Author: HTX Ventures

With the approval of the BTC spot ETF, major institutions and individuals around the world are continuously increasing their holdings of BTC. As a result, the price of BTC has risen, currently ranking among the top ten assets globally. In this market cycle, BTC script and BTC expansion are two sub-tracks that have garnered high market attention. The exploration of diversified returns for BTC ecological assets is attracting attention in the crypto market.

So, which solution will become the optimal one to address the issues of generating interest from Bitcoin assets, network confirmation delays, lack of smart contracts, and high gas fees?

Currently, the main solutions for enhancing the prosperity of the Bitcoin ecosystem include two: Layer2 and sidechains.

As one of the investors in BounceBit's $6 million financing, HTX Ventures views BounceBits and its CeFi+DeFi product model as a potential innovative solution to open up the Bitcoin ecosystem and gain more applications. This research report delves into BounceBit, outlining its product design concept and HTX Ventures' investment philosophy.

What is BounceBit?

BounceBit is a BTC re-collateralization chain designed specifically for Bitcoin. Its built BTC re-collateralization infrastructure provides a foundational layer for various re-collateralization products. This foundational layer is secured by Mainnet Digital and Ceffu's regulated custody. It utilizes a BTC+BounceBit hybrid PoS mechanism for validation.

BounceBit addresses the trust issue of underlying BTC assets through multi-party custody, creating BBTC for DeFi interactions on the Bounce mainnet. Native BTC assets are used for low-risk arbitrage strategies on various centralized exchanges. Additionally, under the hybrid token collateral mechanism, using BBTC+BB (BounceBit's native token) for collateral can generate LSD tokens, further obtaining node staking rewards and re-collateralization returns.

By combining centralized custody and sidechains, BounceBit aims to address the long-standing trust issues of sidechains while revitalizing the BTC ecosystem. This will reduce transaction costs and unleash the financial potential of BTC, enabling its application in more scenarios such as DeFi, gaming, and social activities.

How does BounceBit work?

The product design of BounceBit is very ingenious, as shown in the following figure:

BounceBit operation mechanism and revenue sources diagram

Users can deposit various types of on-chain Bitcoin assets into the BounceBit protocol, which is actually supervised by the MPC wallet jointly managed by BounceBit, CEFFU, and Mainnet Digital to address the trust mechanism issue and ensure the security of user assets.

• Through Ceffu's OTC Exchange Settlement (OES) solution such as MirrorX, users can securely access the exchange's deep liquidity and earn profits through diversified trading strategies, while keeping funds securely in the on-chain MPC wallet. This wallet technology significantly reduces the risk of single point of failure (SPOF) by splitting the private key into multiple parts. Furthermore, because user funds are not actually stored on any centralized exchange but mirrored through Ceffu, counterparty risk is reduced.
• BounceBit collaborates with a series of asset managers with a long-term positive income record to conduct trading through MirrorX. All these asset managers primarily use interest rate arbitrage as their main trading strategy. Interest rate arbitrage is a risk-free strategy that exploits differences in interest rates between different markets.
• On the other hand, after transferring native assets to BounceBit, users will mint new B-Token assets. For example, when users deposit BTC, they will receive BBTC assets operating on the BounceBit mainnet. Currently, these assets can be used for two main on-chain activities: participating in node staking using the hybrid collateralization model of BounceBit with BBTC+BB, and generating LST tokens for further re-collateralization activities, amplifying staking returns; BBTC can also be used for various on-chain DeFi interactions. BounceBit has also launched BounceClub, a platform for developers and users to increase the income potential of BTC assets through diverse DeFi activities and income generation activities on the BounceBit mainnet.

BounceBit product design concept, source: https://x.com/bounce_bit/status/1771481179683692656?s=46&t=ODDW1eIwucwwKwUR-9MGBg

In terms of revenue sources, by participating in BounceBit's staking and on-chain financial interactions, users can obtain asset income from multiple channels:

• CeFi income from native assets in sub-accounts of centralized exchanges.
• DeFi income from on-chain interactions with BounceBit.
• Re-collateralization income from staking using BBTC+BB and the generated LST.

In summary, BounceBit ensures asset security through multi-party custody while providing diversified income generation methods.

Why did HTX Ventures invest in BounceBit?

As one of the main investors in BounceBit, HTX Ventures firmly believes that BounceBit can effectively meet the market's actual needs through its centralized custody model built on standard sidechains.

The core goal of BounceBit is to address the issues of generating interest from Bitcoin assets, inefficient use of idle BTC, lack of innovation, and high gas fees. Its fundamental purpose is to provide diversified income channels to alleviate the challenge of Bitcoin's lack of smart contract functionality. Currently, the main solutions for enhancing the BTC ecosystem include Layer-2 and sidechain technologies.

The main solution of Layer2 is to execute Bitcoin transactions off-chain to improve transaction speed. The current Layer2 solutions mainly consist of two types: state channels and Rollups. Typical projects of state channels include the Lightning Network, but their scalable functions are very limited. Currently, the Lightning Network mainly improves the speed of peer-to-peer transactions and is difficult to deploy smart contracts at the level of Ethereum. As for Rollups, due to the issues of underlying code and signature verification, Bitcoin's Layer2 solutions cannot be verified on the mainnet when returning the ledger, making it difficult to provide sufficient trust assurance. The most promising method that may be implemented is based on the new Taproot protocol, upgrading Bitcoin's BIP layer, miners updating the underlying code to support OP/ZKP verification and Bitcoin miners' computation execution, but there may still be a long way to go before the implementation of Rollups.

Sidechains are essentially a completely independent chain. Typically, by mapping the mainnet's Bitcoin to the sidechain and issuing new assets, the mapping and application of native assets are achieved. Sidechains usually have better processing speed, but from the perspective of trust verification, they are completely independent chains from the Bitcoin mainnet, thus facing trust and consensus issues. It is also relatively easy for the project party to act maliciously, thereby affecting the security of the mapped assets. This is also the TVL dilemma that sidechains commonly face.

BounceBit addresses some challenges in the Bitcoin ecosystem by establishing an independent PoS layer and using a unique approach. In this framework, nodes ensure the security of the chain by staking BTC and BounceBit tokens, and the connection between BounceBit and BTC is established at the asset level rather than the protocol level.

By combining centralized custody and sidechain technology, BounceBit aims to overcome the consensus and trust issues of sidechains. In the current environment, this hybrid model of centralization and decentralization may provide a compromise solution to technical and trust issues. BounceBit's design concept and the background of its development team give it an advantage in competition and open up space for exploring new opportunities.

Future Outlook

With the approval of the BTC spot ETF, major institutions and individuals around the world are continuously increasing their holdings of BTC. As a result, the price of BTC has risen, currently ranking among the top ten assets globally. Meanwhile, in this market cycle, BTC script and BTC expansion are two sub-tracks that have garnered high market attention. Some progress in BTC has excited the market, attracting more attention to the BTC ecosystem and prompting developers and market participants to explore more asset application scenarios and income possibilities around BTC.

As a Cefi+Defi product, BounceBit demonstrates innovation in its product model by introducing a three-party custody mechanism into a trust solution through the combination of centralized and decentralized mechanisms. This generates new on-chain assets on the EVM chain to revitalize the financial properties of native assets, potentially becoming a new solution for the Bitcoin ecosystem.

HTX Ventures believes that there will be more technical developments and breakthroughs in the BTC ecosystem in the future, as well as the emergence of more ecological projects. This is something that excites and anticipates the entire crypto market. At the current stage, BounceBit's Cefi+Defi mechanism has the potential for good TVL growth and is expected to explore diversified returns for BTC ecological assets.

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