This is an opinion piece by Max Keidun, CEO of peer-to-peer Bitcoin exchange Hodl Hodl.
The Bitcoin lending space has been plagued by several major problems in recent months and years. Terra/Luna Crushaffect Celsius When block phiand now FTX Similarly, liquidity is lacking given persistent price declines, various accusations of market manipulation, and more.
All of this has led to massive losses, bankruptcies and a complete reshaping of the lending market. Many users have lost confidence in Bitcoin-based lending products, and the market appears to be hitting historic lows in terms of both transaction volume and public confidence.
As usual, the mainstream media denounced These Bitcoin CrisisBut is this Bitcoin’s fault? Does it make Bitcoin less attractive? Does it mean that Bitcoin should not be considered collateral for loans?
Bitcoin is a super-collateral and it’s the lenders who have failed
Bitcoin’s code is law, but custodial lending platforms are trusted third parties, owned and controlled by private entities. A trusted third party is a security hole. This was true before Bitcoin, and it is still true today.
Additionally, most Bitcoin lending platforms are poorly envisioned, poorly developed and poorly managed. This doesn’t necessarily mean bad code. Although the code is well written, well audited, and verifiably secure, the incentives that arise from the design of lending platforms may be insufficient. Problems can arise when the focus is on treating Bitcoin as if it were a yield asset.
The longer the ‘bitcoin lending’ industry goes on, the more it becomes apparent that most parties don’t really understand how yields are generated. If you are not sure, you is the yield. What that really means is that your bitcoin is being used as the principal for risky investments, and it’s only a matter of time before the Trump house starts to collapse.
The right focus for integrating Bitcoin into intermediary lending is understanding how valuable and unique Bitcoin is and treating it as something you can borrow, i.e. Bitcoin is a super-collateral. I believe it’s a matter of understanding. But what makes it so unique?
We can identify 12 characteristics that make it possible.
bitcoin is liquid
Bitcoin is a highly liquid asset. It trades 24 hours a day, seven days a week, with no weekends or bank holidays. Large liquidity pools across various fiat currencies are available worldwide. For lenders, this means that if they want to convert their collateral into fiat currency, they can do so immediately because the borrower has liquidated or the loan has been repaid off the collateral.
This also enables risk hedging. Bitcoin may be the only type of loan collateral that can be hedged instantly and dynamically. This is a significant competitive advantage.
Bitcoin is programmable
Bitcoin allows the creation of programmable lending products and ownership mechanisms. Among other benefits, this feature allows you to solve the problem of trusted third parties by building non-custodial lending mechanisms and custody systems. For example, you can distribute collateral claims or create conditional logic for redemption that is automatically performed by the Bitcoin network rather than at the whim of centralized financial institutions.
bitcoin is missing
There are only 21 million Bitcoins. Collateral increases in value over time. That means less incentive to sell and more lenders who are willing to accept it.
Bitcoin is flexible and transparent
Bitcoin allows us to enable selective transparency of our assets when useful, but also complete anonymity when needed. You can easily prove to your lender that you own and control your collateral.
Bitcoin is sovereign
Bitcoin is yours. Just like you have your house or car keys, you have your Bitcoin keys. Bitcoin is your personal property. When you use a house or car as collateral, it is owned by the lender, not you. Bitcoin allows you to conditionally own it during the loan agreement. In fact, with the right tools, you can not only use this collateral, but keep using it for the duration of the loan agreement.
bitcoin is safe
Bitcoin is cryptographically, economically and socially protected. It’s wise to assume that Bitcoin’s lowest level of network security extends to the suite of tools built on top of it. For example, you can divide your collateral ownership among multiple independent parties, use offline his wallets, and take advantage of many more security methods.
Bitcoin is market driven
Bitcoin is the essence of a market-driven asset. Bitcoin prices reflect the market almost instantaneously and are not determined by one or more individuals. Manipulating the price of Bitcoin is very difficult. The price of Bitcoin is almost the same in fiat currency in any part of the world and is determined by the global market.
Bitcoin is a real-time asset
Not only can you track the price of your Bitcoin collateral in real time, but Bitcoin’s blockchain also allows you to track your collateral address in real time. Respond appropriately to any price fluctuations. As mentioned earlier, there are no weekends or holidays and the market is open to everyone at all times, so no one closes the market on Friday and sees different prices on Monday.
Bitcoin is objective
Bitcoin is honest. Bitcoin in Miami requires the same amount of fiat currency as in Lugano or Riga. Bitcoin is whether you like it or not. Bitcoin price cannot be determined by personal opinion or predictive ability. To borrow against Bitcoin, you only need to have Bitcoin. As long as you have collateral to borrow from, your credit history, social score, or anything else is irrelevant to the lender.
Take real estate for example. For the same amount of money, you can buy different properties in different countries with the same level of economic and social development. What is the difference? Why can’t you afford a decent home in the Bay Area of the United States for the same amount of money when you can buy a mansion on the Mediterranean coast of Spain or Italy?
It is due to human’s irrational evaluation ability. Real estate valuations are largely based on human factors, so banks will rate your property as too expensive or too cheap, depending on market conditions and plans.
Or take stocks, for example. Stocks in a particular company may have good growth potential, but suddenly the CEO of this company may tweet something stupid and you either lose money or get liquidated. increase. Bitcoin, on the other hand, is fair.
Bitcoin is global
Bitcoin is globally accessible and globally distributed. For lending, this means you can remotely borrow from anyone in the world and lend money to anyone in the world with Bitcoin as collateral. Bitcoin is not limited to any particular local market or published exclusively.
bitcoin is digital
Digital commerce in the digital age requires digital collateral. Bitcoin is already online. It’s on your machine, phone, cold wallet. Bitcoin allows you to borrow remotely and instantly. You don’t need to digitize Bitcoin because you need to deal with real estate, land, cars, and other assets. It’s digital now.
Bitcoin is decentralized
Bitcoin has no single point of failure. Bitcoin has been attacked many times, but it is growing and expanding globally. There is no committee or person responsible for Bitcoin. Having decentralized collateral greatly reduces the reliance of companies and people on any single event or failure. Protected by a decentralized network.
Will lending match Bitcoin’s potential?
Strong materials require powerful tools. Is it possible to build a lending tool that matches the value of Bitcoin? Bitcoin whitepaper.
If you read the Bitcoin white paper, you will find that building a successful lending product (indeed, any kind of Bitcoin product) must meet three main criteria. If your product includes all three, you have passed the test. Let’s call it the “Satoshi Test”.
- Your service should be non-custodial. Remember: it’s not a key or a coin. When using a custodial lending platform, you are exposed to the risk of losing your collateral entirely. This is exactly what happened to many failed lending and trading platform customers in 2022.
- Bitcoin is a peer-to-peer electronic cash system. Again, peer-to-peer. Instead of acting like middlemen, we need to provide technology tools for individuals and businesses to work with each other. Alternatively, you can become a business that allows customers to interact directly with your platform. A good example is a platform where customers can buy bitcoins directly into their cold-her storage.
- The platform should be Bitcoin only. This means that the only collateral you need to use should be Bitcoin. Shitcoins are dangerous and shitcoins code is a time bomb. By integrating many blockchains into our products, we expose the most valuable to the most vulnerable.
There is an additional criterion that can be met: anonymity. If you are building a non-custodial Bitcoin-only peer-to-peer product, security is not complete without anonymity and you need to protect your customer’s data, so this gives your customers anonymity and better privacy. can. , and its funds.
A good way to pass the Satoshi test is to use multisig. Multisig is a simple, secure and powerful tool. This allows us to offer our users peer-to-peer interaction, leverage non-custodial escrow, and use only Bitcoin.
For example, consider a multisig setup with three keys, where the consensus mechanism is reached by entering at least two keys. This is called “two-thirds bitcoin multisig”. In this type of setup, you, as a technical tool provider, can be his one on the keychain, but you don’t have full control over the customer’s funds (because the key is he only has one! ). You cannot move and re-hypothesize. For example, the lender has his one key, the borrower another, and the provider his third. This kind of setup allows users to know that funds are being used only for them, that all parties must act according to the rules in order to reach consensus, and that no single party can act in a questionable way. can be checked.
In fact, there are already powerful platforms that use Bitcoin’s multisig and offer peer-to-peer interactions. These platforms can offer lenders and borrowers around the world a simple 2 out of 3 multisig setup where each side (including the platform itself) has his 1 key. Multisig is created on Bitcoin’s public blockchain, so you can check your collateral at any time via Block Explorer. And the best part is that the platform itself has only one key to ensure that all counterparties involved are acting in a proper and professional manner, so you can’t re-fund.
A suitable lending platform could help HODLers
While the lending market is currently experiencing turmoil and ramifications, it’s a good time to educate yourself on the right lending platform that could serve the true HODLer of the future. As soon as we enter the next bull market, there will be less incentive to sell bitcoin and more interest in long-term holding and borrowing against it. Bear markets don’t last forever, so be prepared. Learn with HODL!
This is a guest post by Max Keidun. Opinions expressed are entirely his own and do not necessarily reflect those of his BTC Inc or Bitcoin Magazine.