This is an opinion editorial by Max Keidun, CEO of peer-to-peer bitcoin exchange Hodl Hodl.
The bitcoin lending space has suffered a number of major problems in recent months and years, from the Terra/Luna crash, resulting in Celsius and BlockFi, and now FTX as well, to liquidity crunches due to continuous price drops, various market accusations. manipulation and more.
All this led to significant losses, bankruptcies and a complete reshaping of the credit market. Many users have lost confidence in bitcoin-based lending products and the market appears to be at historic lows, both in terms of volume and public confidence.
As usual, the mainstream media blamed the crisis on Bitcoin itself. But what is wrong with Bitcoin? Does it make Bitcoin less attractive? Does that mean we shouldn’t treat bitcoin as collateral for a loan? Not!
Bitcoin Is Super Collateral, It’s A Failed Lender
While the Bitcoin code is legal, the custodial lending platform is trusted by a third party, owned and managed by a private entity. Trusted third parties are security holes. This was true before Bitcoin, and it is still true today.
Furthermore, most bitcoin lending platforms are poorly structured, poorly developed and poorly managed. This does not mean bad code. The code may be well written, properly audited and securely verifiable, but there are still perverse incentives arising from the design of these lending platforms. If we focus on treating bitcoin as if it’s a yielding asset, we’re going to be in trouble.
The longer the “bitcoin loan” industry goes on, the more it becomes clear that many of those involved don’t know how to make money. And as the saying goes, if you don’t know where the results come from, then you is yield. What this means is that your bitcoins are used as a risky investment principle, and it’s only a matter of time before the house of cards starts to fall.
I believe that the right focus to integrate bitcoin into intermediation loans is to appreciate how valuable and unique bitcoin is, and to consider it as something to borrow: to understand that bitcoin is a super guarantee. But what makes it unique?
We can identify twelve characteristics that make it:
Bitcoin is Liquid
Bitcoin is a highly liquid asset. Traded 24/7, with no weekend breaks and no bank holidays. A large pool of liquidity in various fiat currencies is available worldwide. For lenders, this means that if you want to convert your collateral into fiat, you can do so quickly – either because the borrower has been liquidated or because the loan has been paid off from the collateral.
This also allows for hedging of risks. Bitcoin may be the only type of loan collateral that can be protected quickly and dynamically: a serious competitive advantage.
Bitcoin Is Programmable
Bitcoin enables the creation of programmable lending products and ownership mechanisms. Among other benefits, this feature allows us to solve the problem of trusted third parties by building a lending mechanism and a non-custodial storage system. For example, we can distribute collateral claims or create conditional logic for redemption that will be automatically executed by the Bitcoin network, not the whims of a centralized financial institution.
Bitcoin is Rare
There will only be 21 million bitcoins. Your collateral gets more valuable over time, which means less incentive for you to sell it, and more likely lenders will be willing to accept it.
Transparent Flexible Bitcoin
Bitcoin allows us to enable selective transparency of your assets when useful, but also allows complete anonymity when desired. In a loan scenario, for example, you can easily prove to the lender that you own and control the assumed collateral.
Bitcoin is Sovereign
Bitcoin is yours. You have the keys to bitcoin just like you have the keys to your house and car. Bitcoin is your personal property. If you use your house or car as collateral, you won’t own it – your lender will. With bitcoin, you can still have these conditions during the loan agreement. In fact, with the right tools, you can not only use but continue to use this guarantee during the period of the loan agreement.
Safe Bitcoin
Bitcoin is protected cryptographically, economically and socially. It is wise to think of the security of the Bitcoin network at the highest level developing for a set of tools built on top of it. For example, you can distribute your collateral ownership among various independent parties, use offline wallets and use other security methods.
Market Driven Bitcoin
Bitcoin is the essence of a market-driven asset. The price of bitcoin reflects the market almost immediately, and is not determined by one or a few individuals. It is very difficult to manipulate the price of bitcoin. The cost of Bitcoin is almost the same in fiat anywhere in the world and is determined by the global market.
Bitcoin Is A Real-Time Asset
Not only can we track the price of bitcoin collateral in real time, but the Bitcoin blockchain allows you to track your collateral address in real time as well. Any price fluctuations can be responded to appropriately. As mentioned, there are no weekends or holidays, and the market is always open to everyone, so no one closes the market on Friday and opens on Monday with different prices.
Bitcoin Is The Goal
Bitcoin is honest. Bitcoin in Miami costs the same amount of fiat as in Lugano or Riga. Bitcoin doesn’t care whether you like it or not. The price of bitcoin cannot be determined by your personal view or forecasting ability. To borrow against bitcoin, you only need to have bitcoins. Your credit history, social score, or anything else has nothing to do with the lender if you have collateral to borrow.
Take real estate, for example. The same money can buy different properties in different countries with the same level of economic and social development. Does it make a difference then? Why can you buy a mansion on the Mediterranean coast in Spain or Italy and, for the same amount, you will not be able to buy a proper house in the Bay Area in the US?
It is because of human irrationality. Because the value of real estate is mainly based on human factors, the bank evaluates your property as too expensive or too cheap, depending on market conditions and plans.
Or take stocks, for example. Your stock in a particular company can have great fundamentals and great potential growth opportunities, but suddenly the CEO of this company can tweet some stupid thing, and you’ll either lose money or be dumped. Meanwhile, Bitcoin is fair.
Bitcoin Is Global
Bitcoin is globally accessible and globally distributed. For lending, this means you can borrow from anyone in the world, and you can lend money using bitcoin as collateral to anyone in the world. Bitcoin is not limited to, or specific to a particular local market.
Bitcoin is Digital
In the digital age, with digital commerce, we need digital assurance. Bitcoin is online. It’s here, in the machine, the phone, the wallet is cold. Bitcoin allows you to borrow instantly and instantly. There is no need to digitize bitcoins as you need to do with real estate, land, cars or other assets. It’s digital.
Bitcoin is Decentralized
There is no point of failure in Bitcoin. Bitcoin has been attacked many times, but it is still growing and growing globally. There is no committee or person responsible for Bitcoin. Having decentralized collateral significantly reduces your dependence on single events and the failure of a company or person. You are protected by a distributed network.
Will Loans Match Bitcoin’s Potential?
Strong guarantees require strong tools. Is it possible to create a credit tool that matches the value of bitcoin? To do that, we all need to take a step back and review the Bitcoin white paper.
After reading the Bitcoin white paper, you will understand that to build a successful credit product (in fact, any kind of Bitcoin product!), you need to meet three main criteria. If your product has all three, congratulations you passed the test. Let’s call it the “Satoshi Test.”
- Your service must be non-custodial. Remember: not your keys, not your coins. When using a custodial loan platform, you run the risk of losing your collateral. Because, as soon as bitcoins reach the platform wallet, they are no longer yours. This is exactly what happened to the customers of many lending and trading platforms that failed in 2022.
- Bitcoin is a peer-to-peer electronic cash system. Once again: peer to peer. Instead of acting as an intermediary, you should provide technical tools for individuals or businesses to use. Or you can be a business that will allow customers to directly interact with your platform. A good example is a platform that allows customers to buy bitcoins directly into their own cold storage.
- Your platform must be Bitcoin only, meaning the only collateral you must use is bitcoin. Shitcoins are risky, and shitcoins code is a ticking time bomb. By integrating multiple blockchains into your product, you open up the most valuable to the most vulnerable.
There is an additional criterion that can be met: anonymity. If you build a non-custodial, Bitcoin-only, peer-to-peer product, this can and will allow you to provide better anonymity and privacy to your customers because security is incomplete without anonymity and customer data must be protected. , as well as funds.
A good way to pass the Satoshi Test is to use multisig. Multisig is a simple and safe but powerful tool. It allows you to offer peer-to-peer interaction to your users, using non-custodial escrows and using only Bitcoin. It also allows you to offer better privacy to your users.
For example, a multisig setup with three keys where the consensus mechanism is achieved by typing at least two keys. This is called “two-out-of-three Bitcoin multisig.” In this type of setup, you – as a technical tool provider – can be one of the key holders, but you will not have full control over the customer’s funds (because you only have one key!), thus ensuring that the funds will win. t will be moved and rehypothecated. For example, the lender will have one key, the borrower will have another, and the provider will have a third key. This type of setup will allow users to verify that the funds are used only by them, and that all parties must act according to the rules to reach consensus, and that no one party can act in a dubious and shady way.
In fact, there are already powerful platforms that use Bitcoin multisig and offer peer-to-peer interaction. The platform can provide lenders and borrowers from all over the world with a simple two-out-of-three multisig setup, where each side (including the platform) has one key. Multisig is created on Bitcoin’s public blockchain, which means you can check your collateral at any time via the block explorer. And the best thing is that no funds can be rehypothecated because the platform has only one key that guarantees that each participating partner behaves in a good and professional way.
The Right Lending Platform Can Work For HODLers
Although the loan market is currently experiencing turmoil and contagion effects, it is a good time to learn about the right lending platform that can be useful for the true HODLer of the future. As soon as we enter the next bull cycle, there will be less incentive to sell bitcoin and more interest in holding it for the long term and borrowing it. Be prepared, because bear markets don’t last forever. HODL and learn!
This is a guest post by Max Keidun. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.