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1. Why does Two Prime call Babylon bitcoin staking yield a subsidy?
On November 4, 2026, coverage of an October 22 interview put a spotlight on a pointed critique from Alexander Blume, CEO and co-founder of the bitcoin lender and asset manager Two Prime. Blume said the returns paid by bitcoin layer-2 networks such as Babylon and Stacks are venture-funded incentives that shrink for each depositor as more capital arrives, and he contrasted them with an offchain lending vault his firm runs on Pareto.
Blume's argument rests on simple arithmetic. When a protocol sets aside a fixed pool of rewards to attract deposits, every new depositor takes a slice of the same pool. Growth in deposits therefore dilutes the payout to everyone already inside. In his telling, that is the opposite of how a sustainable yield should behave, because a return that falls as a product succeeds is a return that depends on the sponsor continuing to pay.
He described the rewards as being, in essence, subsidies funded by venture capital. The interview took place on Unchained Premium, the subscriber tier of the Unchained media company, and the remarks are a useful window into a debate that has run through bitcoin finance for several years: whether a holder can earn a native return on bitcoin without leaving the asset's security model, and where that return actually comes from.
For readers new to the topic, bitcoin layer-2 networks are systems built on top of the base bitcoin blockchain that add features the original network does not offer, such as staking or programmable finance. Their promoters present them as ways for holders to earn a return without selling their coins, which is why the question of where the return originates carries real weight for anyone depositing funds.
2. What did Blume say about venture money and chasing yield?
Blume's central warning was that no project can run on losses financed by venture money indefinitely. Once a subsidy tapers, he said, depositors tend to go looking for the next source of yield. Each hop to a new program means exposure to different technology and a fresh chance of a hack, so the risk the holder carries rises even as the headline return declines.
His comments on the two networks were not equally detailed. On Stacks, Blume acknowledged he knew the system less well. He said he believed holders who keep bitcoin staked there receive Stacks tokens, or possibly bitcoin, as compensation. The distinction matters, as the paragraphs below show, because the structure of the Stacks reward has changed.
The broader point he was making applies to any incentive-led program. A yield paid in a protocol's own token depends on that token holding its value, and a yield paid from a promotional budget depends on the budget lasting. Neither is the same as a return paid by a counterparty who earns money from the borrowed capital.
The risk Blume describes is cumulative. A depositor who moves funds from one program to another encounters new code, new custodial arrangements and new governance each time, and any one of those layers can fail independently. A modest decline in yield can therefore be costlier in practice than it appears, if it prompts a holder to take on a less familiar protocol to recover the lost income.
3. How do Babylon and Stacks describe their own rewards?
The published documentation of both projects offers a more nuanced picture than a single label can capture. Babylon's token documentation states that both people who stake bitcoin and people who stake its BABY token are paid in BABY. The same documentation lists BABY inflation at 5.5% per year, down from 8%. As of November 4, DefiLlama data showed roughly 40,800 BTC, worth about $3.28 billion, staked on Babylon.
Inflation of that kind is worth understanding. When rewards are paid in newly issued tokens, existing holders are diluted unless they also receive the rewards, so the rate of issuance is effectively the cost of the program. A falling rate, such as the move from 8% to 5.5%, shows a program that is tapering its own incentives over time.
Stacks documentation describes a different mechanism for its main bitcoin yield. Bitcoin Staking is set at the consensus level and is not financed from an incentive budget. Its predecessor, Dual Stacking, which was tied to the sBTC program, was replaced on September 10, about six weeks before the interview. Dual Stacking rewards came from an incentive budget that Stacks-affiliated groups seeded using their own Proof of Transfer earnings.
Proof of Transfer is the mechanism through which participants commit bitcoin to the Stacks network, and the earnings that flow from it are what the affiliated groups used to fund the Dual Stacking pool. A budget created in this way is a subsidy by design, though the source is the network's own economics, not an outside investor.
A separate Stacks program, Stack Sats, distributes 1 BTC per month through December 10. Recipients are borrowers and liquidity providers on the decentralized finance applications Zest and Bitflow. It is a fixed, time-limited giveaway, which fits Blume's description of incentives that are spread thinner as more users participate.
4. What is the alternative Two Prime offers?
Two Prime's answer is to take the onchain element out of the return. The company launched a vault for wrapped bitcoin (WBTC) in September on Pareto, a firm that builds onchain infrastructure for private credit. Blume said the only onchain function is collecting assets from depositors. Two Prime then lends the wrapped bitcoin offchain to borrowers that it vets itself.
Under that design, he argued, the source of capital is not a venture subsidy. Borrowers pay for money because they can deploy it more profitably than the interest they owe. The yield, in other words, is a price for credit, set by a borrower's demand for bitcoin liquidity, rather than a marketing expense funded by an investor.
The model carries its own risks, and the interview, as reported, did not dwell on them. Lending offchain means depositors rely on the lender's underwriting and on the borrowers' ability to repay, which is a credit risk, not a smart contract risk. Whether that trade is attractive depends on how much a holder trusts the lender's judgment compared with an open protocol.
Private credit, the broad category Pareto serves, refers to loans made by non-bank lenders directly to borrowers, usually on negotiated terms. Bringing that activity into a tokenized vault is intended to make the flow of deposits transparent, even though the loans themselves are arranged offchain.
5. What does Pareto contribute to the arrangement?
Matteo Pandolfi, CEO and co-founder of Pareto, appeared on the same episode. He explained that Pareto builds infrastructure that allows underwriting to be carried out onchain, while firms such as Two Prime do the actual underwriting. Pareto supplies the rails, and the credit decisions stay with the lender.
Pandolfi also addressed why an approach like this might work now when earlier bitcoin layer-2 efforts struggled to deliver similar products. He said it is a different time, because vaults on networks compatible with the Ethereum Virtual Machine can connect to established protocols including Morpho, Aave and Pendle. That connectivity gives a vault access to existing lending and yield markets rather than requiring a new ecosystem to be built around it.
For a bitcoin holder, the practical consequence is that wrapped bitcoin can be placed in a vault and routed to institutional borrowers, while the vault's shares may later be usable inside other onchain protocols. That composability is part of Pareto's pitch, and it is the reason Blume describes the onchain portion as purely a way to gather assets.
6. How should holders weigh the two approaches?
The interview sets two philosophies against each other. One treats yield as an incentive to bootstrap a network, paid in the network's tokens or from a budget, and expected to decline as adoption rises. The other treats yield as interest on a loan, paid by borrowers who are expected to remain in the market as long as they can earn more than they pay.
Both carry risks that a depositor should price. Incentive programs expose holders to token price swings, smart contract flaws and the end of the subsidy. Credit-based vaults expose them to borrower default, counterparty judgment and the limits of an offchain legal relationship. Blume's warning about chasing the next yield is, in part, a warning about stacking one set of risks on top of another.
It is also worth noting the context in which these comments were published. The coverage was marked as sponsored, and Two Prime has a commercial interest in the product Blume described. Babylon and Stacks, for their part, describe their own reward structures in their documentation, and those descriptions differ in important ways from the blanket label he used.
7. What happens next for bitcoin yield products?
The immediate data points are visible. Stack Sats is scheduled to run through December 10, which will test how participation behaves once that program ends. Babylon's issuance rate has already declined from 8% to 5.5% per year, and its staked balance of about 40,800 BTC provides a benchmark for whether deposits hold as rewards fall.
More broadly, the market will decide whether holders prefer native network rewards or credit-style returns. Blume's critique suggests that products depending on subsidies must eventually show that depositors stay when the incentives shrink. His own vault must show the reverse: that offchain lending to vetted borrowers can produce a steady return without losses. Neither claim can be settled by an interview, and both will be tested by the behavior of depositors and borrowers over time.