How to Earn Yield on Bitcoin Without Giving Up Custody

Until recently, earning yield on Bitcoin required transferring custody to a third party. Every centralized platform that offered BTC yield required holders to deposit their bitcoin before they could participate. When several of those platforms failed in 2022 and 2023, depositors learned they were unsecured creditors, not asset holders.

Other Bitcoin yield solutions offered self-custody, but paid out yield in altcoins or assets other than Bitcoin.

Bitcoin Staking on Stacks is a different mechanism. BTC remains on Bitcoin L1, locked under the holder's own keys, earning BTC-denominated yield, throughout the entire process. The following is a step-by-step explanation of how it works.

Step 1: Lock BTC on Bitcoin

The process begins with creating a timelock on Bitcoin using OP_CHECKLOCKTIMEVERIFY, a standard Bitcoin script that has been part of the protocol since 2015. This locks BTC for approximately six months. During that period, the bitcoin cannot be moved by any party. It remains on Bitcoin's blockchain, secured by Bitcoin's consensus rules, under the holder's own keys.

This is not a bridge. The BTC is not wrapped, not transferred to another chain, and not deposited with any entity. It stays on Bitcoin.

Step 2: Pair It with STX

On the Stacks blockchain, the participant locks STX worth approximately 5% of the BTC position value. This pairing, the locked BTC combined with the locked STX, creates what is called a protocol bond. The STX commitment is small relative to the BTC position, and it is what secures the participant's allocation in the bonding period.

Step 3: Earn BTC Yield from Miners

The yield originates from Stacks miners. Every 10 minutes, miners bid BTC to compete for STX block rewards through a consensus mechanism called Proof of Transfer. This mechanism has been in continuous operation since January 2021. The BTC that miners spend forms the reward pool for Bitcoin Staking. As a protocol bond holder, you are paid first from that pool each reward cycle (approximately once a week).

This is not lending. No one borrows your bitcoin. The yield comes from miners committing BTC to earn block rewards, in the same way that Bitcoin miners expend electricity. It is a function of the network's consensus mechanism.\

Step 4: BTC Unlocks at Maturity

After approximately six months, the Bitcoin timelock expires and the BTC is available again, untouched, along with whatever yield was earned during the bonding period. For participants who need access to their BTC before maturity, an early exit option is available. It returns the bitcoin but forfeits undistributed yield for the remainder of the bonding period.

What Does the Yield Look Like?

The initial target is approximately 3% APY, denominated and paid in BTC and annualized over a 52,560-block Bitcoin year (50 weekly reward cycles). A 6-month bond covers 24 of those cycles, so it delivers about 1.44% of locked BTC. The target rate for each bonding period is supported by real miner revenue and may vary slightly with miner economics; a reserve fund buffers cycle to cycle variability.

What Protects You

The yield structure follows a waterfall distribution:

• Protocol bond holders are paid first. Miner BTC is allocated to bond holders before any other participants.
• STX only stakers are paid next. Miner revenue beyond protocol bond obligations is split between STX-only stakers and the reserve fund. STX-only stakers yield varies with miner activity and total participation.
• A reserve fund provides a buffer. a portion of  miner revenue is set aside each cycle to cover periods when revenue declines.

There is no slashing mechanism. There is no protocol-level principal loss. BTC cannot be seized because it is locked by Bitcoin's own consensus rules rather than held by an entity.

Who This Is For

Bitcoin Staking is designed for BTC holders who want their bitcoin to generate yield without giving up custody. Participation requirements are a six-month lockup and a small STX position.

It is designed for those who prioritize custody, transparency, and a yield source that can be verified on-chain.

Read the full Bitcoin Staking Whitepaper.‍

Read next: Where Does Bitcoin Staking Yield Come From? | The Risk Profile of Bitcoin Staking Explained

‍