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The problem
Why do we need an on-chain Bitcoin lending protocol? Because today’s Bitcoin lending solutions carry too much risk, specifically counterparty risk.
To lend out or borrow against BTC, you have to trust a third party with handling your BTC funds and lack visibility into who your BTC is being lent out to. As a result, most Bitcoin sits idle in cold storage and isn’t used to grow the Bitcoin economy.
The counterparty risk of centralised Bitcoin lending solutions became extremely clear over the course of 2022. It appeared that almost all Bitcoin lending platforms had been lending a significant amount of their assets to the same insolvent hedge funds (Three Arrows Capital, Alameda, and others). Because of the untransparent nature of crypto lending, users had no way to find out how exposed their crypto lending platform was to the cascading defaults that ensued. Users also became increasingly concerned over counterparty risk from any centralised entity in crypto. As a result, users pulled their Bitcoin capital from centralised lending platforms en masse. The fledgling Bitcoin capital market imploded.
As Bitcoin credit dried up, even the most credit-worthy participants in the Bitcoin economy were no longer able to access Bitcoin capital. The crypto credit crunch left market-makers unable to facilitate liquidity on exchanges and forced miners to sell (part of) their BTC holdings. BTC price slid down to $16k. We learnt one lesson the hard way: functioning Bitcoin capital markets matter.
Any economy needs borrowing and lending to live, breathe, and grow - and so does the Bitcoin economy. Bitcoin holders need to be able to access liquidity without having to sell their BTC. Market makers need access to credit to facilitate deep liquidity on exchanges. For Bitcoin to become the global reserve asset, it needs to trade in the world’s most liquid markets. Miners need access to credit to grow their hashpower and secure our wealth. Companies that are looking to adopt Bitcoin for payments should do so in the knowledge that they will be able to borrow against their future earnings in a global Bitcoin credit market. After all, corporate finance 101 is to denominate your debt in the currency you receive as payment. Without a resilient capital market, it’s hard to see Bitcoin growing to billions of users.
Last modified 5mo ago