Restoring the Trust in CeFi with Centralized Custody: Ceffu X BounceBit
Introduction
In the wake of the tumultuous events of 2022, where leading Bitcoin-based financial platforms like Genesis Trading, Babel Finance, and Celsius faced bankruptcy, the Bitcoin ecosystem was left with a significant void in financial service provision.
Cryptocurrency firms dedicated their efforts to managing financial reserves, averting reputational harm, and avoiding the possibility of a complete breakdown.
Caught in this mess were also centralized exchanges, FTX, JPEX, Poloniex just to name a few. They mismanaged their users’ funds, were hacked or just committed outright fraud in the case of FTX. Nevertheless, it is clear that centralized exchanges are set to stay front and center in the world of digital assets. They’re the go-to spots for turning your dollars or euros into crypto, where all the KYC and compliance is supposed to happen. Plus, they’re where tokens get listed, liquidity pools gathered, and prices get set. Over time, more action might migrate to decentralized protocols, but for now, these centralized exchanges are the big players, acting as the compliance gatekeepers of the industry. So the question is how to minimize counterparty risk and settle transactions off-exchange.
The answer to this question is centralized custody and off-exchange settlement (OES).
BounceBit is closely working together with regulated custody solutions like Ceffu to bring OES to BounceBit’s ecosystem. Bitcoin is chosen as the main currency to employ OES to BounceBit’s framework. As the cryptocurrency with the highest market capitalization, Bitcoin’s resurgence is vital for restoring market momentum and revitalizing its financial infrastructure, thereby enhancing liquidity and expanding use cases.
The industry’s confidence in CEX asset custody capability is arguably at an all-time low. We advocate that “Off Exchange Settlement” (OES) should be the industry standard for interacting with centralized marketplaces.
BounceBit is looking to revamp the combination of CeFi and DeFi by integrating MirrorX, Ceffu’s OES solution connected to the world’s largest cryptocurrency exchange.
What is Off-Exchange Settlement?
In simple terms, OES involves a custody provider holding collateral funds off the exchange while still allowing clients to access liquidity for trading and settling on centralized platforms. This is achieved by mirroring assets of the clients on the exchange and then trading them as usual. To maintain trust, the assets are held in transparent multi party computational wallets rather than the large opaque wallets of exchanges.
Transactions are automatically settled off-chain at T+1, thus enabling the frequent settlement of any outstanding P&L. It enables institutional investors to keep their collateral, e.g. for leveraged positions, off-exchange.
The OES workflow can be divided into three basic steps:
- Client deposits assets with the Custodian
- Custodian “locks” the funds in some of the Client’s wallet in favor of the Exchange upon the Client’s wish
- The Exchange “mirrors” those funds on its platform, allowing the Client to trade using the locked capital as margin
Benefits & Risks of OES
We believe that OES is the perfect solution for accessing the large liquidity of centralized exchanges, while keeping the risk of it at a minimum. Secure and transparent custody is essential for the BounceBit ecosystem that builds on top of it.
The benefits include but are not limited to:
- Reduced Counterparty Risk: Off-exchange settlement can minimize counterparty risk by facilitating direct transactions between parties. It reduces the risk of default or insolvency associated with third-party custody of assets.
- Fund Security: Ceffu uses the industry standard in multi-party computation cryptography, eliminating any single point of failure to safeguard digital assets with segregated on-chain cold wallets.
- Regulatory Compliance: BounceBit partners with Mainnet Digital & Ceffu to ensure regulatory compliance. Clear and enforceable contractual arrangements are essential for ensuring legal certainty in off-exchange settlement transactions.
- Increased Efficiency: Off-exchange settlement streamlines the settlement process, It basically reduces the time and complexity involved for executing transactions. By directly settling transactions between parties, time & resources are saved.
It is undeniable that utilizing centralized custodians carries risks. For example, there is the slight risk of the custodian getting hacked. However, this risk is offset by multi-party cryptography; A hacker would have to gain control of at least two out of three parties.
Furthermore, there is the possibility of funds getting locked on an exchange in case of exchange failure and the settlement not having completed yet.
BounceBit’s Integration with Ceffu’s Mirror X
BounceBit uses Ceffu’s custody solution in the first layer of the ecosystem. User funds are immediately & automatically transferred into Ceffu’s custody with Multi-Party Computational (MPC) Wallets, a wallet technology that essentially splits the private key into multiple shards. This way the single point of failure (SPOF) risk is reduced to a minimum. Additionally counterparty-risk is reduced, as the user funds are never actually stored on any centralized exchange, but rather are mirrored by Ceffu. The parties in BounceBit’s case are BounceBit, Ceffu and Mainnet Digital.
Mirror X is the OES solution that is used in the Premium Yield Generation. BounceBit collaborates with several experienced asset managers boasting a long-standing history of positive returns to conduct trades through the Prime Wallets of MirrorX. All these managers employ Funding Rate Arbitrage as their primary trading strategy, a profitable delta-neutral approach that exploits differences in funding rates across various markets. We have already released a detailed blog elaborating on this strategy. You can find it here.
Since the beginning of Premium Yield Generation on February 5th, the platform has amassed a total profit of 74.17BTC and over $1M USDT. This translates to an average APR of 17.49% for BTC and 38.85% for USDT. These figures, though subject to fluctuations, maintain market neutrality. It’s crucial to emphasize that participation in these trading strategies is optional and not a prerequisite for accessing the DeFi aspect of BounceBit.
Conclusion
Looking ahead, BounceBit will continue to use Mirror X as an OES solution to securely facilitate the CeFi layer of BounceBit. The reduced counterparty-risk and fund security, while still being able to access liquidity allows for a scalable foundation for BounceBits ecosystem. Ceffu and BounceBit are determined to set an industry example on how centralized custody can fit into the realm of crypto.
About BounceBit
BounceBit is building a BTC restaking infrastructure that provides a foundational layer for different restaking products, secured by the regulated custody of Mainnet Digital and Ceffu. The BounceBit chain, designed as a showcase of a restaking product within the BounceBit ecosystem, is a PoS Layer 1 secured by validators staking both BTC and BounceBit’s native token — A dual-token system leveraging native Bitcoin’s security with full EVM compatibility. Critical ecosystem infrastructure like bridges and oracles are secured by restaked BTC. Through an innovative CeFi + DeFi framework, BounceBit empowers BTC holders to earn yield across multiple networks.
