BadgerDAO, a decentralized autonomous organization focused on introducing Bitcoin to DeFi, has launched eBTC stETH
-1.99%
-backed, bitcoin-linked token in partnership with liquid staking platform Lido.
The launch will allow users to take out free, reward-bearing bitcoin loans, designed to provide a more capital-efficient way to borrow bitcoin, a statement said.
The experimental eBTC token is backed by staked ether (stETH). Rather than holding assets through traditional staking, the Lido liquid staking protocol allows users to earn staking rewards on the underlying asset – in this case ether – while unlocking utility and liquidity for it through various DeFi applications in the form of a derivative token for liquid staking. — in this case stETH.
“After 18 months of rigorous development, we are excited to launch eBTC, a truly unique DeFi primitive that makes it easy for anyone to borrow bitcoin with absolute transparency,” said BadgerDAO founder Chris Spadafora, also known as Spadaboom. “Finally we can bring out the power of Ethereum staking Bitcoin 
BTC
-1.29%
.”
Lido’s Liquidity Observation Lab will offer 15 stETH ($55,000) in additional rewards for early adopters as part of the partnership, distributed via an airdrop at the end of a one-month incentive period.
BadgerDAO claims to have generated $3.5 billion in lifetime bitcoin deposits. The DeFi protocol currently has a total value of $23.4 million, down significantly from a peak of $2.3 billion in February 2021, according to DefiLlama facts.
Lido, Ethereum’s largest liquid staking solution, has a current TVL of $35.1 billionaccording to DefiLlama, with sETH’s market cap ranking among the top ten cryptocurrencies.
“The eBTC protocol introduces an exceptional new use case for Lido Staked ETH, leveraging the power of reward staking to provide a more capital-efficient lending option for bitcoin on Ethereum,” Lido’s DeFiYaco said.
How does eBTC work?
Users can deposit ether in various forms to borrow overcollateralized eBTC without having to pay any origination fees, redemption fees, or interest fees typical of DeFi lending protocols. The eBTC protocol then stakes the ether with Lido as sETH, allowing users to earn on their collateral instead of paying fees to borrow.
The protocol generates revenue by taking a percentage of the accrued stake yield from the total system collateral, known as the ‘protocol revenue share’.
BadgerDAO unveiled a “purple paper” for the eBTC protocol in July 2023, designed as a trusted synthetic version of bitcoin in DeFi, with a minimized governance mechanism.
The approach ensures that the protocol remains non-custodial and censorship-resistant, while retaining some flexibility to change parameters related to fee competitiveness, peg stability, risk management and economic and technical security to adapt to market developments, the team said at the time.
This contrasts with popular packaged bitcoin tokens like wBTC, which rely on custodial services to manage the bitcoin that backs the token, and eliminates the requirement to use cross-chain bridges – which remain one of the most prominent attack vectors in Being DeFi.
To ensure the solvency of the system, eBTC uses a liquidation mechanism – meaning that if the collateral ratio of a collateralized debt position falls below the minimum of 110%, the debt position is eligible for liquidation. “The outstanding debt can be repaid by any market participant in exchange for some excess collateral and the gas fee as an incentive,” the team said last year.
In cases where a debt position is not liquidated despite the collateral ratio falling below 103%, the protocol considers it as insufficient collateral and a debt redistribution is implemented. Liquidators can receive the outstanding collateral at a fixed discount of 3%, and any outstanding debt will be redistributed to active, collateralized debt positions.
Renewed focus on security after $120 million exploit
In December 2021, BadgerDAO was exploited for $120 million in a front-end attack. The incident had a domino effect on the crypto industry, with troubled crypto lender Celsius Network among those who lost money in the hack.
In the wake of this attack, BadgerDAO said it approached the launch of eBTC with a renewed focus on “top-tier” security, including collaboration with RiskDAO for economic risk assessments, Spearbit for smart contract audits, Cod4rena for a crowdsourced audit and Immunefi for a bug bounty before launch.
