Swingby Protocol is Creating decentralized custodian solution. It is a decentralized cross-chain lending protocol which soft pegs Bitcoin and Ethereum using decentralized custodians.
Swingby’s goal is to create an ERC20 stable token for Bitcoin on Ethereum. This happens through a lending protocol where the main emphasis lies on decentralization. The decentralized lending mechanism keeps custody over bitcoin and lends it as ERC20 tokens. This results in a soft peg between the Bitcoin and Ethereum blockchains, and makes sure that the custodian is decentralized.
The Swingby protocol is a decentralized mechanism where users can either earn profit by lending out BTC or can come to mint BTC Tokens. Someone who mints BTC Tokens is actually borrowing regular Bitcoin from the lender, but is represented as a BTC Token.
The lender can earn profit from the protocol by lending out BTC. This is done by locking BTC. At this point a borrower is already decided and the BTC is locked inside a kind of Hashed timelock contract (HTLC). The HTLC used in the Swingby protocol achieves a trustless escrow between both parties. The mechanism is similar to an atomic swap. However, with the Swingby protocol this atomic swap is not immediately concluded. The BTC that is locked is instead passed on to the borrower in the form of debt. This means that 1 BTC Token owned now by the borrower represents the debt of 1 BTC, and thus the same value.
This being said, the borrower is only able to mint his BTC Token by providing ETH for collateral. This effectively makes his debt into a collateralized debt position (CDP); a concept also used in the stablecoin DAI by MakerDAO.
With the Swingby protocol however, it is possible for the borrower to clear his position and receive real Bitcoin by burning his BTC Tokens. This also concludes the atomic swap between the two parties, therefor passing the locked ETH collateral to the lender and adding a small interest amount.
This is how the Swingby protocol creates a 1–1 soft-peg between BTC and the BTC Token while keeping the custodian decentralized, which is the main focus of Swingby opposed to other solutions. Because in the Swingby protocol the lender is incentivised and anyone can participate it creates a situation with optimal custodian decentralization.
Similar to MakerDAO, Swingby utilises governance tokens. This is used for community voting on decisions concerning witnesses and the Oracle price feed to monitor the BTC value.
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