Signalling Proposal: Programmatic Deflation of BABY

This governance proposal seeks 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.

• 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.
• Claiming and managing BSN reward tokens may trigger accounting and tax difficulties, especially for institutional BABY stakers.

Option-2 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 programmatically 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:

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

For full details, please check the corresponding forum post: https://forum.babylon.foundation/t/programmatic-deflation-of-baby/676