Episode #69: Meet the Startup Turning Bitcoin Into A Yield-Generating Asset

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  Samantha Herrick:
  This is a podcast brought to you by Alumni Ventures, a show where we tell you the stories and creators of tomorrow. Welcome back, everyone, to the Tech Optimist.

  David Tse:
  With Babylon, we try to take all the research learnings we get and apply them to the real world, and see to make a real impact. And so, we’ve been working on Babylon for almost three years now.

  Samantha Herrick:
  That is David Tse, co-founder of Babylon.

  Ray Wu:
  It’s great that you’re building enabling layers for this ecosystem.

  Samantha Herrick:
  And that is Ray Wu, managing partner here at Alumni Ventures. He’s designed assembly software for DNA and RNA sequencing data. He’s got a bunch of awards that I’m not going to read because there are too many of them to read. And that’s me. You know me. My name is Sam Herrick. I’m the guide and editor for this show.

  All right. Everyone at this point knows the drill for this show. So, first I’m going to give you a little sneak peek into what Babylon does, what their mission is, and then we can hop into the interview.

  Babylon is a Bitcoin startup, so this is a very financially focused episode. The core concept and core values of what Babylon does is developing a self-custodial Bitcoin staking protocol. It aims to build a Bitcoin-secured decentralized world by allowing Bitcoin holders to stake their BTC on proof-of-stake systems.

  This enables Bitcoin staking without the need for smart contracts using Bitcoin’s time-locking mechanism. It allows POS networks to leverage Bitcoin security without wrapping or bridging solutions.

  Some key features:

  • Self-custodial staking, so users retain control of their Bitcoin.

  • Unstaking on demand.

  • Leverages over $1 trillion of inactive Bitcoin capital.

  Phase one of the main net launch was set to launch in August of this year, and it’ll be in three phases. The first phase allows BTC holders to stake their coins.

  As far as funding goes, they’ve raised $70 million in a funding round led by Paradigm and received investment from Binance Labs. They’re supported by over 200 finality providers. They’re integrated with wallets like Binance Web3 Wallet, OKX Web3 Wallet, BitGit Wallet, and others. They were co-founded by Stanford Professor David Tse and Dr. Fisher Yu in 2022.

  Some potential impact: they could redefine BTC staking parameters on POS chains. It aims to enhance the crypto economy security of POS networks using Bitcoin’s large market cap and security. This may lead to deflation in POS networks by reducing the need to mint new tokens for validation incentives.

  Currently, they’ve already launched successful test nets, including one that saw over 100,000 stakers within 48 hours. Babylon represents a significant innovation in the cryptocurrency space, potentially bridging the gap between Bitcoin’s security and the efficiency of POS systems.

  Now we’re going to get into the nitty-gritty about that a little bit later. But before we hop into the episode, we’re going to get some admin stuff out of the way. We’ll do an ad really quick here for Alumni Venture’s FinTech Fund, then a disclaimer, and then we’ll hop right into the nitty-gritty of the interview. So, hang tight—don’t go anywhere. This is a good one.

  Speaker 4:
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  Samantha Herrick:
  As a reminder, the Tech Optimist podcast is for informational purposes only. It’s not personalized advice and it’s not an offer to buy or sell securities. For additional important details, please see the text description accompanying this episode.

  Ray Wu:
  Hi, my name is Ray Wu. I’m a managing partner at Alumni Ventures. Today I’m speaking with David, who is a co-founder of Babylon Chain. We’re truly excited to support the company and be part of this journey together.

  Hi David, welcome to the show. First of all, a huge congratulations on your success. Babylon is a unicorn now. I still remember our Zoom calls and our meeting in our garage about three years ago to brainstorm which product to launch, and pros and cons of various VCs for the C round. It’s been a great journey to get here. Truly excited for you.

  Maybe as a starting point, could you please introduce yourself and Babylon Chain?

  David Tse:
  Yeah, so great to be here on your show, Ray. I still remember almost three years to this day we started the journey, indeed at this garage—same location as this podcast.

  And yeah, a few words about myself: I started doing research in the blockchain space about six years ago. Before that, I was doing research on wireless communication. I’m also a professor at Stanford University.

  In fact, I think we came into contact, Ray, because you focus on supporting university academics becoming entrepreneurs. So that’s how we got connected at the beginning of this journey.

  Yes, my background is research. But with Babylon, we try to take all the research learnings we get and apply them to the real world to make a real impact. We’ve been working on Babylon for almost three years now. So, that’s my background and how I got here.

  Ray Wu:
  Yeah, great. You are a famous professor at Stanford, so what inspired you to start this venture? Are there any industry catalysts or trends that influenced your decision to start at that time?

  Samantha Herrick:
  Okay, before we talk about trends and we hop into market opportunities with David, I want to give our listeners and everyone out there who doesn’t know who David Tse is a bit more information on how legendary of a researcher he is.

  He’s a Stanford professor, as he said, of engineering. He also previously was a professor at the University of California Berkeley from 1995 to 2014.

  For his own education, he’s got a bachelor’s in systems design engineering from the University of Waterloo, and an MS and PhD in electrical engineering from MIT. His research focus is on information theory and its applications in wireless communication, machine learning, energy, and computational biology.

  He also researches blockchain technology and security. David is the inventor of the proportional fair scheduling algorithm used in 3G, 4G, and 5G cellular systems. He’s a co-author of the widely used textbook Fundamentals of Wireless Communication and has designed assembly software for DNA and RNA sequencing data.

  He’s got a bunch of awards that I’m not going to read because there are too many of them. But in his recent work, he’s the co-founder of Babylon Chain, which is his company. He’s collaborating with other blockchain projects and has published research on Bitcoin-enhanced proof-of-stake security. His research has earned him over 77,000 citations. The list of his work goes on and on. He’s a very accomplished person and is a highly respected figure in electrical engineering and information theory, with significant contributions to wireless communications and, more recently, blockchain technology and security. His work has had a wide-ranging impact on both academia and industry.

  David Tse:
  Yeah, I’ve been an academic ever since the start of my career many years ago. But I’ve always wanted to not only do research but take the research to the next level, which is to impact the development of a technology. And as you know, developing a technology is much more than just research. Research is the first step—it’s to figure out what is possible. But once you figure out what is possible, converting it into a reality is another story.

  I was quite lucky early in my career because, as I was doing research in wireless communication, I got involved with this company called Qualcomm, which at that time was still a very small company. It turned out that this company was able to essentially build out the entire third-generation wireless communication system. I was there working with a group and transferring some of my technology into that 3G standard. My impact was through this collaboration and working with this company.

  From that experience, I learned two things. One is that you have to be at the right time and the right place to influence a technology. You have to be at a time when the infrastructure is being rolled out. For example, if I were to do the same research now and try to impact 5G or 6G, it’s too late because much of it is already set—many things are already set in stone.

  With blockchain, my feeling is that we are exactly at the same time as wireless was 20 or 30 years ago. It’s still early; the applications have not fully appeared yet. There’s an initial inkling of potentially interesting applications, and people are thinking about how to lay down the foundation of the infrastructure. That’s one reason why I’m inspired.

  Now, one difference between blockchain and wireless communication is that, whereas in wireless there were big companies like Qualcomm or Broadcom, there’s no such thing in blockchain. Most of the innovation is happening at the startup level. So, I felt that doing a startup was the right way to transfer some of the research learnings that we had to impact the real world.

  Ray Wu:
  Indeed. Timing worked out great, and I’m glad you started. When I first started, it was more about security. Now it’s about Bitcoin staking, as I see a lot of activity. You’ve got $1.5 billion staked on your chain now. Can you share more about the product evolution and ecosystem build-out over the last three years?

  David Tse:
  Yeah, so our research in academics—and research in general—is focused on security. When you build a startup, you obviously start from your expertise. It’s like, “Okay, what do I know?” You should do a startup in an area you know well. So, we had a very strong focus on security.

  Now, one lucky thing we had was that we not only focused on security but took as a starting point the idea of extracting the security of Bitcoin. As we progressed and built different protocols, we realized that pure security alone is not enough to make a significant impact. Here’s why: when you build a security product, people don’t really care about security until they get hacked. Security is not the first-order thing that people think about.

  So, we felt that while security is important for the long-term health of the blockchain ecosystem, we needed to couple it with something else that had broader appeal to make it a more holistic product that more people would adopt.

  That’s how we came up with the idea of staking—specifically Bitcoin staking. Staking has two aspects to it: from the blockchain’s point of view, staking provides security; from the asset holder’s point of view—in this case, Bitcoin holders—staking provides an opportunity to earn rewards.

  By focusing on staking and inventing this new protocol called Bitcoin staking, we were able to keep our central thesis of the importance of security while broadening it to a wider audience—in this case, Bitcoin holders. And the thing about crypto is that almost everybody holds Bitcoin, which is a big advantage.

  Ray Wu:
  Since that’s enabling the Bitcoin ecosystem, do you have any predictions about where this ecosystem is going in the future?

  David Tse:
  Yeah, so Bitcoin is the oldest blockchain—it’s the OG blockchain—and it’s also the most valuable asset. But Bitcoin has had a bad rap historically. A lot of technologists abandoned Bitcoin because they felt it was too rigid. Some people even think of Bitcoin as a religion.

  One thing about religion is that you try to minimize change—because if you keep changing a religion, it’s not very successful. A successful religion hardly changes. But for technology, something that never changes is difficult because you need to innovate. So, a lot of technologists moved on to build Ethereum, Solana, etc.

  What’s happening now is that people are saying, “Hey, actually, although Bitcoin changes slowly, we can bring back some of the good ideas developed in other ecosystems to Bitcoin to help it advance.”

  The advancement here focuses on scaling Bitcoin—leveraging its security and asset value while improving throughput and latency. This has led to the idea of taking Ethereum’s concept of layer 2 (L2) solutions and connecting it to Bitcoin. These L2 solutions form scaling layers for Bitcoin.

  I think there’s a lot of technological progress happening now. In addition to Bitcoin staking, there’s been significant tech progress in the past year that gives us hope of realizing this L2 vision around Bitcoin—which, by the way, is four times the size of Ethereum’s asset base.

  Samantha Herrick:
  All right. This is a good time to take a quick break. Hang tight. We’ll be right back.

  Speaker 4:
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  Ray Wu:
  Yeah, that’s really exciting. I mean, Bitcoin has mostly been considered just an asset base, yet nothing has really been built on top of it like you mentioned. So, it’s great that you’re building enabling layers for this ecosystem. Anything that you want to highlight—latest developments, trends, and some of the success you’ve had building out the Babylon Chain at this moment?

  David Tse:
  Yeah, so our main innovation thus far is this idea of taking Bitcoin as an asset and allowing it to be a staking asset for other blockchains. These other blockchains include layer 2 solutions, other blockchains like Cosmos chains, etc.

  When we came up with this idea, a lot of people told us, “Your idea won’t work.” The reason was that Bitcoin holders are very conservative. They don’t want to do anything with their Bitcoin. They just want to hold it and that’s it. They’re not interested in earning yield, they’re not interested in providing security for another—perhaps for this program I shouldn’t use the more colorful word Bitcoiners use for those chains—but for other chains, let’s put it that way.

  What we’ve proven with our mainnet launch and with this $1.5 billion TVL is that, although $1.5 billion is still a very small percentage of the $1.3 trillion asset, we’ve already provided evidence that it’s not true that Bitcoiners aren’t interested in new use cases for Bitcoin.

  For us, as a new protocol, we’re just starting, but there’s already some pretty decent evidence that there is a significant chunk of Bitcoin holders who are interested in earning extra rewards for their Bitcoin—provided that the solution has a strong security level. That’s where we are now. In my mind, that is the major learning in the past few months since we launched the mainnet.

  Ray Wu:
  Certainly. Especially this year with the Bitcoin ETF launches, I think it’s moving beyond traditional Bitcoin holders into more of a financial asset. I can see that trend in terms of Wall Street enabling this layer and essentially enabling this kind of staking and yield in addition to the security you mentioned.

  Maybe, in terms of the venture rounds and leading VCs, can you share a little more about the journey you’ve had so far and who are the top VCs that have supported you?

  David Tse:
  Yeah, so we’ve gone through three rounds of funding, and you were a strong participant in the seed round. In terms of the more recent rounds, we had Polychain and HackVC leading the second round. For the third round, the lead investor was Paradigm. These are the major VCs involved.

  I should also mention some other VCs—for example, Framework Ventures was also a strong participant in the second round. There’s a VC called Bullish Ventures, which is a relatively new VC, but they’ve been a strong supporter. Their support is important for us because they actually own quite a lot of Bitcoins. As a Bitcoin holder, their support is very important because they have a strong stake in the success of the Bitcoin ecosystem, and they’re essentially betting on us to help push this forward.

  Ray Wu:
  All right. In that case, Alumni Ventures has more than 700,000 community members. Any requests for our Alumni Ventures community—how can we help you?

  David Tse:
  Consider staking Bitcoin on our protocol.

  Ray Wu:
  Perfect answer. It’s truly great to see how much has developed over the last three years. I think we can stop here, but it’s great to have you with us, David. I’m glad we had a chance to catch up. Babylon is one of those investments we did in our Fund II, and I’m so glad to see your success.

  Ray Wu:
  We’re raising our new [inaudible]—yeah, looking forward to finding more opportunities to work together. Thanks again for being part of the show.

  David Tse:
  Yeah, thank you so much, Ray.

  Samantha Herrick:
  Thanks again for tuning into The Tech Optimist. If you enjoyed this episode, we’d really appreciate it if you’d give us a rating on whichever podcast app you’re using. And remember to subscribe to keep up with each episode. The Tech Optimist welcomes any questions, comments, or segment suggestions. So, please email us at [email protected] with any of those. And be sure to visit our website at AV.VC. As always, keep building.

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