Bitcoin-Backed Loans

You may be exposed to risk by lending your bitcoin. This article is not intended to be a guideline for financial, investment, trading, or other decisions. Due to Ethereum’s built-in support of smart contracts and network effects many DeFi projects are currently using it. However, this trend is rapidly changing. A bitcoin-backed loan allows you to borrow cash easily using your bitcoin as collateral. BTC loans are becoming increasingly popular because they facilitate the transition to decentralized finance. They use a bitcoin standard and there is little space for intermediaries. The protocol’s solid foundations also ensure security. The new financial system offers many opportunities for everyone with no censorship. Bitcoin’s total value locked (TVL), is $108 million, while Ethereum’s is $30.37 billion. Despite the enormous potential for unlocking DeFi on Bitcoin, there are many reasons why it is so far behind Ethereum’s $30.37 billion. This is a great thing for Bitcoin but it also means that there is not much money available for development. DeFi vs. CeFiCentralized Finance (CeFi), and decentralized financing (DeFi) are rapidly-growing areas of cryptocurrency that will likely influence the future of financial services. While CeFi is still provided through an intermediary, CeFi uses cryptocurrency and blockchain technology to offer more affordable, faster, and more secure financial products. Trust must be placed in an intermediary, in this case the centralized platform. DeFi, on other hand, is peer to peer financial services and lending that place trust in smart contracts and protocol without any intermediary (other then, perhaps, an an escrow company). Third-party gatekeepers can make transactions more expensive and users lose control of their money. “DeFi cannot be built on a central protocol or one managed by rulers” – @AlyseKilleenThere are two types of bitcoin lending platforms within these branches: centralized and decentralized. Both offer high-interest rates to lenders and lower-than usual rates to borrowers. They also require borrowers to deposit bitcoins as collateral to get loans. There are two main types of bitcoin lending platforms: centralized lenders and decentralized lenders. DeFi platforms operate directly through smart contracts and do not require users to trust a central authority. However, CeFi provides a user interface and takes custody of bitcoins. DeFi allows users to take full control of their bitcoins and avoid the risk of technology obstacles. If you want to save money, HODLING bitcoin is the best option. However, DeFi loans allow you to give bitcoin a second purpose as a lender or borrower. DeFi loans are similar to banks lending you money in return for cash. You can borrow money from bitcoin peers in exchange of fiat or stablecoins. You will not be able to get a loan or a bank loan unless you have excellent credit and can provide additional guarantees. You won’t have to give up your bitcoin if you are a borrower or lender with bitcoin DeFi loans. Instead, you will pay reasonable interest rates to buy products and services using fiat. Depending on where you live, there may be fewer taxes. You will earn interest as a lender on the bitcoins you lend. Traditional finance requires trust between lenders and borrowers to be maintained by financial institutions, which are exposed to huge risks when lending money to customers. Banks and institutions need to follow strict verification procedures to reduce the risk of losing their money. Businesses can lend cash in exchange for bitcoin. They will keep the cryptocurrency until the loan is fully paid back. This will satisfy the borrower, who is allowed to use the service without restriction. People in emerging countries are unable to get traditional loans from banks. They can now use bitcoin ownership as collateral for loans. This is a huge breakthrough for billions of people around the world. The impact of bitcoin lending in the financial sector is rapidly expanding, as can be seen from the information we have already discussed. The industry is still young and there are risks. How does it work? The Bitcoin base layer (also known as Layer 1 or L1) is the most reliable, secure, robust, and decentralized of all the blockchains. This is possible through a tradeoff. The base layer’s capabilities are very limited and can only support a small number of basic transactions. Bitcoin is not scalable if it’s limited to the base layer. Its solid foundation allows for development on top of it network to build DeFi or smart contract platforms. Bitcoin was built to scale in layers. Satoshi Nakamoto (the pseudonymous creator of Bitcoin) suggested this possibility in 2010. This led to a new wave of innovation that could dramatically expand the Bitcoin economy. Here we look at the future of Bitcoin and how it will be built. We will highlight some projects that bring new uses to Bitcoin. The Bitcoin base layer was designed to support settlements and not payments. For example, payments on the Layer 2 Lightning Network and Liquid sidechains are quicker and more affordable, but they still settle on Bitcoin’s base layers. Layer 2 side chains such as RSK and Stacks — which will be discussed later — allow for smart contracts to be executed faster and more securely than payments on the Layer 2 Lightning Network or Liquid sidechains. It is important to ensure that your money is safe. You will be lending your money to a central entity or an escrow which will hold it until you repay the loan. There are strategies that can help you save money, reduce fees, and minimize the risk of your portfolio being liquidated. To save money or reduce fees, it is a good idea to keep your portfolio loan-to value (LTV) at 20%. This will allow you to better resist a 50% drop in BTC prices. If the loan’s collateral drops in value, it could be liquidated. Unless you continue topping up with bitcoin, this would make it a margin loan. These strategies will help you better prepare for loan challenges. Read More >> Learning from Bitcoin Loan StrategiesHow to Get a Bitcoin-Backed LoanBitcoin’s native Script Language is technically capable of supporting limited smart contracts. However, it is cumbersome. It is restricted to prioritize security over programmability. Side chain solutions that settle on the main chains are preferred to manage smart contracts and enable DeFi services such as borrowing or lending against bitcoin. RSK is a Bitcoin sidechain which is simultaneously merge-mined to Bitcoin for increased security. It also has a native currency, RBTC, that is a 1:1 BTC peg. BTC to RBTC conversion is required to access Zero. Zero is a decentralized protocol that allows customers to borrow ZUSD, a USD-pegged stablecoin with zero interest and BTC as collateral. People must still trust an intermediary, in this instance, the centralized platform. The minimum collateral ratio (collateral/debt for Sovryn loans) is 110%. This means that your loan must be collateralized at least 110% at all time. To use BTC as collateral, RBTC must be converted first into RBTC. Then, RBTC must be transferred to Rootstock bitcoin sidechain. Sovryn claims the Zero protocol is not custodial. It is governed by Bitocracy protocol stakers and then transferred to the Rootstock bitcoin sidechain to be used as collateral. After securing L-BTC (Liquid Bitcoin), as collateral in a smart agreement, anyone can use Fuji to borrow any asset on the platform. For every $1.50 in BTC locked, the smart contract creates 1 fuji USD (Fuji US Dollar). The risk of liquidation is reduced if there is more collateral. Once the debt is settled, the borrower can get all collateral back. Repayment is made by burning the same amount Fuji assets used for collateral and a small 0.25% payment for the redemption of the secured collateral. Ledn offers Proof-of-Reserve attestations that are overseen by an independent certified public accountant. Clients’ privacy is protected with a unique anonymized ID which is assigned to every client reference number. The individual’s identity is not revealed to the independent accounting firm. Ledn uses BitGo to cold store clients’ bitcoin deposits and doesn’t rehypothecate collateral assets (i.e. Ledn does not lend them to others to make extra revenue. Ledn will notify the borrower if the LTV ratio reaches 70%. Ledn will notify the borrower if the LTV reaches 70%. If it reaches 80%, all collateral Bitcoin will be liquidated by Ledn. The mortgage becomes more secure if it is backed by the property’s worth. This will reduce the likelihood of a loan being liquidated. Some financial institutions are interested in becoming lenders on the platform. The platform already offers bitcoin-backed loan, but it is looking to expand its offerings. Both borrowers and lenders can benefit anonymously from the platform’s P2P bitcoin-backed loans. They can also set their own terms, including interest rates and currencies. The company creates an escrow contract that holds the borrower’s bitcoin. According to the contract, the lender transfers the loan amount to borrowers. The lender transfers the amount of the loan to the borrower according to the contract. The Texas-based company was founded in 2017 to offer bitcoin-backed loans in the U.S. Verify 21This is a bitcoin-only financial service company that was founded in Europe in July 2022 to serve all bitcoiners. Verify21 claims to offer a straightforward and transparent loan application process. Initial funding is available only in USD stablecoins. Fiat currencies and bitcoin will be added in 2023*. Verify21 accepts only bitcoin as collateral. The platform does not have a token and does not rehypothecate clients bitcoin or lend client collateral to other borrowers. Bitcoin collateral is kept with institutional custody partners. Verify21 conducts a bi-annual proofof reserve audit. Initial loans are offered at a 10% interest rate with a 2.5% origination fee. The total APR for the loans is now 12.5%. Verity21 will notify borrowers that they must top up their collateral if the bitcoin price drops significantly or approaches a high LTV ratio. Verity21 will notify borrowers that they must top up their collateral if the bitcoin price falls further. They will then have to pay off the client’s loan, settle the loan, and return any collateral to the client.”Atomic FinanceAn interesting startup that is currently in Beta is Atomic Finance. This company is a bitcoin-only financial service business that offers a way to make a profit on bitcoin, without having to give up custody. To unlock DeFi capabilities on blockchain, smart contract protocols don’t require the creation or use a native token other than bitcoin. A DLC is a two-party transfer of funds to a multisig address to bet on a certain outcome based upon a pre-determined condition. One example is bitcoin’s future price. A transaction is signed by an agreed-upon oracle, which is a party that connects smart contracts with offchain data such as the price of bitcoin. DLC participants who correctly predict that outcome will be eligible to claim funds from the DLC multisig. SuredBits and DG Lab are two other companies that are looking to adopt the same model as Atomic Finance. These are the purest forms bitcoin finance because they allow DeFi to use bitcoin only. This allows LPs to earn 4-6% bitcoin yield while borrowers can get on-chain bitcoin loans directly against the balance sheets. Zest is only available to corporate and institutional borrowers at this stage. Borrowers must be approved using a standard process. SummaryBitcoin’s Layer 2 DeFi lending platforms may change the future of finance in a way never seen before. They are less dependent upon the banking system and more fair to participants. This is all happening on top of the immutable and reliable Bitcoin protocol. It’s opening up opportunities that all will be able take advantage of. You must be comfortable with the possibility of losing permanent access to your bitcoin. It is best to be cautious. If you are willing to take the risk, let it be with a small amount of your bitcoin.

 

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