Lorenzo Protocol: A platform that unlocks Bitcoin liquidity
(DeFi) Decentralized Finance
Explore how the Lorenzo protocol transforms mortgaged Bitcoin into liquid re-staking tokens, enhancing liquidity and enabling participation in DeFi.
Learn how to enable Bitcoin liquidity through Lorenzo, making it more flexible and accessible to users across the DeFi ecosystem.
As the father of cryptocurrencies, Bitcoin has proven its resilience and value over the years.
However, it faces constraints, particularly regarding liquidity and accessibility.
Traditional financial systems do not fully integrate with Bitcoin, hindering its growth potential.
Enter the Lorenzo Protocol - an innovative solution that bridges the gap between Bitcoin and decentralized financing (DeFi).
Lorenzo aims to unlock Bitcoin liquidity, making it more versatile and accessible to users within the decentralized financing (DeFi) scope.
Phase 1: Bitcoin Network (Base Layer)
Users: At the heart of Lorenzo lies its user base. Individuals can re-stake their Bitcoin (BTC) with Lorenzo, igniting the process.
Lorenzo Cold Multisig Wallet 2: This secure, offline wallet holds the staked Bitcoin, ensuring maximum protection.
The Victor: The Victor acts as a guardian and monitors the Bitcoin network for any shifts or security threats.
And if any suspicious activity occurs, such as a shift or security breach, it immediately raises an alarm to protect user investments.
Phase 2: Babylon Integration (Expansion Layer)
Staking Agent: The staking agent is a critical intermediary between Bitcoin stakers and the Lorenzo network. Its core role is to facilitate the conversion of staked Bitcoin into Bitcoin Liquid Re-staking Tokens (BLRTs).
By connecting stakers to the Lorenzo system, the staking agent ensures a smooth flow of liquidity.
Lorenzo Holders: A Lorenzo holder acts as a bridge, ensuring effective communication between Lorenzo's smart contracts and external DeFi platforms.
Its responsibilities include token exchange, liquidity provision, and settlement.
Lorenzo Hot Multisig Wallet 2: This wallet is designed for more frequent transactions, complementing the cold storage option.
Cove Units:
StakeAgent Unit: Manages the staking process, handling user deposits and withdrawals.
Control Unit: Manages general protocol operations and interactions with other units.
SPT & YAT Control Unit: Oversees the issuance and management of Staking Pool Tokens (SPTs) and Yield Accumulating Tokens (YATs).
SPTs represent the staked BTC, while YATs capture the accumulated rewards.
Governance: This module allows for centralized decision-making through a voting system by empowering users.
EVM Compatibility Layer: By interacting with DeFi applications based on the Ethereum Virtual Machine (EVM), Lorenzo expands its scope and functionality.
Reward Distribution: This ensures that users receive rewards when staking BTC, incentivizing participation.
Cosmos AppChain and Ethere mint
The Lorenzo protocol is built on a chain of Cosmos applications using Ethere mint technology.
The Cosmos application chain provides scalability, compatibility, and security while Ethere mint ensures compatibility with smart contracts on Ethereum, allowing seamless interaction with existing DeFi protocols.
Benefits of Lorenzo's modular architecture
Scalability: Lorenzo allows for the separation of functions to handle more transactions without compromising security.
Flexibility: Seamless integration of new units ensures adaptability to evolving DeFi needs.
EVM Compatibility: Compatibility with the decentralized financial ecosystem in Ethereum opens new possibilities.
User Governance: Decentralized decision-making empowers the Lorenzo community.
How does Lorenzo work?
Source: Lorenzo Protocol White Paper
The Lorenzo protocol acts as a digital intermediary, coordinating communications between very important players:
Stakers: These are individuals who participate in BTC (Bitcoin) within the Lorenzo ecosystem.
By holding BTC, it contributes to the overall liquidity pool.
Babylon: Babylon represents DeFi platforms hungry for additional Bitcoin liquidity. It seeks to effectively utilize staked Bitcoin within its ecosystem.
Lorenzo ensures that stakers find suitable projects while helping projects access the Bitcoin liquidity they need.
When Babylon stakes Bitcoin, Lorenzo initiates a transformation process:
Staked Bitcoin: Babylon locks a certain amount of Bitcoin as collateral.
Liquid Re-staking Tokens (BLRTs) for BTC: Lorenzo converts the staked BTC into BLRTs, a flexible form of BTC that can be used within the DeFi system.
These tokens maintain the value of BTC while allowing seamless interactions with other DeFi assets.
Now, liquidity has been added to BLRTs, leading to its flow downwards into the broader decentralized financial ecosystem.
This ensures that yield farming, lending, and other DeFi applications gain access to this enhanced liquidity, making BLRTs tradable, usable, and multi-purpose assets.
Bitcoin Re-staking Fragmentation
Bitcoin Liquid Re-staking Plan (BLRP)
The Bitcoin Liquid Re-staking Plan (BLRP) aims to unlock liquidity that is often locked due to Bitcoin re-staking.
When users re-stake Bitcoin, Lorenzo converts it into Bitcoin Liquid Re-staking Tokens (BLRTs) through BLRP.
BLRTs maintain the value of Bitcoin while allowing seamless interactions within the DeFi ecosystem.
Liquid Principal Token (LPT)
Liquid Principal Tokens represent claims on the capital staked in Bitcoin after the re-staking process is completed.
LPTs do not have to be in the same form as the original staked BTC.
However, Lorenzo promotes stBTC, a token pegged to BTC, as its official LPT to avoid liquidity fragmentation.
Yield Accumulating Token (YAT)
The tokens that are entitled to yield represent the right to claim returns from reinvestment once the reinvestment period is over.
Returns from Bitcoin reinvestment activities accumulate in each YAT.
YATs are ERC-20 tokens issued by reinvesting into the BLRP (Bitcoin Liquid Re-investment Plan).
Since both LPTs and YATs are tradable, their holders can claim returns separately and withdraw the re-staked BTC.
