Programmatic Deflation of BABY

📜 Proposals 🗣️ Text Proposals
1

Programmatic Deflation of BABY

Summary

This proposal seeks to get support from the Babylon community regarding using BSN rewards that are distributed to Babylon Genesis to deflate BABY.

The Context and the Question

The upcoming Babylon BTC multi-staking launch will allow one bitcoin to be staked and supercharge multiple networks (a.k.a., BSNs, potentially including both ETH roll-ups and Cosmos chains). In return, BSNs provide staking rewards to BTC stakers in exchange for the validation services (the finality round). A portion of such BSN staking rewards will be programmatically directed to the Babylon Genesis chain to pay for the necessary control plane service it provides.

The question here is: how should this portion of staking rewards be utilised to ensure the system is running smoothly and participants are incentivized to provide the necessary blockchain security and IT services so that Bitcoin staking can function?

The Options

  1. distribute staking rewards to BABY stakers in exchange for their services related to securing and running Babylon Genesis as a necessary control plane for Bitcoin staking.
  2. Introduce deflationary protocol features on Babylon Genesis - one way to achieve this is to deploy an on-chain auction mechanism where the associated BSN rewards are automatically auctioned with bids denominated in BABY. The winning bid gets the BSN rewards, and the bid BABY is burned programmatically without human intervention.

Analysis

Option-1 might seem attractive to certain participants, but has some practical considerations.

  1. Every BABY staker is “forced” to receive and manage all types of BSN tokens, even if they are not interested in a particular BSN. This problem is particularly tricky for institutional BABY stakers, which may have policies on what types of tokens they can accept.
  2. Claiming and managing BSN reward tokens may trigger accounting and tax difficulties, especially for institutional BABY stakers.

Option-2 is might be more desirable because BABY stakers can continue to earn a single token for the staking services as they have done so far without the need to do due diligence and tax analysis on a number of tokens.

Recommendation

We recommend Option-2: using the rewards to programatically deflate BABY.

Babylon Labs, as the software development entity behind the Babylon Genesis protocol, did a survey with Babylon Genesis validators and 100% of the votes were for Option-2. It is worth noting that the same approach has been taken by Hyperliquid.

Any choice made by the Babylon community can be changed in the future through the same governance process if the system is not functioning well.

Steps

In terms of execution, given the time constraint and the complexity of developing a fully functioning auction, the following can be considered:

  • For the multi-staking launch, Babylon Genesis will use a community-controlled address to receive and escrow the BSN staking rewards.
  • After the launch, a fully automated on-chain auction mechanism shall be designed and implemented.
  • A subsequent governance proposals would be made to deploy the auction mechanism and transfer the accumulated staking rewards from the escrow address to the auction mechanism.

Submitted by: [Fisher Yu/Babylon Labs]
Date: [2025-07-25]
Contact: [[email protected]]

10 Likes
2

Burning $BABY is the only right option. The token inflation is very high and need to be counteracted with a burn mechanism.

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3

I propose the adoption of the same burning mechanism with gas fees from current VM operations and future EVM operations.

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4

This the only correct way to bring back value to $BABY token holders.

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5

Hey Fisher @baby_fisherman
Ohad here from Escher — currently the largest LST on Babylon.

Really great to see the Babylon ecosystem growing. We definitely need more sustained buying pressure for the BABY token, and I appreciate you kicking off this conversation.

On Option 2, I think the key question is: how much of the BSN inflation will actually reach users? We should evaluate this from a one-year perspective — do you think it will balance or offset the ~4% inflation currently going to BTC stakers (who mostly sell their BABY rewards)?

At Escher, we’d be happy to help develop shared vaults that allow all BABY holders to participate — not just whales or validators. These vaults could be flexible, with each creator defining their own terms and strategies.

One more thing: I strongly recommend routing all new tokens through the Union bridge (@kaiserkarel) . This would ensure consistent token versions and full composability across chains. Today, Union already holds ~94% of Babylon’s BTC, and I believe bridging through it will lead to the best outcome for users and developers alike.

Happy to dive deeper if helpful!

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6

We are a Babylon validator and finality provider. If option 2 is chosen, will BTC stakers still receive BSN chain tokens, like OSMO and SUI, or only BABY?

Second, we would be concerned that if option 2 was enacted, only whales and the largest validators would win the auctions. So, @Ohad mentioned a vault system and while that may or may not be the proper solution, we very much agree with his sentiment.

5 Likes
7

We support this proposal, and specifically option 2 of this initiative.

BABY is crucial to Staked BTC yield, and without the proper mechanisms to drive market demand to the token, the protocol may struggle to realize its full potential.

When looking at analogous projects like EigenLayer LRTs, who receive staking rewards from the AVS they secure in various tokens, differing reward strategies emerged, but ultimately there was and still is a lack of value accrual to the native EIGEN token itself. We believe the Option 2 auction strategy could facilitate structural demand for BABY which scales BTC yield alongside, BSN adoption and TVL growth. The timing is also ripe given BSN rewards outside Babylon Genesis are not flowing to BTC stakers.

When looking at other similar proof of concepts for such auctions, outside of Hyperliquid’s assistance fund mechanism, which is mentioned by OP, we can turn to Euler’s Fee-Flow model. While Hyperliquid’s assistance fund model is highly functional, its also important to recognize that there is existing deep liquidity for HYPE/USDC, but in a model suggested by OP the auction participants would likely face greater complexity.

Euler’s fee-flow model auctions off protocol fee’s to participants via a Dutch Auction. However, the assets auctioned off are longer tail esoteric assets such as vault derivative tokens, etc. Here is an example transaction hash of one of their auctions: 0x89a9217df243a50101d05d63de93c4a747889bae2e52dd89813e1d50a00a9908

In our opinion this demonstrates that a similar type of auction would work well for Babylon. To further highlight the data on these auctions, you can see in the chart below how much EUL is accrued to the protocol on a weekly basis across all the different chains Euler is deployed on.

Jito Auction (12)
Jito Auction (12)960Ă—540 117 KB

Additionally, there were concerns mentioned above regarding the winning bidder being concentrated amongst a small group or a single individual. In our opinion, this itself is not a bad thing. Ultimately the important thing is the auction clearing at as close a price to NAV as possible so that the maximum amount of BABY can be burned and removed from the supply without the protocol leaking value. However, we do believe that better auction competition will be the thing that drives better pricing, allowing it to clear at an optimal price. When looking at several months of Euler’s fee flow auction data, we can see that 34 unique addresses have won the auctions, but also there is a slight concentration.

The biggest open questions from our perspective are the following:

  • What chain(s) would the auctions take place on?
  • Would there be sufficient onchain liquidity for the BSN tokens & BABY on those chains?
  • What frequency would the auction take place at?
  • Would the auction be facilitated in one tranche, and if not, what tranche size would be used?

In conclusion, we support this proposal believe Option-2 could drive real structural demand to BABY, which is necessary for the protocol to scale staked BTC apy alongside BTC TVL, which could ultimately create a healthy reflexive feedback loop.

We would welcome the opportunity to work alongside the Babylon team and others to create a robust mechanism that can autonomously drive value accrual back to the BABY token, fueling the protocol’s growth.

4 Likes
8

Hello!

What if some ratio is set. Like 40% to stakers 60% to burn.

Avoiding issue if some stakers don’t want to receive certain tokens, they could have simple option to swap them to BABY or BTC( like Hydro has to swap to ATOM )

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Hey Kairos team,
Ohad here from Escher.

Really loved your thoughts on using a Dutch auction model similar to what Euler did — that was actually the first thing that came to my mind as well, and I completely agree with your direction.

I believe the auction should happen directly on the Babylon chain. The main reason is to ensure the integrity of the token — keeping a single, unified version across the ecosystem by using one bridge. If we do that, Escher and Union can extend participation to communities outside Babylon, like SEI, Osmosis, Plume, and more.

Just like we did with chain-abstracted liquid staking, we can enable users to bid and participate in the auction in a single click — even if they don’t currently hold BABY in their wallets. That opens the door to a much larger pool of bidders and significantly more capital, without technical friction.

Let me know what you think — happy to brainstorm further.

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10

Let’s use deflation instead of burning baby :sweat_smile:

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11

Gas fee is in $BABY already. So no need auction, right? But points taken, we could later submit a governance proposal that burns the gas fee!

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12

Hi Atlas Staking, thanks for sharing your concerns.

Re your first concern:

If you are an FP of a BSN and a BTC holder multi-stake BTC to this BSN via you, then this BTC holder will receive the associated BSN rewards, and you will receive the associated commission.

If you are not an FP of a BSN, then you will just receive BABY in the same way as now.

The part of the BSN rewards discussed in this post is the portion of the BSN rewards that is paid to Babylon Genesis for the control plane service it provides. It does not go to BTC stakers or FP anyway.

Re your second concern: technically, we could split BSN rewards into small bites for a more “affordable” auction. Also, the “governance controlled escrow address” I mentioned in the post is indeed kind of a vault. We can surely implement something more sophisticated.

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13

Hi SasoLithops, thanks for sharing your idea. We have indeed thought about this and we believe doing both will defeat the purpose:

  • BABY stakers who do not want certain tokens will still have to first receive them before they can swap out, so the issues I described in the post will still persist
  • A hybrid system is usually not here nor there: BABY stakers who want extra rewards will feel the reward is not high enough and be upset. BABY holders who want to deflate will feel the burning is not enough and be upset.
  • System wise, we will be implementing and maintaining two reward distribution systems, which adds complexity and is generally not a good practice.
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Hi Ohad, thanks for sharing your thoughts and suggestions, and highly appreciated Esther’s contribution to the Babylon ecosystem!

How much of the BSN inflation will actually reach users: most of it. Most (about 90%, varies BSN by BSN) of BSN rewards (not necessarily inflation, some are sequencer fee, some are transaction fee) are paid to the BTC multi-stakers and their FPs of that BSN. The portion of BSN rewards that will be used to deflate BABY is the remaining ~10% of the BSN rewards.

At the early stage, I don’t think the deflation will fully offset the 4% inflation of BABY that goes to the BTC staker. A combination of measures will need to be taken to reduce the overall inflation - we are preparing those. I would also likely to kindly note that it is not evil to have some level of sustainable inflation. If used properly to incentivize the ecosystem, it would be worth it.

Thanks for offering help in the development of the auction mechanism! Totally agreed that it should not be just accessible by whales and big validators. This is not our intention anyway - we can always split the rewards into small bites.

Re union bridge: noted. Don’t know what does “holds ~94% of Babylon’s BTC” mean, though. BTC is staked natively on BTC chain and is self-custodial.

3 Likes
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Hi Kairos Research,

Super insightful thoughts and convincing data. Highly appreciated!

Let me answer your question first:

  • What chain(s) would the auctions take place on?
  • Would there be sufficient on-chain liquidity for the BSN tokens & BABY on those chains?
  • What frequency would the auction take place at?
  • Would the auction be facilitated in one tranche, and if not, what tranche size would be used?

It will happen on Babylon Genesis, so the BABY liquidity will be plenty. We haven’t decided on what auction mechanism to use and the implementation details yet. We also understand how complex the project could be, so in light of time shortage, we propose to escrow the rewards in a governance-controlled address for now. We can then develop a proper auction mechanism together!

Well noted on the difference between Hype auction and Euler auction. I quoted Hyper because it provides a concrete evidence that “auction” is a successful approach. It does not mean that I believe the particular auction mechanism adopted by Hype is the best for Babylon as well.

And at a higher level, agree with you that to fully realize Babylons’ potential we need systematic measures in driving demand and don’t leak value. This auction is just the start. We are also working with the community on designing other measures. Please feel free to share your ideas as well!

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Hey @baby_fisherman,

Thanks for your quick response. I think we should establish a target for how much BABY can reduce inflation. I agree that inflation is perfectly acceptable when you have a fully functional ecosystem where users can actively utilize and burn the token—and that’s the direction we’re heading.

What I was trying to emphasize about Union and our project was more about enabling broader user participation. Specifically, I was referring to the BTC LST that moves between EVM chains and Babylon chains.

I have a few questions about the auction process:

  1. On which chain will the auctions take place?
  2. Will the assets be sold individually or bundled together with different assets?

My general concept was to allow other ecosystems to participate as well, giving them the option to buy back their tokens. To accomplish this, we need a unified version of the token—this would be especially beneficial for the BABY token and also for the BSN tokens.

Hope this clarifies my thoughts.

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Forgive me, but i think we might misunderstand what being a finality provider means. You said only fps of “that BSN” receives that BSNs tokens. We thought being a fp meant we earn BABY and all BSN tokens. That’s not correct?

Staking BTC for just over 1% APY in only BABY tokens is a much tougher sell than if it also included all BSN tokens.

If we are mistaken, how does a fp become a fp for specific BSNs.

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Hi @baby_fisherman !

Thank you for reply. I agree with your points especialy the last one to make it simple, not add complexity.

In that case I am in favour option 2. I wouldn’t mind some of tokens/or a portion of tokens being swapped to BTC to be added to treasury. But that is probably complicated to do.

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Thanks Saso Lithops! This “use part of the reward to build a BTC treasury” idea is a great one and has also been advocated by some validators. It is doable, but as you said will add more complexity, especially given that there is no native BTC swap and management on-chain (for now, until we invent it :slight_smile: ). So at the beginning, let’s focus on one thing and make it right!

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Awesome.

Touche. Step by step and making it right​:clap::clap:

Try connecting with Osmosis team. They building Polaris. Once Babylon chain integrated on Polaris those swaps will be easy as the native BTC already connected on Polaris through Rango and LiFi(maybe some others too)

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