What is the BounceBit liquidity custody protocol and why is it the foundation of its ecosystem operation?

BounceBit, a Bitcoin-based re-staking project, has announced that its Liquid Custody protocol will be launched alongside the mainnet. What are the benefits of this product for its ecosystem? How does it differ from existing Liquid Staking?

Background: Introduction to BounceBit
BounceBit aims to solve the following problems with its liquidity custody service:
– Lack of liquidity for assets deposited in CeFi (Centralized Finance)
– Lack of transparency in the security of assets deposited in CeFi

Introduction to Liquid Custody by BounceBit
Liquid Custody is a variant of liquid staking.
BounceBit has implemented the Liquid Custody protocol.

Opportunities and Challenges of BounceBit’s Liquid Custody Protocol
Opportunities:
– The ability to generate organic staking rewards for BTC through the creation of a new ecosystem, BounceBit Chain.
– By using network income as the native income of Bitcoin, this ecosystem aims to provide a more comprehensive solution. For more information, please refer to the link below.

Recommended Reading:
Overview of BounceBit’s design architecture and why Bitcoin can generate staking rewards.
Reason for recommendation: This article provides a comprehensive introduction to the overall design architecture of BounceBit, allowing readers to have a better understanding of how it solves the “lack of native income for Bitcoin” blueprint. This article introduces the core of its ecosystem, Liquid Custody, which can be compared and referenced.

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Currently, BounceBit is still in the early access stage and only allows users to deposit assets into partner CeFi institutions. However, the team announced yesterday that the liquidity custody service, which is the core funding gateway of the BounceBit ecosystem, will be launched alongside the mainnet in the future.

Currently, when users invest their assets, they typically choose from a series of CeFi strategies and products, which results in them losing direct control over their assets. This applies to both ordinary investors and third-party fund managers.

Even with off-chain settlement solutions that have on-chain evidence, the ability to transfer and settle positions is still subject to many restrictions. For example, assets held in investment institutions cannot have liquidity and more applications. Users are actually sacrificing the possibility of further utilizing their assets for staking and liquidity provision to generate profits.

Users need to choose between “putting assets in a cold wallet to gain control” and “putting assets in CeFi to gain investment returns.”

Of course, DeFi is also a feasible solution to this problem, but certain assets (especially Bitcoin) usually cannot have sustainable and considerable returns in existing DeFi structures, which is the unique dilemma of BTC.

Furthermore, since the control of the assets invested in CeFi is in the hands of institutions, transactions usually come with higher counterparty risks, and most financial products provided by centralized exchanges have a certain degree of complexity. Once a default occurs, user funds will be lost, as seen in recent events on FTX and other exchanges.

BounceBit’s team stated that their partner OES (Off-exchange Settlement) solutions, such as Ceffu and Copper, can reduce such risks, but these institutions are only available to hedged traders and are not accessible to ordinary cryptocurrency traders, which raises the entry barrier.

Taking into account the above two issues, BounceBit proposes a new product that combines the advantages of CeFi and DeFi – Liquid Custody.

BounceBit’s team states that with the Liquid Custody solution, CeFi assets can have liquidity and significantly reduce the threshold for using the service.

The concept of Liquid Custody is named after Liquid Stake, which is a mechanism introduced by Lido on Ethereum to solve the liquidity problem caused by users staking ETH on the network. It provides users with LSD (such as stETH) as staking liquidity to maximize the efficiency of user assets.

Liquid Custody is similar to liquid staking in that both increase asset liquidity through the issuance of derivative tokens linked to the value of the underlying assets. However, the former does not mortgage assets to the Ethereum network but transfers assets to custodial institutions and receives a proof token. BounceBit’s team refers to this as Liquid Custody Tokens (LCT).

Liquid Custody combines the advantages of CeFi and DeFi. It not only ensures that assets are securely held by users (guaranteed by smart contracts), but also ensures that assets are easily accessible or tradable.

BounceBit currently accepts assets including BTC, USD, ETH, and other tokens. When users deposit assets into the BounceBit liquidity custody protocol, they will receive an LCT as proof, and the corresponding assets mentioned above will generate BBTC, BBUSD, BBETH tokens for users who deposit their assets.

These tokens can be cross-chain transferred to the BounceBit Chain for further use, such as staking BBTC on the network’s dual-token PoS module and receiving stBBTC, or directly participating in DApps within the network’s ecosystem.

Users’ original assets can still generate custody income through CeFi products and strategies.

Liquid Custody Protocol is the asset gateway of the BounceBit ecosystem.

When users need to withdraw funds, they also need to use an equivalent amount of LCD to cancel the custody of the assets and redeem them.

Liquid Custody is expected to support many different blockchains and currently supports Ethereum and BNB Chain. It has not been launched in the early access stage and is expected to be launched alongside the mainnet.

Liquid Custody is essentially the concept of CeDeFi, making the process of depositing assets into institutions simpler and maintaining liquidity. As the funding gateway for the operation of the BounceBit ecosystem, it is its most important foundation for development.

If it can indeed solve the transparency and security issues of traditional CeFi assets, along with the feature of releasing liquidity, it may attract a lot of attention in the narrative of maximizing asset efficiency in the Bitcoin ecosystem in recent times. However, long-term development still requires the consideration of more factors, such as whether the cooperating institutions can operate in the long term.

BounceBit’s implementation of the liquidity custody protocol essentially leverages assets. Therefore, if any link in the stacked architecture has a problem, such as contract errors, user assets may be damaged.

In addition, if the backend structure of the custodial institution is not completely controlled by smart contracts, or if the control rights of the contract are still not transparent, the help to user asset control and security will still be limited. Specific details still need to wait for the team to release more information.

Therefore, it is still necessary to think rationally about the long-term development of this product.

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Liquid Custody
Liquid Custody Tokens