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One of the latest projects making a splash in the Bitcoin ecosystem is Stroom Network, a protocol that recently received $3.5 million in funding.
The Stroom DAO is a protocol that plans to introduce “liquid staking” to Bitcoin, paving the way for enhanced Bitcoin utilization in decentralized finance (DeFi). Ethereum has witnessed the rise of liquid staking solutions in its recent shift to Proof-of-Stake, enabling staked ether (stETH) to engage in DeFi.
Stroom seeks to channel this innovative mechanism for Bitcoin DeFi, thereby broadening the utility for Bitcoin in the DeFi landscape and offer Bitcoin holders a way to indirectly participate in the Lightning Network.
Before diving into what the Stroom Network is, we will briefly dive into what is the Lightning Network, liquid staking, and how it plays into Stroom.
A Quick Primer on the Lightning Network
The Lightning Network (LN) is a layer-2 solution that addresses Bitcoin's performance and scalability challenges. Bitcoin is notorious for its security, censorship resistance, and immutable properties. However, it sacrifices performance and output, often leading to high transaction costs.
The LN addresses this by facilitating transactions using a distributed system of payment channels. These channels are secured by a 2-of-2 multisig output created and settled on the Bitcoin blockchain. This allows many LN transactions to be processed in a single channel, requiring only two on-chain transactions. The two transactions include the initial deposit and the final (net) result of all transactions that are included on the Bitcoin blockchain. These channels are usually closed either when participants decide to end them or in cases of disputes.
The Lightning Network could be visualized as a web of nodes interconnected by payment channels. Lightning Nodes set fees and can subtract fees from transactions as they travel through their channels as a reward for providing liquidity.
The efficiency and capacity of each payment channel are based on the influx of Bitcoin liquidity within these channels. A channel's capacity, or amount of BTC in a channel, sets the upper limit on how large a transaction could pass through.
What is Liquid Staking?
Liquid staking offers a way to maximize the utility of staked tokens in PoS blockchains. Users have the option to stake tokens in a liquid staking protocol, minting a derivative token. This derivative token represents a 1:1 of your original staked amount. While the original staked tokens earn staking rewards, users can bring these derivative tokens into the DeFi ecosystem.
This allows users to enjoy both staking rewards and the benefits of DeFi simultaneously. This mechanism boosts capital efficiency and strengthens PoS networks by encouraging more people to stake.
What is Stroom and How Does it Work on Bitcoin?
Stroom is pioneering a Bitcoin liquid staking derivative protocol using Bitcoin, the Lightning Network (LN), and Ethereum-compatible blockchains. With plans to initially launch with Ethereum, Stroom's vision is to abstract the technical nuances of managing an LN node, enabling users to participate in the LN and offering dynamic yield farming opportunities within the EVM DeFi ecosystem.
Source: Stroom
Stroom Bridge
When users deposit BTC into the Stroom DAO treasury, an equivalent amount of lnBTC is minted on Ethereum through bridging. The lnBTC token can be used in Ethereum's DeFi ecosystem, mirroring other staking derivatives like Lido Finance's stETH. The treasury and bridging process is overseen by a multi-sig federation of trusted entities monitoring both Bitcoin and Ethereum chains. They are responsible for lnBTC minting and redeeming, or the life cycle of LN channels.
Stroom-enabled Lightning Nodes & Hubs
These hubs are specialized nodes that adhere to Stroom’s requirements. In contrast to traditional LN nodes, Stroom-enabled LN hubs don't have direct access to the Bitcoin held in their channels. They are connected to a multi-sig federation system managed by validating nodes. Nodes violating protocol rules are slashed and could be removed from the network from the federation.
Stroom Validating Nodes
A Stroom Validating Node ensures the approval of various protocol operations. Using the FROST algorithm, a specialized Schnorr threshold signing technique, each node independently validates actions. For each action to move forward, a consensus of at least 2/3 + 1 of the nodes is needed. These nodes synchronize like a pBFT-style consensus blockchain, fostering a robust and censorship-resistant network. Each validating node integrates with a Bitcoin and Ethereum full node to form a DAO-managed LN watchtower, monitoring channels and reinforcing the network's security layers.
What is Stroom Trying to Achieve?
At its core, Stroom is taking a novel approach to grow the Lightning network’s capacity and improving efficiency by aggregating BTC and running Lightning nodes on users' behalf. Currently, the technical nuances of personally running a LN node causes friction, hindering the growth of the LN ecosystem.
Suppose users are comfortable with the risks associated with wBTC, also a federated/custodied wrapping platform, similar users could be open to using lnBTC in DeFi with enhanced LN routing fee earnings.
Stroom Tokenomics
The primary utility of the STROOM token serves as a governance token, enabling holders to vote on proposals that control network parameters. The voting power is weighted by total STROOM tokens staked in the voting contract. The total supply of STROOM tokens is currently unknown and has yet to launch.
Validating nodes and Stroom-enabled hubs on the Stroom network must stake these tokens as collateral to ensure incentive alignment and honest participation. To disincentivize malicious actors, a slashing mechanism is in place to disincentivize malicious actors and ensure smooth operations and LN node coordination.
Adjacent to the STROOM token is the lnBTC wrapped BTC token. The very validators and Stroom-enabled hubs are required to stake STROOM, facilitate lnBTC’s minting, redeeming and LN node operating processes. The federation of trusted validators authorizes the life cycle of lnBTC.
What Challenges and Risks Could Stroom Face?
Like most emerging protocols, Stroom will endure the challenges of onboarding new users. Liquidity tends to move quickly as users chase the most significant opportunity. However, since Stroom’s total yield will be denominated in both LN fees (e.g., satoshis) and DeFi yield, it could be a new method for managing risk that doesn’t currently exist.
When considering the risk landscape, it’s well known that smart contract risk impacts every corner of the vast smart contract-enabled ecosystem. Bugs in the code are a common vulnerability where bad actors have exploited billions of dollars. However, a few other notable risks include the following:
Custodial Risk
The Ethereum bridge facilitates the minting of lnBTC, which introduces an attack vector. Although the Stroom DAO structure is intended to mitigate this custodial risk, BTC deposits are secured through Validating Nodes, or a federation of trusted parties authorized to mint and redeem lnBTC. Entities of the federation are required to have a financial commitment in various areas of the protocol’s architecture, which helps improve alignment.
Lightning Network Risk
The vision of Stroom requires it to rely heavily on Lightning Networks’ tech stack, exposing it to software security, slashing, and adoption risks. Stroom aims to alleviate these risks by implementing the most tested and widely used LN software. Slashing, in particular, is an event where a percentage of a node's stake is sacrificed when abnormal channel closures occur. A DAO-run “watchtower,” which will monitor the actions of LN nodes, is in place to reduce these risks. Lastly, a lack of transactions routed through Stroom-enabled LN nodes equating to lower LN routing fees could disincentivize users seeking more attractive opportunities.
Other risks include an lnBTC de-peg, low LN adoption, and protocols onboarding the lnBTC derivative asset to be used within the DeFi ecosystem.
“Wrapping” Up
This year, the surge of innovation in Bitcoin's ecosystem has been unprecedented with developers all around building unique solutions for users. Stroom's novel approach of expanding the Lightning Network through "staked" BTC on EVM chains is an exciting way to expose users to the LN and diversify yield through LN routing fees and DeFi Yield.
The key to widespread adoption will hinge on effective user education about the protocol's mechanism and associated risks. While enticing Bitcoin holders accustomed to using wBTC in DeFi to explore Stroom might pose challenges, the anticipated push for greater decentralization in the coming phases will likely bolster Stroom's appeal. As we approach their anticipated Q4 2023 launch, it remains to be seen how Stroom will navigate these unchartered waters.
