Holding the world's most valuable asset, but having to hand it over to a stranger just to use it. That is the reality for Bitcoin today. Trillions of dollars remain unused because accessing DeFi meant trusting a bridge or a centralized company with your keys. Babylon’s Trustless Vaults fix this model. Now, you can put your Bitcoin to work: earning yield, backing loans, and funding trade without ever giving up control or wrapping your coins.
Key Takeaways
- The Old Way: Previously, using Bitcoin in DeFi meant a dangerous choice: trust a central company with your keys or risk using a bridge.
- The Vault Solution: Babylon vaults allow native BTC to act as collateral on any smart contract chain without ever leaving the Bitcoin network or being wrapped.
- Huge Savings: The system uses BitVM3/ZKPs to verify external conditions, reducing the cost of usual vault operations to approximately $2.66 (standard Bitcoin fees).
- Real Utility: Bitcoin becomes fully programmable. It can finally back stablecoins, loans, and trades anywhere, effectively becoming a universal asset for DeFi.
- True Ownership: Every vault is distinct. Your coins are never pooled or mixed with others, meaning you aren't exposed to other users' risks.
- The Timeline: The "Vault First" roadmap targets a launch in early 2026: starting on Ethereum to capture deep liquidity, then expanding to Babylon’s own network.
The Bitcoin Underutilization Problem
Bitcoin is the largest crypto asset by market capitalization, yet less than 1% of all bitcoins move to smart contract platforms where DeFi activity occurs. The reason is straightforward: every bridge that's attempted to bring BTC to other chains introduces centralization.
Either the bridge controls the private keys (centralized), or it requires a significant trust assumption (federated model). Bitcoin's scripting language lacks covenants - spending conditions needed to build trustless bridges entirely on-chain. So Bitcoin holders face an uncomfortable choice: keep their BTC in their wallets and miss DeFi opportunities, or bridge to DeFi and accept counterparty risk.
This tradeoff reveals user priorities. Bitcoin holders actively choose trustless staking over wrapped BTC alternatives, even when wrapped tokens offer greater DeFi yield. The preference for self-custody over centralized access demonstrates that users value trustlessness. Yet today, achieving that trustlessness means sacrificing DeFi opportunities. Babylon's vaults eliminate this compromise.
What is Babylon
Babylon is building infrastructure to make this work. The project operates on two fronts: a staking protocol that's already live, and a new vaults mechanism launching in 2026.
The staking side is mature. Since August 2024, Babylon has activated over $5 billion in Bitcoin staking across 56k+ BTC. The protocol lets Bitcoin holders stake their coins to secure other blockchains and earn rewards, all without giving up custody. Major exchanges including Kraken, Binance, and OKX offer staking through Babylon. The infrastructure is real: 60+ active finality providers (250+ total) run globally, processing transactions and validating the network.
In addition, Bitcoin holders can stake their coins for staking rewards while simultaneously using staked BTC as collateral for DeFi borrowing stablecoins, participating in perpetual contracts, or accessing lending markets. The same Bitcoin does double duty.
But Babylon's bet is straightforward: Bitcoin's real value lies in its ability to participate in multiple economic systems simultaneously, rather than being tied to a single chain or functioning merely as a staking feature.
Babylon's Trustless Vaults: A Different Approach
The Vaults are Babylon's solution to a problem that cryptographers considered unsolvable: how to build trustless Bitcoin bridges. Unlike traditional bridges that either centralize custody or require collective ownership, Babylon's Vaults use a fundamentally different approach.
Instead of moving Bitcoin off its network, vaults keep BTC on Bitcoin while connecting it to smart contracts on other chains. The mechanism is cryptographic, not custodial. Bitcoin holders deposit native BTC into a vault and pre-sign transactions that define exactly when and how those bitcoins can be withdrawn. The conditions are enforced entirely on-chain, without any intermediary.
This distinction matters enormously. With bridges, you're asking a third party (or group of signers) to hold your BTC and return it when you ask. With vaults, you're defining mathematical conditions that must be satisfied.
No one holds your coins. No one decides if you get them back. The protocol does.
The vaults work with Bitcoin as it exists today. No consensus changes needed. No new opcodes required. Just cryptography specifically, zero-knowledge proofs and BitVM3 to verify that conditions on external chains have been met.
How Babylon's Vaults Work
Here's the mechanic: A Bitcoin holder creates a vault by locking native BTC in a UTXO using pre-signed transactions with cryptographic conditions. This vault is tied to a specific smart contract on an external chain (Ethereum, Babylon Genesis, etc.). The Bitcoins inside never leave Bitcoin's network.
When the user wants to withdraw, they generate a proof attesting to the conditions on the external chain. If you're using your BTC as lending collateral, the proof confirms the loan was repaid. If you're using BTC for a perpetual DEX, the proof demonstrates that the collateral requirements are still met. The vault permits withdrawal when these conditions are cryptographically proven.
The proof mechanism is the innovation. Bitcoin cannot directly read smart contract state from other blockchains, it's not designed to. Babylon solves this using an optimistic approach powered by BitVM3.
Users generate a zero-knowledge proof off-chain that attests to the smart contract state. In the "happy path" this proof is not posted to Bitcoin, keeping on-chain costs minimal. If challenged, the user must submit their proof to Bitcoin, where garbled circuits verify its validity on-chain. This moves the heavy verification work off-chain while keeping the security guarantees tied to Bitcoin.
The final layer of security and coordination is key to adoption: Each vault is segregated. Your bitcoins don't mix with anyone else's. This individual custody is critical for institutions seeking regulatory clarity.
This entire system is economically coordinated by the BABY token. As BTC enters and exits vaults, context-specific usage fees are applied programmatically and may be denominated in native BTC, aligning long-term incentives with BTCFi system growth.
The Babylon team has proposed deflationary protocol features on Babylon Genesis through an automated on-chain auction system where BTC-denominated fees would be auctioned for BABY tokens. Under this proposal, the winning bidder receives the BTC while the spent BABY is programmatically burned. This mechanism remains subject to governance approval, and final implementation details will be determined by the Babylon community. By linking value creation to the governance asset, this strategy, paired with multi-chain deployment of the vaults, is designed to maximize BABY's utility and scarcity.
How Babylon Vaults Compare to Other Bitcoin DeFi Solutions
To understand Babylon's advantages, it's useful to compare trustless vaults against existing approaches. This table contrasts the trust model, custody, security, and cost structure of four methods for connecting Bitcoin to DeFi.
The comparison highlights a fundamental shift in how Bitcoin is utilized. Historically, connecting Bitcoin to DeFi meant accepting a major compromise: Wrapped Bitcoin (WBTC) offers utility but forces you to trust a central custodian. Other trust-minimizing protocols like BitVM Bridges and DLCs improve the model, but they still rely on committees of operators to manage the funds. Early versions of these protocols faced significant on-chain costs for proof verification. BitVM2 experiments cost over $15,000 to post proofs on-chain, while BitVM3 reduces this amount by 170x to just $93 for challenged cases and to ~$2.66 (standard Bitcoin fees) through optimized off-chain verification.
The Real-World Impact of Trustless Vaults
Babylon’s architecture does more than just enable new features, it fundamentally changes the risk and cost equation for anyone holding Bitcoin.
In the lending market, this shift is financial. Today, borrowing against Bitcoin is expensive because lenders have to charge a premium for the risk of holding your assets. By replacing that custodial trust with cryptographic enforcement, Babylon allows native Bitcoin to serve as collateral without ever leaving your control. This removal of the "custody tax" can drive borrowing costs down to 4–5%, significantly lower than traditional off-chain rates. More importantly, it eliminates the fear of a lender going bankrupt with your funds. Borrowers keep their keys in segregated vaults, meaning their assets are never pooled with others or exposed to corporate mismanagement.
For stablecoins, the benefit is about independence. Current options force users to trust either a bank audit or a bridge operator. Babylon's model allows for the creation of a dollar-pegged asset backed strictly by native Bitcoin. Unlike wrapped assets that rely on trusted intermediaries, solvency is mathematically enforced rather than promised, backed by Bitcoin collateral that remains verifiable and secure. This creates a stable asset that is resistant to censorship and free from bridge risk, capable of circulating across the economy while remaining anchored to Bitcoin.
Active traders see this advantage as safety. Typically, getting leverage requires depositing funds onto an exchange, which introduces the risk of that exchange failing. Trustless vaults allow traders to use their Bitcoin as margin for perpetual futures without ever handing it over. The collateral remains locked on the Bitcoin network and can only be liquidated if the protocol cryptographically proves a position has breached its safety threshold. This preserves the trader's long-term Bitcoin exposure and removes the risk of exchange insolvency from the trade.
Finally, for those providing security, this system solves the problem of capital inefficiency. Babylon invented the protocol that first allowed Bitcoin to be staked natively to secure other networks. However, staking requires locking assets for long periods, making that capital illiquid. By using a vault with multiple spending conditions, the protocol allows the same Bitcoin to earn staking rewards and generate DeFi yield at the same time. This means stakers can access liquidity, like minting a stablecoin or taking a loan, without having to unstake or wait for unbonding periods.
Expanding the Horizon
Beyond these immediate tools, this infrastructure lays the groundwork for a sophisticated institutional economy on Bitcoin. Because of the strict vault segregation mentioned earlier, institutions can finally deploy Bitcoin treasuries into DeFi while maintaining the rigid custody controls required by regulators - something impossible with pooled funds. We will likely see corporations issuing Bitcoin-backed bonds to raise operational capital or automated market makers executing cross-chain arbitrage strategies without ever wrapping their assets. Essentially, these vaults function as a universal liquidity layer, allowing native Bitcoin to flow seamlessly into any financial application where trustless collateral is needed.
Launch Strategy: Building the Foundation First
Babylon’s rollout plan is highly deliberate, focused on solving the toughest challenge, Bitcoin liquidity, before scaling the entire ecosystem. This approach is called the "Vault First Roadmap".
The immediate priority is getting the Trustless Vaults to market, aiming for a mainnet launch in early 2026. This means the launch of Babylon’s own EVM and other Bitcoin-supercharged networks (BSNs) is intentionally scheduled to occur after the vaults. By building the liquidity layer first, Babylon ensures that when its network fully opens, it will already be stocked with capital and ready for immediate adoption.
The Multi-Chain Rollout
The strategy is not to build a single wallet garden, but to make Bitcoin a universal asset.
Phase 1: Starting with Ethereum. The initial launch targets Ethereum, which offers the deepest existing pools of capital, the most established DeFi protocols, and a clear regulatory history. This allows Bitcoin holders to immediately and safely participate in the largest DeFi ecosystem, proving the vault technology at scale and focusing on lending and liquid staking derivatives.
Phase 2: Full Ecosystem Expansion. Once the vaults gain traction on Ethereum and large DeFi chains, they will roll out to Babylon Genesis (the native L1 chain) and other networks. This approach establishes the vaults as a Bitcoin liquidity layer that spans the entire DeFi world.
The Longer View
Babylon's Vaults represent a shift in how Bitcoin participates in the broader crypto economy. Instead of Bitcoin remaining locked on its own chain, or flowing through trust-requiring bridges, Bitcoin becomes a composable asset across DeFi. This doesn't dilute Bitcoin's role as a store of value. It extends it. The same BTC that serves as collateral for a loan can be staked, held in cold storage, or transferred peer-to-peer whenever the holder decides.
The protocol's design: segregated vaults, ZK verification, minimal on-chain overhead ensures that this new functionality comes without compromising Bitcoin's security or the user's sovereignty.
For Bitcoin holders seeking yield, for institutions building Bitcoin treasuries, and for DeFi developers wanting to build on the largest crypto asset, the vaults open doors that didn't exist before. Not through marketing, but through actual mechanics.
The information provided by DAIC, including but not limited to research, analysis, data, or other content, is offered solely for informational purposes and does not constitute investment advice, financial advice, trading advice, or any other type of advice. DAIC does not recommend the purchase, sale, or holding of any cryptocurrency or other investment.
