What is BounceBit's liquidity custodian protocol? Why is it the foundation of its ecosystem operation?

Bitcoin re-collateralization project BounceBit announced that the Liquid Custody protocol will be launched along with the mainnet. What synergies does this product bring to its ecosystem? How does it differ from the existing Liquid Staking liquidity collateralization?

Background: Introduction to BounceBit

BounceBit is a re-staking project built on the Bitcoin ecosystem, aiming to "enable BTC to generate organic staking rewards." By creating a new ecosystem, BounceBit Chain, the project hopes to utilize network revenues as native returns for Bitcoin. For more detailed information, please refer to the link below.

Currently, BounceBit is still in the early access phase, only allowing users to deposit assets into partnered CeFi institutions. Just yesterday, the team announced the upcoming launch of the mainnet, along with a liquidity custody service, which serves as the core funding gateway for the BounceBit ecosystem.

Issues Addressed by BounceBit Liquidity Custody Service

Lack of Liquidity for Assets Deposited in CeFi

Currently, when users invest assets, they typically choose from a series of CeFi strategies and products, losing direct control over their assets in this structure. Even with off-chain settlement solutions with on-chain proofs, the ability to transfer and settle positions is still limited. Assets held in investment institutions lack liquidity and broader applications. Users are essentially sacrificing the potential for further leveraging their assets for staking and liquidity to provide profits.

Users need to weigh between "having control over assets by storing them in cold wallets" and "earning investment returns by storing assets in CeFi."

While DeFi is a viable solution to this problem, certain assets, especially Bitcoin, often cannot generate sustainable and substantial returns within existing DeFi structures, presenting a unique challenge for BTC.

Opacities in Security of Assets Deposited in CeFi

Additionally, since control of assets deposited in CeFi lies with institutions, transactions usually come with higher counterparty risks, and most financial products offered by centralized exchanges involve a certain level of complexity. In the event of default, user funds are at risk, as seen in recent years with incidents on FTX and other exchanges.

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The BounceBit team stated that their partners, such as Ceffu and Copper, offer off-exchange settlement (OES) solutions that can mitigate such risks. However, these institutions are limited to institutional traders and not accessible to regular cryptocurrency traders, posing a high barrier to entry.

Combining the above two issues, BounceBit proposes a new product, Liquid Custody, which combines the individual strengths of CeFi and DeFi.

Introduction to BounceBit Liquidity Custody

The BounceBit team stated that through the Liquid Custody solution, CeFi assets can gain liquidity, significantly reducing the barriers to using the service.

Liquid Custody as a Variant of Liquidity Staking

Liquid Custody is conceptually named after Liquid Stake, a mechanism introduced by Lido on Ethereum to address the lack of liquidity resulting from users staking ETH on the network. It provides users with Liquidity Stake Derivatives (LSD), such as stETH, to enhance asset liquidity and maximize asset efficiency.

Similar to liquidity staking, Liquid Custody increases asset liquidity through derivative tokens linked to the value of the underlying asset. However, instead of collateralizing assets on the Ethereum network, assets are entrusted to custody institutions, yielding a proof token referred to as Liquid Custody Tokens (LCT) by the BounceBit team.

Liquid Custody combines the advantages of CeFi and DeFi, ensuring that assets are securely held by users with smart contract guarantees, while maintaining asset accessibility and circulation.

Implementation of BounceBit's Liquidity Custody Protocol

BounceBit currently accepts assets including BTC, USD, ETH, and other tokens. When users deposit assets into the BounceBit Liquidity Custody Protocol, they receive an LCT as proof and corresponding BBTC, BBUSD, BBETH tokens are generated for users entrusting their assets.

These tokens can cross-chain to the BounceBit Chain for further utilization, such as staking BBTC in the network's dual-token PoS module to receive stBBTC for staking, or directly participating in DApps within the network ecosystem.

Users' original assets can earn custody rewards in CeFi products and strategies.

When users need to withdraw funds, they must use an equivalent amount of LCD to cancel the asset custody and redeem it.

Liquid Custody is expected to support various blockchains, currently supporting Ethereum and BNB Chain. The early access phase has not yet been launched, and it is expected to be released upon the mainnet launch.

Opportunities and Challenges of BounceBit's Liquidity Custody Protocol

Ecosystem Opportunities

Liquid Custody embodies the concept of CeDeFi, simplifying the process for users to deposit assets in institutions while retaining liquidity. As the primary funding gateway for the BounceBit ecosystem, it is crucial for its development.

If it can indeed address the transparency and security issues of traditional CeFi assets, coupled with the liquidity release feature, it may attract significant attention in the Bitcoin ecosystem's current pursuit of maximizing asset efficiency. However, long-term development will still require consideration of various factors, such as whether collaborating institutions can sustain operations.

Potential Risks

The liquidity custody protocol implemented by BounceBit essentially leverages assets, so if any part of the stacked structure encounters issues, such as contract errors, user assets may be at risk of damage.

Furthermore, if the backend infrastructure of the custody institution is not entirely controlled by smart contracts or if control over the contract remains opaque, user asset control and security may still be limited. Specific details are awaited as the team releases more information.

Hence, a rational approach is necessary when considering the long-term development of this product.