Lombard Finance is setting its sights on creating a yield-bearing Bitcoin token, a move that could significantly boost liquidity within the decentralized finance (DeFi) space. With the DeFi market evolving rapidly, the question of which asset will emerge as the primary collateral for DeFi protocols remains up in the air.
As of now, DeFi platforms have locked nearly $126 billion in value, inching closer to the $175 billion peak seen in 2021, according to DeFiLlama. The bulk of this locked value is in ether (ETH) and its derivatives, such as staked ether (stETH) and wrapped ether (weETH), with wrapped bitcoin (wBTC) and stablecoins holding smaller shares. However, Lombard Finance aims to change the narrative with its new LBTC token, designed to make Bitcoin the dominant collateral in the DeFi space.
Co-founder Jacob Philips argues that Bitcoin has always been the king of collateral on centralized platforms, but it hasn’t yet claimed that role in DeFi. “Bitcoin is unmatched as a store of value,” he explains. “It’s the ideal asset for collateral, and we need to build DeFi on top of it, just like we do in the centralized world.”
Bitcoin has had an exceptional year, increasing by 124% since the start of 2024, driven by political developments in the U.S. and the ongoing success of Bitcoin exchange-traded funds (ETFs). Meanwhile, Ethereum’s price has only risen by 48%, despite its market capitalization being four times smaller than Bitcoin’s. As Bitcoin’s influence continues to grow, discussions about its potential role in a U.S. Bitcoin reserve are heating up, suggesting that the asset could play a larger role in the DeFi ecosystem in the near future.
Philips believes that Bitcoin is poised to become the next major liquidity source for DeFi. He sees it as a massive opportunity to bring new capital into the space, making DeFi more efficient and potentially rivaling the liquidity found on centralized exchanges. “Even if we capture just a portion of Bitcoin’s $1.9 trillion market cap, it would lead to a flood of new activity in DeFi, improving the efficiency of protocols across the board,” he says.
Introducing a Yield-Bearing Bitcoin
One of the key advantages of Ethereum over Bitcoin is that ETH can be staked on the Ethereum network to earn a yield. Bitcoin, on the other hand, lacks a similar staking mechanism, but Lombard Finance aims to change that. Through its Babylon protocol, Lombard is developing a way to stake Bitcoin and generate a yield with LBTC tokens.
Here’s how it works: Users send their Bitcoin to Lombard, which stakes the Bitcoin through Babylon and mints an LBTC token for each Bitcoin staked. These LBTC tokens are ERC-20 compliant, allowing them to interact seamlessly with Ethereum and other DeFi platforms. The yield for LBTC will come from the blockchains secured by Babylon, which already has several projects, including Corn, BOB, Cosmos Hub, and others, integrating with its development network.
Currently, Babylon’s staking program is in its early stages, and no rewards have been distributed yet. Despite this, Babylon has already locked in $5.4 billion in value, becoming the 10th-largest protocol in DeFi. Early adopters are incentivized through a points system, potentially leading to an airdrop, although Babylon has yet to confirm whether it will issue a token.
A Challenging Road Ahead
Out of the $6 billion staked on Babylon, more than $1.4 billion is through Lombard to mint LBTC tokens. However, without staking rewards at present, LBTC does not offer a yield. Philips notes that yield is only one part of the equation when it comes to choosing Bitcoin over Ethereum or vice versa. Other factors, such as Bitcoin’s growing role in global finance and regulatory sentiment, also influence user decisions.
While Bitcoin can already be used as collateral in DeFi through wrapped Bitcoin (wBTC), it has yet to offer a yield. wBTC’s market capitalization stands at $12.9 billion, still close to its all-time high, but its role in DeFi is less significant compared to Ethereum-based assets like ETH and stETH. Currently, $5.7 billion in wBTC is used as collateral in major DeFi protocols, while $14.5 billion in ETH and $11.1 billion in stETH are locked in.
The rise of stETH, in particular, has disrupted the DeFi market, with tokens like wrapped ether (weETH) offering additional yield through restaking rewards. This competition puts LBTC in a tough spot, but Philips believes LBTC’s yield will help it stand out. “The LBTC yield should eventually match Ethereum’s staking rewards,” he asserts. “Our goal is to encourage Bitcoin holders to move their assets from cold storage and take the first step into on-chain finance.”
Lombard Finance has already raised $16 million in funding from top investors like Polychain Capital, Franklin Templeton, and Nomad Capital. Philips says the response has been particularly positive from those already familiar with DeFi, who are more likely to embrace Bitcoin staking.
Despite the competition from Ethereum-based assets, Lombard believes LBTC can carve out a unique niche in the DeFi space by offering Bitcoin holders the opportunity to earn a yield while participating in decentralized finance.
