What Is StakeStone Trying to Do by Joining the BTC Ecosystem?
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What Is StakeStone Trying to Do by Joining the BTC Ecosystem?
How will StakeStone expand into the BTC ecosystem? What is StakeStone's airdrop plan?
Navigating Web3 tides with focused insightsHost: Peng SUN, Researcher at Foresight News
Guests: Blue Wharf, Core Contributor of StakeStone; Jeff, Founder of Merlin Chain
Around March 25, StakeStone announced investments from both Binance and OKX, and recently launched an airdrop campaign, generating significant attention. At the same time, StakeStone also announced a strategic partnership with the BTC Layer2 network Merlin Chain to launch interest-bearing BTC "mSTONEBTC," officially integrating BTC liquidity into its cross-chain liquidity distribution network. Foresight News invited Blue Wharf, core contributor of StakeStone, and Jeff, founder of Merlin Chain, to discuss how StakeStone plans to expand into the BTC ecosystem and details about its airdrop program.
Host: Let’s start by asking each guest to introduce themselves and their respective projects.
Blue Wharf (Core Contributor, StakeStone): Hello everyone, I'm Blue Wharf from StakeStone. StakeStone is a cross-chain liquidity distribution protocol focused on liquidity—specifically major liquid assets in the market. Before the rise of the Bitcoin ecosystem, Ethereum was the primary liquid asset. As the Bitcoin ecosystem evolved, we recognized BTC's potential as a new liquid asset. Aligned with our vision for liquidity distribution, we chose to fully support and integrate Bitcoin assets.
For Ethereum-based assets, our protocol architecture is very clear: users deposit liquid assets with us, and we continuously distribute them through an intermediate layer to generate risk-free returns. We support various consensus mechanisms such as PoS, restaking, AI, and RWA. We are not just another LP; ETH is one of our underlying consensus assets. Whenever new consensus layers emerge, we aim to support those foundational assets too, since consensus-backed base assets are essentially risk-free.
Beyond consensus assets, if new low-risk yield-bearing base assets like RWA emerge, our protocol can also accommodate them. Each base asset represents a pluggable strategy. Our entire architecture is designed to distribute liquidity across various risk-free base assets. After generating yield-bearing assets, these are further distributed across different chains and applications—forming a comprehensive liquidity distribution system built on mainstream assets.
With the growth of the Bitcoin ecosystem, we’ve seen the first real opportunity for Bitcoin to earn yield. For the first time, it has become possible to create yield-bearing Bitcoin assets, distribute liquidity downward, and then propagate upward across multiple chains and application layers. From day one, aligned with our long-term vision of liquidity distribution, we announced mSTONEBTC—the yield-bearing BTC product for the Bitcoin ecosystem.
Jeff (Founder, Merlin Chain): Hi everyone, I’m the founder of Merlin Chain. Since last year, we've been developing several protocols on Bitcoin L1, and this year we launched Merlin Chain—a scalability solution for Bitcoin. Our goal is to enable Bitcoin-native assets to have smart contract functionality while being minted on L1, allowing for better liquidity in a highly efficient and cost-effective environment, and making it easier to integrate with more applications such as DeFi, gaming, and social platforms.
Since launching in February, Merlin Chain has already reached nearly 2 million active addresses, with close to 40,000 BTC and large amounts of native Bitcoin assets like ORDI on-chain. We’ve now officially announced our collaboration with StakeStone, aiming to enhance network decentralization and empower our Oracle network to handle greater data validation and security responsibilities.
Host: What is StakeStone’s core narrative and positioning?
Blue Wharf (Core Contributor, StakeStone): Back in April last year, we had deep conversations with major liquidity providers and found that they were struggling to use native ETH for liquidity provision. Native ETH offers around 4% staking yield, settled in ETH itself. So when a public chain tries to attract ETH liquidity, it faces a 4% PoS opportunity cost. Don’t underestimate this 4%. Because settlement is in ETH, if you’re issuing a chain-specific token like Manta, you’d need to offer 10% Manta tokens just to offset that 4% ETH opportunity cost.
And if a project within the Manta ecosystem wants to attract liquidity, it might need to offer annual yields as high as 20% to cover the PoS cost. We see this as a massive structural conflict—one that is fundamentally irreconcilable. This tension surfaced industry-wide during the Shanghai upgrade when LSDfi became a hot topic. That’s when we realized ETH’s era as the dominant liquidity asset was coming to an end.
ETH is no longer the most capital-efficient liquidity asset. Someone needed to step up and create a new carrier for liquidity—a new standard that could replace ETH’s liquidity role and eliminate these opportunity costs, so that other chains and developers could grow their ecosystems at lower capital cost. We saw this as both a critical industry problem and a huge opportunity, which is why StakeStone was born in April last year. When we first started talking to chains and projects, many didn’t fully grasp the issue. But then Blast emerged as the first Layer2 offering interest-bearing capabilities, exposing this core problem to the entire industry.
At that point, we were the only team providing a real solution. Manta was the first to adopt our approach. Our collaboration with Manta succeeded because we didn’t just identify the problem—we had already solved it seven months before Blast could deliver theirs. Since then, many projects have adopted similar models to attract liquidity. We don’t place trust in any single on-chain base asset because the landscape constantly evolves. That’s why StakeStone was designed from the start as a multi-base-asset-compatible protocol. Right now, the largest risk-free base asset happens to be Ethereum, but in a few months, people will begin to appreciate StakeStone’s value as a upstream liquidity protocol.
The same logic is now playing out in the Bitcoin ecosystem. We’ll continue applying our protocol—not simply copying code—but doing customized development for BTC to solve similar problems. For example, there’s a clear need for a Bitcoin-based asset to help users overcome BTC’s opportunity cost. Our consistent mission and vision remain: to distribute liquidity assets efficiently and improve capital efficiency across the entire Web3 space.
Host: What strategic considerations underlie your move into the Bitcoin ecosystem via yield-bearing BTC? And how does your partnership with Merlin Chain work?
Blue Wharf (Core Contributor, StakeStone): We couldn’t have predicted the Bitcoin ecosystem would explode in this way. Initially, our basic assumption was that in the early stages of the Bitcoin ecosystem, the scale of BTC as liquidity would be far smaller than Ethereum’s. Therefore, just like Ethereum needed a more liquid asset for settlement, so does Bitcoin.
That’s why, from the beginning, we partnered with Merlin Chain to provide yield-bearing ETH. But as the Bitcoin ecosystem matured, we realized that relying solely on yield-bearing ETH was no longer sufficient. That’s why we decided to take the next step and launch yield-bearing BTC.
Currently, there are two main approaches to yield-bearing BTC. One is similar to Babylon’s model—using timestamps on another chain and issuing certificates on-chain. The other is directly issuing certificates on the Bitcoin blockchain itself.
The first approach appears very crypto-native because staking occurs on a public chain. However, there's a fundamental flaw: Bitcoin L1 itself doesn’t generate yield. So teams using this model must find external sources of yield. Since their own setup doesn't generate yield, they have to partner with yield-generating chains—leading to a sharp contradiction: Why should the yield generated by others be shared with third parties?
If Ethereum had introduced restaking before PoS existed, nobody would have cared. Today, most restaking capital still relies on Ethereum’s PoS rewards—it’s hard to sustain purely on AVS incentives alone.
We believe the Bitcoin ecosystem must first solve PoS before tackling shared security. You need your own security mechanism first. Only then can a third party say, “I can help share your security.” You can’t have a third party provide all your security from scratch. The core of full security lies in PoS. That’s why we believe the second approach is more important. We should prioritize serving networks like Merlin Chain and perfecting PoS first, rather than building a shared security layer on top and then trying to provide security for Merlin Chain.
Host: How does Merlin Chain work, and what sets it apart from other Bitcoin Layer2 solutions?
Jeff (Founder, Merlin Chain): Before February this year, the concept of BTC L2 was quite chaotic. Many people considered it a fake concept—including, I believe, some even today. Definitions were unclear, and overall understanding of Bitcoin scaling solutions was fragmented, though also highly competitive. All current projects are still exploring, and we’re happy to see new Bitcoin scaling proposals emerging globally and in Asia, gradually converging toward the direction we outlined a month ago.
What is this direction? First, a decentralized consensus mechanism is essential to ensure network security and anti-fragility—this is precisely why we’re partnering with StakeStone. Second, native transaction data must be shared in a verifiable, decentralized manner so that all nodes and users can participate in data maintenance. Third, we need to explore fraud-proof mechanisms on Bitcoin L1. For instance, Babylon uses timestamp scripts on L1 for secure staking. But on L2, this becomes problematic because user funds are actively spent on L2. If L1 funds are only locked via scripts, double-spending can occur on L2.
So today, BTC L2 projects are actively exploring ways to implement fraud proofs on Bitcoin L1. These three elements are essential—doing just one isn’t enough. Pure PoS on Bitcoin may raise concerns about weak binding to Bitcoin’s L1 security. But attempting slashable fraud proofs or rollups directly on L1 is difficult because Bitcoin isn’t Turing-complete and lacks the infrastructure to support such features.
So teams are navigating between reality and idealism, experimenting with different security models and node architectures.
Our yield-bearing BTC is designed to maintain a decentralized Oracle network, simulating network-level security. Whether acting as agents or direct participants, nodes on Merlin Chain perform intensive tasks: data compilation, zkproof circuit generation, uploading to Bitcoin L1, verification on Bitcoin, multi-party Oracle validation, generating L1 signatures, and final zkproof settlement and attestation. All these functions must be fulfilled by Oracles within our network.
These Oracles must stake substantial BTC because their stake secures the network. In case of fraudulent or dishonest behavior, they face slashing to compensate affected users. As network guardians, they also receive transaction fees and governance token incentives. Regular users can join this program by participating in different node roles and earn yield.
Once minted, yield-bearing BTC can be reused across various projects on Merlin Chain, enabling layered yield opportunities.
Host: How can the cross-chain liquidity protocol StakeStone empower the Bitcoin ecosystem?
Blue Wharf (Core Contributor, StakeStone): As mentioned earlier, our liquidity distribution structure starts with directing liquidity toward consensus-layer functions, since PoS currently offers the lowest-risk, sustainable yield source. Liquidity must flow to the consensus layer. Once yield-bearing BTC is minted and the consensus layer is robust, it can further distribute down to L3 or various application layers, reducing capital costs across the board.
The overall structure remains the same on BTC, except that the entry point shifts from L1 to L2—because BTC L2 effectively plays the role that Ethereum L1 does. BTC L1 itself cannot execute complex commands easily.
Jeff (Founder, Merlin Chain): Over the past years of blockchain evolution, Bitcoin assets have largely been overlooked. They're mostly seen as digital gold, lacking practical utility. In contrast, Ethereum rode the wave over the past four years. While Ethereum hasn’t surpassed Bitcoin in market cap, it’s clearly more popular among users, and ETH integrates much better into diverse ecosystems.
When I talk to friends in the U.S., many tell me they started with only ETH—no stablecoins or BTC—because they used ETH to buy NFTs. The benefits were obvious. Now, we’re seeing real opportunities in the Bitcoin ecosystem, especially given Bitcoin’s massive capital base, which could fuel an even larger ecosystem than Ethereum’s.
Under these conditions, we must reconsider Bitcoin’s intrinsic properties. When StakeStone approached us, we were excited—our PoS network relies on Bitcoin to ensure security. More participants mean stronger network protection. If transactions fail or fraud occurs, these nodes bear the loss.
With yield-bearing assets, Bitcoin gains new utility. Holding BTC won’t just be about waiting for price appreciation—it opens up numerous use cases. Whether participating in ecosystem apps, securing Merlin Chain, or reusing yield-bearing assets in other projects, Bitcoin’s financial utility increases significantly. This attracts more holders and participants, which I believe is the core value of a cross-chain liquidity protocol.
Host: How do you think yield-bearing BTC will reshape the Bitcoin ecosystem?
Blue Wharf (Core Contributor, StakeStone): I expect many BTC L3s to emerge soon. For L3s, yield-bearing BTC is crucial—otherwise, capital efficiency suffers. Yield-bearing BTC solves connectivity issues between L2 and L3, bringing structural change. Looking at on-chain applications, yield-bearing BTC lowers capital costs. On Ethereum L2s today, many chains hold almost no native ETH—instead, they rely entirely on yield-bearing ETH as the primary asset for ecosystem development.
Moreover, yield-bearing BTC can move across chains—that’s another key focus for StakeStone. We’re building a truly cross-chain liquidity distribution framework—not just vertical distribution between layers, but horizontal movement across chains. In the future, once mBTC reaches sufficient scale, it could interconnect more BTC L3s and other networks, forming a comprehensive cross-chain liquidity structure.
Jeff (Founder, Merlin Chain): Everyone talks about Bitcoin Layer2, but if you look closely, most projects are essentially building “Ethereum on Bitcoin.” Since Bitcoin isn’t Turing-complete, it can’t run smart contracts natively. So our scaling efforts are effectively creating a full-featured Ethereum-like environment on Bitcoin. For Ethereum, network security is paramount, but performance bottlenecks arise, requiring additional chains to offload work.
These L3s form consensus based on Merlin Chain’s security. We’re all building “Bitcoin’s Ethereum,” and I think people will come to understand this.
Traditional Bitcoin financial services need a dedicated network environment. For example, lending and staking demand is high in traditional Bitcoin finance, but these are hard to implement on centralized ledgers. Running DeFi models on Merlin Chain allows these services to operate with decentralized ledgers—offering low-cost, high-security CeFi operations while sharing liquidity with actual DeFi users on L2.
In simple terms, CeFi goes on-chain and shares DeFi’s liquidity. DeFi demand vastly exceeds CeFi—while CeFi might offer 2–3% returns, DeFi borrowing rates can reach 10% or even 20%. This hybrid model unlocks far larger capital pools. The total addressable market isn’t limited to $10 billion—it taps into the vast traditional Bitcoin capital base, though it remains chaotic today. Honestly, terms like L2 and L3 aren’t precise. Merlin Chain’s role—and the role of our on-chain infrastructure—is more akin to Ethereum L1 and L2 combined.
Bitcoin’s asset characteristics are relatively fixed, and expectations are extremely high. On top of this strong consensus, introducing financial utility and yield-bearing capabilities can have massive implications. With Bitcoin’s market cap around $1.3 trillion, even a small portion gaining yield potential can profoundly impact ecosystem development and network prosperity.
So I don’t think we’re discussing how yield-bearing BTC will reshape the ecosystem—I think we’re opening up possibilities, and now we’re exploring what becomes possible.
Host: Now, let’s hear from Wharf about StakeStone’s airdrop campaign.
Blue Wharf (Core Contributor, StakeStone): Our airdrop will consist of three main parts. The first is a completely barrier-free activity open to everyone. The second involves partnerships with multiple chains—each with its own base activities and ecosystem incentives. We don’t run standalone campaigns but instead empower each public chain’s initiatives. Since our core function is liquidity distribution, this part reflects our distribution mission. Some tasks here are more advanced and require higher engagement.
However, we encountered a minor issue: without time weighting, many large holders felt no difference between depositing on day one versus day two, so they waited—creating a coordination dilemma. To fix this, we’re reintroducing time weighting and reorganizing the timeline. The third part involves rewarding our extensive community—including mBTC holders—and historical interactions with StakeStone, including media partners who will receive participation awards.
Many DeFi power users love stacking layers, but there’s a widespread misconception that more layers equal higher yields. That’s not true. We don’t stack layers unnecessarily. Most users won’t need more than one layer, and even with lockups possibly lasting until end of May, a single layer suffices to deliver strong capital efficiency.
The most critical aspect of any airdrop is withdrawal. Depositing is easy—any protocol can do it. But withdrawals test a protocol’s real capability, and withdrawal design heavily impacts effective yields. We always clearly communicate withdrawal timelines, unlike many protocols that leave users guessing. During our collaboration with Manta, withdrawals caused severe block congestion—two transactions competing in the same block. With Ethereum blocks every 12 seconds, this led to intense contention. Block congestion doesn’t happen under normal conditions—it only occurs when massive TVL attempts to exit in a short window.
To prevent this, we built a queuing system. Engineers worked 22 hours straight to deploy it manually. During congestion, if a user fails to withdraw, they lose nothing—but still pay high gas fees. If 10 users submit in the same block, 9 fail and all 9 pay gas. To protect users, we specifically built this queuing mechanism.
Host: Where does the future of yield-bearing Bitcoin lie—on L1 or L2? And can cross-chain liquidity infrastructure strengthen Bitcoin’s liquidity?
Jeff (Founder, Merlin Chain): Babylon uses timestamps on L1, but along that path, restaking isn’t feasible later. If you go through a Layer2 protocol first—staking funds into a decentralized network and adding timestamps—you create a bidirectional yield mechanism from L2 to L1.
I personally believe yield-bearing BTC will primarily emerge on L2. Bitcoin’s network only needs miners for PoW—it doesn’t require your BTC for any function. You can’t do anything else with your BTC on L1.
The source of yield will likely come from applications, protocols, and new networks within the ecosystem. By providing liquidity and security to these networks, you earn incentives. So the financial return originates from the ecosystem. When people talk about the Bitcoin ecosystem today, they’re mostly referring to L2 applications.
Blue Wharf (Core Contributor, StakeStone): Think of it this way: someone works on L1 but generates no yield. Someone else works on L2 and creates yield for BTC. Now, the person on L1—who contributed nothing to yield creation—tries to claim a large share of that yield. That’s unjustifiable.
We firmly believe yield-bearing BTC must originate on BTC L2. But Jeff raised an interesting point: if you stake mBTC on L2, the underlying native BTC could simultaneously be staked on L1 via Babylon. This way, you get both Babylon airdrops and mBTC’s simulated PoS yield. Then, with your yield-bearing BTC, you can engage in applications and further distribution to earn even more. We believe this combined yield structure is the most rational outcome for mBTC holders.
Host: Restaking is essentially a matryoshka doll game. Where do you see the risks?
Blue Wharf (Core Contributor, StakeStone): EigenLayer created middleware for consensus-layer liquidity distribution. Future AVSs run their own clients—essentially, each chain launching an AVS requires a PoS client, like operators running iOS clients. EigenLayer’s key innovation is enabling one ETH to provide shared security to multiple clients, giving Ethereum access to AVS1, AVS2, AVS3… theoretically, the sum of AVS(N) yields.
The risk? The more AVSs you join (higher N), the greater your slashing risk. If any single AVS gets slashed, they all get slashed. If there are 100 AVSs, can you realistically run 100 clients? Can one ETH handle 100 services? Operators must manage 100 clients—like 100 iOS apps updating separately: A upgrades this week, B next week, C and D together the week after. It becomes a massive operational burden, and each AVS typically offers low individual yield.
Host: What if there’s a bank run?
Blue Wharf (Core Contributor, StakeStone): Since our underlying assets can be fully reconstructed, there’s no true bank run risk—only temporary queueing during mass withdrawals.
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