by Jendrik Poloczek, Aug 31

We’re thrilled to share that Greenfield is leading Stroom’s $3.5M seed funding round with further participation by Lemniscap, No Limit Holdings, and ANKR, among others. This backing reflects our excitement for both Europe’s pioneering crypto founders and the Bitcoin Lightning Network. Stroom, based in Kiev, Ukraine,  stands out with an innovative approach: their liquid staking protocol allows seamless provisioning of channel liquidity in BTC to the Lightning Network and earning fees through yield-bearing DeFi-enabled lnBTC tokens on Ethereum, all without running a node.

See also selected media coverage on the announcement: The Block, Decrypt 

Behind Stroom are Rostyslav, Slava and Viktor who have convinced us with this transformative idea bridging Ethereum and Bitcoin’s Lightning Network in completely new ways. The founders acquired relevant experience at Bitfury, running Lightning Nodes as early adopters, and have been involved early at Lido, which is the largest liquid staking token in terms of TVL. Hence, we’re excited to support Stroom, a protocol that sources dormant bitcoin liquidity to be actively used to bolster the Lightning Network and simultaneously provide competitive yields for liquidity providers.

The Lightning Network and its latest advancements

Proposed in 2015 by Joseph Poon and Thaddeus Dryja, the Lightning Network has been a long time coming. Its foundational horizontal peer-to-peer architecture choices make it the most viable and efficient crypto payment network as of now. The Lightning Network is built on top of Bitcoin and leverages its asset bitcoin and its security. Prime use cases are (micro) payments between human and machine actors. The goal is to replace fee-heavy, oligopoly traditional payment rails such as Mastercard and Visa, with a decentralized open payment network. 

We have previously written about the Lightning Network and highlighted the enablers and catalysts that have emerged in the last few years. The summary is:
1. a massive reduction of payment failure and an increase in liquidity and connectivity,
2. advancements in UX and developer experience, and
3. renewed interest in Bitcoin through experimentation and Taproot assets, enabling the issuance of custom assets on top of Bitcoin and LN.

Thriving along these notable positive advancements is a well-funded ecosystem building on top of the Lightning Network. 

Now, shifting focus back to Stroom and why it fits the current market environment so neatly. For this, we can elaborate the respective existing problem on both the demand and supply side, and conclude with how Stroom combines them to solve both problems.

Demand-side: Why channel liquidity is in need

The demand side lies in the Lightning Network. A router’s role in the LN is to route payments through the network. For this, a router connects to other routers by opening up peer-to-peer channels with them, and lock bitcoin as channel liquidity. For their service in running the router and providing liquidity routers earn a base fee (which is a flat fee) and a fee rate (percentage based) on each payment that gets routed through. Hence, the revenue depends on how many payments are routed, and how big those payments are. Payments in the network are routed in a shortest-path manner, similar to TCP/IP the protocol that facilitates the routing of internet traffic, so to acquire most of the payment traffic one needs to find a good position in the network: One in which most / or the biggest payments are routed over. Anybody can operate a router but (and this is the crucial part) doing so requires technical expertise to run in a fault-tolerant manner, re-balance unbalanced channels, enough liquidity in bitcoin and as described above a strategy for good connectivity in the network. 

In Stroom, all of this will be handled by the role of a specialized node operator. The node operator gets liquidity, in the form of bitcoin, through the protocol, and takes a cut for the node operation. Now, let’s focus on the bitcoin supply-side which acts as liquidity for the Stroom-enabled Lightning Network routers.

Supply-side: non-custodial Bitcoin yields

So far, we have seen two basic ways bitcoin holders can lend out their BTC: through centralized lending platforms, and through wrapped bitcoin through established DeFi venues. To differentiate the following options from Stroom’s offering let’s elaborate: 

In option one, bitcoin holders lend out their bitcoin on centralized lending platforms, which also includes exchanges e.g. Binance, Kraken (around 0.5% APR estimates). In the past, we have seen notable collapses such as Celsius (gave up to 17% APY on BTC and filed for bankruptcy), BlockFi (filed for bankruptcy) or Voyager (also filed for bankruptcy). Lessons learned: The APY is simply not worth the (hidden) risk. Irresponsible rehypothecation is probably the biggest but not the only risk, others include theft through hacking and rug-pull scams. 

Option two, the decentralized route, involves wrapping the native bitcoin e.g. using the most liquid wrapped version WBTC. Providing WBTC to decentralized lending markets on e.g. Aave or Compound gives holders 0.05% APY or 0.02% APY, respectively. Apart from low yield, the demand for WBTC depends mostly on market sentiment for leveraged trading.

With these two options laid out, let’s compare them with the offering of Stroom for bitcoin holders. Similar to WBTC, Stroom bridges the gap between the Bitcoin network and Ethereum to allow bitcoin liquidity to be used in a wide range of financial markets. However, the major distinction is that BTC provided to the Stroom protocol will give you a yield-bearing liquid staking token lnBTC on the Ethereum side. The yield is profit from routing fee revenue by actively using the supplied BTC when routing payments by the Stroom-enabled routers. 

In summary, Stroom enables a third option: By providing BTC to Stroom, bitcoin holders can easily participate in the growing channel liquidity market in the Lightning Network. The yield-bearing liquid staking token lnBTC is as composable as WBTC, and can therefore also  act as e.g. collateral/security in financial derivatives, but has an intrinsic yield component that WBTC lacks. The result: more (diversified) yield for the BTC holders.

Conclusion

Stroom is the first of its kind liquid staking token protocol in the Bitcoin ecosystem. We are excited to see that experienced Ethereum developers are applying battle-tested tokenomics for aligning incentives to Bitcoin. 

If you’re one of the Ethereum builders who dare to apply your skills to Bitcoin or the Lightning Network, please reach out to us.