assets are in ether (ETH) and its derivatives, such as staked ether (stETH) and wrapped ether (weETH), with wrapped Bitcoin (wBTC) and stablecoins occupying the lower ranks. Lombard Finance, however, is positioning itself to challenge this by introducing LBTC, a liquid Bitcoin token. The goal, as described by co-founder Jacob Philips, is to position Bitcoin as the dominant collateral for the on-chain economy, overtaking ETH and stETH.
“On centralized platforms, Bitcoin is the main collateral—there’s no question about that. So why isn’t it the same in DeFi?” Philips said in an interview. “Bitcoin excels at being a store of value. It’s perfect for collateral, and we should be building DeFi on Bitcoin.”
Bitcoin has had an impressive year, appreciating 124% since January, driven by political developments in the U.S. and the success of Bitcoin-focused exchange-traded funds. In contrast, Ethereum has seen a more modest 48% increase despite its much smaller market cap. As demand for Bitcoin grows, including speculation about a potential U.S. Bitcoin reserve under the upcoming Trump administration, the asset’s on-chain presence may expand, reshaping the DeFi landscape.
Philips sees Bitcoin as a major new source of liquidity for DeFi, stating, “It’s a massive influx of capital. Even if we capture just a fraction of Bitcoin’s $1.9 trillion market cap, it will bring enormous activity into the DeFi ecosystem and make it more efficient—possibly even rivaling the liquidity of centralized exchanges.”
A Yield-Bearing Bitcoin
A key difference between Bitcoin and Ethereum is that ETH can be staked on the Ethereum network, earning interest in return, while Bitcoin lacks such staking mechanisms. Lombard Finance plans to change that with LBTC, a yield-bearing Bitcoin token through its Babylon protocol, which allows users to stake Bitcoin to secure other blockchains.
Here’s how it works: Users send Bitcoin to Lombard, which then stakes the Bitcoin through Babylon, minting one LBTC token for each Bitcoin staked. These LBTC tokens are ERC-20 compatible, enabling them to be used across Ethereum and its protocols. The yield on LBTC is expected to come from the blockchains secured through Babylon, a process that involves projects like Corn, BOB, Cosmos Hub, and others integrating with Babylon’s development environment.
Currently, Babylon’s devnet has integrated with nine projects, and the protocol is expected to go live in 2024. Despite not offering staking rewards yet, Babylon has amassed $5.4 billion in value locked, becoming the 10th largest DeFi protocol by TVL. Early users are also incentivized through a points program, which could lead to an airdrop, though Babylon has not confirmed the issuance of a token.
Facing Tough Competition
Out of the $6 billion staked on Babylon, Lombard is responsible for over $1.4 billion through LBTC tokens. However, without staking rewards, LBTC doesn’t yet offer a yield. Philips believes users aren’t choosing between Bitcoin or ether based solely on staking yield. Other factors, like Bitcoin’s potential role in a U.S. reserve or regulatory sentiment, play a significant part.
While Bitcoin can already be used as collateral in DeFi through wrapped Bitcoin (wBTC), it lacks yield generation. wBTC’s market cap is $12.9 billion, which is close to its 2021 high. However, wBTC’s liquidity in DeFi is less significant than ETH and stETH, with $5.7 billion in collateral locked in major DeFi protocols, compared to $14.5 billion in ETH and $11.1 billion in stETH. Wrapped ether (weETH), a new token allowing users to benefit from restaking rewards, adds further competition for Bitcoin-based collateral.
In response, Philips argues that LBTC will succeed where wBTC has faltered because it will offer yield. “The LBTC yield is expected to align with the Ethereum staking rate,” he said. “The goal is to get people to move their Bitcoin out of cold storage and make their first step into on-chain finance. Then, we’ll show them the protocols that are safer than their bank.”
Lombard Finance has raised $16 million in funding from notable investors such as Polychain Capital, Franklin Templeton, and Nomad Capital. Philips reports strong interest from those familiar with DeFi, who are particularly open to the idea of Bitcoin staking.
Despite facing stiff competition from stETH and other tokens, Lombard believes that by offering a yield on Bitcoin, LBTC could carve out a significant role in the rapidly evolving DeFi ecosystem.
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