Until Now

Today, there are three methods to earn Bitcoin - excluding custodial services. The first involves consuming energy to mint new coins, while the second and third involve deploying on-chain capital to earn yield:

• Block Mining: The original method for earning bitcoin was block mining. Mining is the act of creating a block of transactions, producing a corresponding proof of work, and broadcasting it to the network in hopes that other nodes continue mining blocks on top of yours. This process results in the miner profiting from a predetermined block subsidy along with transaction fees. Unlike the other two methods, this requires a sizable investment in hardware and energy and doesn’t depend on onchain capital. Additionally, if you are not a “large” miner it is extremely likely that you will experience a high degree of variance in your earnings. To circumvent this, you can join a mining pool, responsible for aggregating energy and hardware to make it more likely to mine a block.

• Lightning Nodes: Bitcoin has a couple of inherent limitations which make it infeasible to use as a payment layer. First, its limited block size results in high transaction fees, making it illogical to perform low-value or high-frequency transactions. Second, its reliance on probabilistic finality requires approximately an hour (6 block confirmations) to be confident that the transaction won’t be reverted. The Lightning Network solves this by allowing two users to transact almost instantaneously through payment channels. Payment channels are open and closed on-chain, but “transacted through” by exchanging off-chain commitments to their most recent state. If a user doesn’t have a direct channel with the intended recipient, they can route the payment through a series of channel “hops”. These “hops” are facilitated by routing nodes who charge a fee proportional to the amount of Bitcoin being transferred through them. Although Lightning provides an elegant solution to the problems posed by Bitcoin, it also comes with its own limitations. On the operations side, node operators need to be able to run lightning nodes and make sure they are available for payment routing. On the liquidity management end, node operators must ensure capital efficiency for payment channels, periodic rebalancement of channels, and sufficient procurement of inbound liquidity to enable outbound payments.

• Babylon: More recently, Babylon[3] has emerged as a means of earning yield by staking one’s Bitcoin to secure other blockchains. Babylon presents a graceful solution which overcomes Bitcoin’s limited programmability by using EOTS (extractable one-time signatures) to enforce slashing conditions. Yield generation on Babylon differs from the methods discussed above, as Babylon stakers earn yield in the native currency of the chain they are validating instead of Bitcoin. Stakers also have the option of delegating their stake to a validator on their behalf for a share of their earnings.

While there are multiple avenues for generating yield on Bitcoin, each comes with its own set of trade-offs, often requiring significant technical expertise, sizable capital investment, or acceptance of yield in non-Bitcoin assets. Also note that all methods besides delegated staking on Babylon require active participation by the user, making them unappealing to the masses.