In the rapidly evolving world of cryptocurrency, trust and transparency remain elusive yet crucial elements. Imagine a stablecoin that not only guarantees security and transparency but also bridges the gap between centralized and decentralized finance, creating a seamless ecosystem where your assets work harder for you. Enter BitU Protocol—redefining the landscape of stablecoins and leading the charge in the CeDeFi revolution.
BitU is more than just a stablecoin; it’s a pioneering solution designed to address the core issues plaguing the cryptocurrency market today. By combining the robust security and regulatory compliance of centralized finance (CeFi) with the transparency and innovation of decentralized finance (DeFi), BitU offers a trusted, yield-generating stablecoin that stands at the forefront of BNB Chain ecosystem and BitcoinFi development.
Key questions addressed in this article:
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How can BitU ensure the transparency and security that centralized stablecoins often lack?
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What makes its approach to bridging CeFi and DeFi unique and effective?
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How does BitU support the growth of the Bitcoin ecosystem while providing robust financial returns for its users?
Join us as we explore these questions and uncover how BitU is transforming financial trust and stability, one block at a time.
Challenges Faced by Stablecoins
The Blackbox
The current mainstream solutions for stablecoins in the market are predominantly fully centralized. In this approach, the issuer of the stablecoin holds reserve assets, such as USD, in traditional financial institutions and then mints stablecoins on the blockchain based on those reserves.
This method has captured the majority share of stablecoins in the crypto market, with centralized stablecoins like USDT and USDC accounting for over 92% of the market. Despite their large scale, the lack of transparency has always been a significant concern with centralized stablecoins. Users have been unable to verify with confidence that these stablecoin issuers possess sufficient reserves. The transparency reports published by the issuers themselves have not been convincing enough for the market and users.
Centralized stablecoins have also experienced several instances of being unpegged in the past few years, with the most severe case being the unpegging of USDC due to the bankruptcy of Silicon Valley Bank. In March 2023, one of the six banks collaborating with USDC, Silicon Valley Bank, went bankrupt. Since approximately $3.3 billion of USDC’s reserve assets were held in Silicon Valley Bank, the market became concerned about the adequacy of the reserve assets to support the circulating value of USDC, leading to its unpegging. On that day, the price of USDC dropped to a low of $0.8698, representing a decline of about 13% from its pegged value of $1.
These incidents demonstrate that even with the endorsement of traditional financial institutions, trust remains fragile. Establishing trust in the financial industry has always been a lengthy and challenging process, but the erosion of trust can occur in an instant.
Fundamentally, the solution adopted by centralized stablecoins remains an opaque black box for users. Users are required to trust this black box and hope that nothing unexpected happens.
One of the essential characteristics of blockchain technology is its ability to be used securely without permission or trust. Compared to relying on trust to use a product, users are more inclined towards solutions that can eliminate the possibility of unexpected incidents through technology and mechanisms.
After all, one of the main core principles of crypto is the saying “verify, don’t trust”
Unfair Distribution of Profits
Regardless of whether the collateral assets for stablecoins are denominated in USD or other assets, there is also an issue of unfairness in the distribution of profits.
Taking USDT as an example, users who provide USD as reserve assets receive USD stablecoins issued by Tether. However, the investment profits generated from the reserve assets are entirely owned by Tether, the issuing company. These profits are derived from the USD provided by users, but users do not receive any share of the profits.
According to transparency reports released by Tether, the majority of the reserve assets, including over 67%, are invested in various activities, with the primary investment being in U.S. Treasury bonds.
Tether company currently holds reserve assets totaling over $110 billion, which generates substantial annual profits. In fact, “Tether’s attestation for the first quarter of 2024 revealed the firm made a net profit of $4.52 billion, saw its highest-ever percentage ownership of Treasury bills and had total net equity exceeding $11.3 billion [1]”. However, unfortunately, even though these funds inherently belong to the users, ordinary users are unable to receive a share of these immense profits.
The Blacklist Risk
One of the core functionalities of blockchain is being permissionless, which means that applications built using blockchain technology should be open for anyone to use[1]. The developers of the application should not prevent any user from interacting with blockchain applications at the smart contract level. Additionally, another core principle of DeFi applications is to support the unbanked, providing financial services to users who cannot access traditional financial industry services.
According to a study from 2021 by the World Bank “Globally, about 1.4 billion adults remain unbanked — without an account at a financial institution or through a mobile money provider.” [2]
However, centralized stablecoin issuers like USDT and USDC have the ability to freeze any user’s account at any time, adding their wallet address to a blacklist and locking their assets[3].
In fact, as of now, USDT and USDC have blacklisted over 1,600 addresses, freezing over $1.1 billion in funds[4].
Challenges Faced by DeFi
Lack of Native Underlying Revenue
Since the rise of DeFi from the “DeFi Summer” a few years ago, it has gone through multiple iterations and innovations. Most DeFi projects typically use their protocol’s native token as an incentive mechanism for protocol bootstrapping, attracting more users and funds to participate.
This approach was highly effective in the early stages. During bullish market conditions, token prices were expected to rise significantly, resulting in substantial rewards for users. However, after going through a full market cycle, this model becomes challenging to sustain. The core reason behind this is the high token inflationary supply and selling pressure caused by attracting users through token rewards. As token prices decline, rewards diminish, leading to many protocols becoming deserted.
Looking back, the essence of this model is to attract users using newly minted project tokens, which do not represent real sustainable earnings. In the realm of blockchain, meaningful earnings can be categorized into three main types:
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Transaction fees on the blockchain network.
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Earnings generated from lending and borrowing activities.
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Trading fees for liquidity providers.
First, blockchain transaction fees generally are allocated to node operators, who are limited in number and involve significant overhead costs. However, the real opportunities for ordinary users are through lending their assets and fees generated from DEX trading. Lenders pay interest to users who provide liquidity through the protocols, and traders pay transaction fees to liquidity providers.
During periods of high blockchain network activity and increased demand for funds, these two types of real earnings also increase. However, during market downturns or periods of low on-chain activity, these earnings are relatively low.
What’s more, many other DeFi protocols rely on these two types of revenue-generating systems as their underlying infrastructure which saw the rise of the term “Real Yield”. The building blocks of DeFi, often referred to as ‘DeFi Lego’, also depend on these underlying projects to generate real earnings.
It’s essential to have projects that can generate real earnings beyond just the protocol’s native tokens. This is a crucial underlying infrastructure for the development of a healthy ecosystem. These protocols generally serve as an ‘anchor,’ allowing larger-scale protocols to be built on top of them.
CeDeFi
Yield Gap Between On-Chain and Off-Chain
The yield gap between on-chain and off-chain investments refers to the differences in returns between funds managed off the blockchain and those on it. Here’s a breakdown to clarify this concept:
Definitions:
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Off-Chain Funds: Associated with centralized institutions such as exchanges, where funds are used for centralized business activities.
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On-Chain Funds: Held by users in decentralized formats, such as wallets or protocols directly on the blockchain such as smart contracts.
Off-chain transactions often feature higher performance and liquidity, which facilitates greater capital utilization, larger trading volumes, and a broader user base. These factors collectively drive a higher demand for funds off-chain. Conversely, on-chain activities usually operate on a smaller scale with relatively lower demand for funds. This fundamental difference in scale and demand is the core reason behind the persistent yield disparity.
The core reasons for this persistent yield difference include:
Costs of Fund Circulation
Transferring funds between off-chain to on-chain, or vice versa, typically requires users to initiate an on-chain transaction. In addition to the transaction fees incurred, there are often hidden risks in the circulation of funds on the blockchain. Blockchain transactions and addresses often consist of strings of data that may not carry explicit meaning to users and can occur on most Layer 1 or Layer 2 solutions, introducing implicit risks and UX complexity. Furthermore, external phishing attacks are also a concern. These hidden factors represent the hidden costs of blockchain transactions [1].
Costs of On-Chain Fund Storage
The security of funds has long been a recurring issue, with numerous incidents of wallet theft within the industry. Frequent users of decentralized wallets have likely experienced such events to some extent, including cases of leaked mnemonic phrases, stolen private keys, or losses caused by phishing software or websites. These ongoing security vulnerabilities lead many users to opt for storing their funds with large centralized institutions rather than in their own decentralized self-custody wallets. However, funds held in centralized institutions cannot directly interact with on-chain applications and need to be transferred back to decentralized wallets for to be used for DeFi and other on-chain activities.
Costs of On-Chain Application Security
Apart from the additional costs associated with fund storage, there are additional risks when interacting with on-chain applications and participating in profit-generating activities. Smart contracts, a notable innovation of Ethereum that extended to other blockchains, are immutable once deployed on the blockchain. Combined with potential vulnerabilities in smart contracts, there have been numerous instances of funds being lost within on-chain applications due to attacks.
The security risks associated with funds are a significant factor that discourages many users from investing in on-chain applications.
Costs of On-Chain Application Usage
For users who have been utilizing decentralized applications (dApps) for years, this may not be considered a significant cost. However, when considering the broader range of cryptocurrency users, this becomes a substantial barrier. Even after more than a decade of blockchain and cryptocurrency development, there are still many users who do not have their own decentralized wallets and may solely rely on centralized exchanges. Installing software, understanding concepts such as mnemonic phrases, private keys, and gas fees, are complex tasks for many newcomers. This hinders the flow of funds from the off-chain world to the on-chain for many users.
Time Delay Between On-Chain and Off-Chain
Blockchain networks are self-contained and closed systems, and changes in data within these networks can only occur through external transaction events. These transaction events can be broadly categorized as data updates brought into the blockchain network by oracles or new transaction events initiated by users. The time it takes for information to be transmitted between the on-chain and off-chain worlds is different. Events occurring off-chain and their impact on core data, such as prices, generally propagate faster than their impact on the on-chain world.
CeDeFi Solutions: Merging CeFi Efficiency with DeFi Security
Given the disparity in returns between on-chain and off-chain funds, the key question arises: Can we bridge this gap by addressing the underlying issues? Specifically, can we enhance returns for on-chain funds, increase liquidity for off-chain transactions, and establish a robust income layer for other on-chain applications? The answer is yes, through CeDeFi.
Centralized Finance (CeFi), traditionally supported by institutions such as centralized exchanges, market makers, and banks, offers efficiency and a broad user base. On the other hand, Decentralized Finance (DeFi) leverages blockchain and smart contracts to ensure transparency and self-custody. CeDeFi combines these models to harness the efficiency and scalability of CeFi while maintaining the core benefits of DeFi. This hybrid approach not only enhances fund security but also optimizes returns and liquidity across both realms.
By integrating the strengths of both centralized and decentralized models, CeDeFi can provide an innovative solution to the financial discrepancies currently observed between on-chain and off-chain ecosystems.
In the previous sections, we analyzed the costs associated with using on-chain applications and the challenges posed by security risks. Introducing a secure third-party custodian that bridges on-chain and off-chain applications could mitigate many of these issues and enhance capital deployment efficiency. By leveraging professional institutions dedicated to ensuring fund security, we can effectively address and reduce these risks.
In this scenario, the user interaction process with the protocol would be as follows:
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Users directly interact with decentralized protocols, which can be accessible by any user at any time.
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Users’ funds are transferred to a trusted custodian for safekeeping, ensuring absolute fund safety that can be verified on-chain at all times.
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Off-chain applications utilize the funds held by the custodian through fund mirroring, without any actual transfer of funds.
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The higher returns generated by off-chain applications are distributed to the users, creating a lucrative flywheel.
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Users can retrieve their funds stored with the custodian at any time through on-chain applications.
In summary, by effectively combining CeFi and DeFi and designing appropriate mechanisms, CeDeFi can bring significant advantages:
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Ease of Access: New users can engage with CeDeFi protocols and enjoy CeFi features through DeFi integration.
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Seamless Integration: DeFi applications can easily integrate and deploy modules within CeDeFi applications.
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Cost Efficiency and Enhanced User Experience: By reducing the high transaction fees of DeFi, CeDeFi can provide lower transaction costs and a smoother user experience.
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Optimized Returns: By leveraging off-chain liquidity and efficiency, CeDeFi can offer higher and more stable returns for on-chain funds.
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Robust Security: CeDeFi ensures the security and transparency of DeFi funds by introducing licensed third-party custodians.
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Regulatory Compliance: While exploring blockchain products and infrastructure, CeDeFi can also meet necessary traditional financial regulations such as AML (Anti-Money Laundering).
Supporting the Growth of the BitcoinFi Ecosystem
Since the approval of Bitcoin spot ETFs in the US and HK markets, the entire crypto market has experienced a frenzy. Apart from gaining significant attention in traditional financial markets, the entire crypto ecosystem has also begun to explore Bitcoin more deeply.
For a long time, Bitcoin has primarily served as a store of value and had limited participation in decentralized finance (DeFi). The main Bitcoin tokens involved in decentralized applications are WBTC (Wrapped Bitcoin) and BTCB (Bitcoin BEP2). However, even when combining the total supply of these two largest tokens, it accounts for only slightly over 210,000 Bitcoins, which is approximately 1% of the total Bitcoin supply.
Even considering the Bitcoin balances on exchanges, there is still a significant amount of Bitcoin lying idle. The key factor behind this is that most people still view Bitcoin as a reserve asset and place great importance on its security. If the potential returns from using Bitcoin in applications are minimal, most individuals would not be willing to sacrifice a certain level of security for limited gains.
Supporting the Growth of the Bitcoin Ecosystem
The development of Bitcoin-backed stablecoins like BitU can greatly support the growth of Bitcoin’s on-chain ecosystem aka BitcoinFi. Currently, there are dozens of Layer 1 and Layer 2 solutions that support different flavors of Bitcoin. However, the native Bitcoin ecosystem requires substantial resource support to establish reliable underlying income protocols.
BitU Protocol aims to provide a continuous and stable source of income for Bitcoin ecosystem. Once such income protocols are in place, more funds will be able to remain within the Bitcoin ecosystem rather than flowing out to other chains. This will enable the emergence of various new asset types on Bitcoin.
Enabling Increased Economic Activity
With more funds and asset categories staying within Bitcoin, there will inevitably be increased activity in trading, lending, and other financial services in the ecosystem. BitU can play a key role here by providing a trusted stablecoin solution.
As a crypto-native collateralized stablecoin protocol, BitU leverages off-chain liquidity and efficiency to deliver higher yields. BitU’s CeDeFi approach, combining aspects of centralized and decentralized finance, is well-suited to enabling this increased economic activity on Bitcoin in a more efficient yet still decentralized manner.
Expanding to Other Ecosystems
While the Bitcoin ecosystem will be a crucial part of BitU’s initial development path, the protocol also plans to expand into other blockchain ecosystems in the future. By establishing itself first on Bitcoin and then bringing its stablecoin and CeDeFi solutions to other chains, BitU can help drive growth across the broader crypto ecosystem.
Evidently, by providing a reliable and high-yield stablecoin protocol, BitU aims to help more value accrue to and remain on-chain. This will support the development of Bitcoin’s on-chain economy and provide a sustainable foundation for the network’s long-term growth. Over time, BitU intends to bring these benefits to other blockchain ecosystems as well.
Conclusion
CeDeFi represents a groundbreaking fusion of centralized and decentralized finance, offering a strategic blend that leverages the best of both worlds. By integrating the robust security and regulatory compliance of CeFi with the innovative, transparent protocols of DeFi, BitU stands at the forefront of this transformation. This hybrid approach not only enhances fund security and accessibility but also maximizes returns for investors, thereby accelerating crypto adoption across various sectors.
Central to BitU’s offerings is our stablecoin, backed by the robustness of Bitcoin — a testament to our commitment to reliability and innovation. BitU’s pioneering platform ensures that users enjoy optimized returns through seamless fund integration, lower transaction costs, and enhanced user experiences. As we continue to refine and expand our offerings, the potential for CeDeFi to reshape the financial landscape becomes increasingly apparent, promising a more inclusive and efficient future.
Get Involved
For more detailed information about how BitU is driving this innovation, we invite you to visit our website, explore our documentation, and follow us on Twitter. Join us in shaping the future of finance!