Papaya: A Decentralized Financial Infrastructure for Bitcoin

Liquid Staking | Proactive Market Maker


Jake Krogman Aakanksha Mahajan CiaraMaria Proia Tim Varner


Our estimates put the utilization rate of BTC in DeFi at approximately 0.006%[1]. This is because there are no decentralized financial services for Bitcoin. The upcoming release of sBTC on the Stacks blockchain presents a major opportunity to unlock Bitcoin's full potential as a programmable asset. By introducing sBTC, a synthetic Bitcoin pegged to its value, Stacks enables seamless movement of Bitcoin assets in and out of smart contracts, opening up fresh possibilities for decentralized finance (DeFi) applications for Bitcoin and related use cases. This represents the first time in history that BTC can be brought into DeFi applications in a truly decentralized way.

Papaya aims to enhance Bitcoin liquidity through innovative liquid staking, advanced proactive market making, and its unique governance model. The Papaya protocol plays a pivotal role in bootstrapping sBTC on the Stacks blockchain and will feature two integrated products: Liquid Staking (LS) and a Proactive Market Maker (PMM).

Liquid Staking in Papaya aims to solve the illiquidity issue associated with locking STX to participate in Stacks Proof of Transfer (PoX) consensus mechanism by issuing staked STX (stSTX) tokens in a 1:1 ratio with STX. These tokens represent a claim on the staked assets and any staking rewards, allowing users to trade, lend, or engage in other DeFi activities without unbonding their staked assets. This way, users can earn BTC rewards from Stacking while still maintaining liquidity, thereby optimizing asset utilization.

Papaya adopts a newer algorithmic approach to market making: Proactive Market Maker. A Proactive Market Maker is a financial entity that takes the initiative in quoting both buy and sell prices for a financial instrument, aiming to facilitate trading and add liquidity to the market. Unlike passive market makers, who respond to incoming orders, proactive market makers actively manage outstanding positions and adjust price quotes in anticipation of market events and trends. A Proactive Market Maker’s actions not only facilitates immediate trades but also contribute to overall market efficiency.

Papaya offers a unique platform to compound the network's sBTC supply and bring in BTC earned from Stacking. Our process increases the overall allowable circulating sBTC supply by compounding Staking (see Architecture below in Section 2.3). Papaya's involvement propels sBTC growth, enhancing Bitcoin's utility in the Stacks ecosystem.

Papaya employs a new & unique governance model called Implicit Governance. Implicit Governance does not have a governance token, instead users participate in decision making processes via quadratic weighted voting power based on their individual stake in Papaya. This approach is designed to prevent traditional governance-related attacks and exploits, and ensure that those affected by the outcome of governance decisions have significant influence.

1. Introduction

1.1. Contexts

1.1.1 Market Context: BTC Utilization in DeFi

In our DeFi utilization calculations for Bitcoin, we omit wrapped Bitcoin (wBTC) due to its reliance on centralized KYC/AML procedures. These procedures are at odds with DeFi's decentralization ethos and hinder the flow of native Bitcoin into DeFi. We explore these barriers further later in the paper.


1.1.2 Technological Context: Stacking, PoX, and BTC rewards

There are very few ways to earn native BTC rewards, and Proof of Transfer (PoX), the consensus mechanism on the Stacks network offers a way to earn native btc yield. The release of sBTC represents a trust minimized peg to BTC, which enables the use of (s)BTC without the need for KYC/AML in Smart Contracts on Stacks.