Bitcoin can be a super collateral if lenders understand its value

This editorial is Max Keidun’s opinion editorial. He is a contributor to peer to peer bitcoin trading and lending platform Hodl Hodl, and also CEO of Debifi. These events have resulted in significant losses, bankruptcies, and a complete reshaping the lending market. Many people have lost faith and confidence in bitcoin-based lending products. Is this all Bitcoin’s fault? Is it making Bitcoin less attractive? Does this mean that bitcoin should not be considered as collateral for lending? No! Bitcoin Is Super Collateral, It’s the Lenders Who have Failed. While Bitcoin’s code of conduct is law, custodial lending platform are managed and owned by private entities. Trusted third parties can be security holes. This was true even before Bitcoin. This does not necessarily mean that the code is bad. Even though the code may be well-written, audited, and verified secure, there may still be poor incentives arising from the design of the lending platforms. If bitcoin is treated as a yielding asset, it is likely that we will have trouble. As the old saying goes, “If you don’t know where your yield comes from, you are the yield.” It means that your bitcoin is being used to make risky investments. It is only a matter time before the house of cards collapses. What makes it so special? Twelve characteristics make it unique:Bitcoin is LiquidBitcoin has an extremely liquid asset. It can be traded 24/7 without any weekend breaks or banking holidays. Global liquidity pools are large and include a variety fiat currencies. This means that lenders can convert their collateral into fiat instantly – either because the borrower is dead or because the collateral was repaid. This allows you to hedge risks. Bitcoin is the only type of loan collateral that can be instantaneously and dynamically hedged. This is a significant competitive advantage. This feature, among other benefits, allows us to solve trust issues by creating non-custodial lending and storage systems. We can, for example, distribute collateral claims and create conditional logic to redeem that will be executed automatically by the Bitcoin network. This means that there will be less incentive to sell your collateral and more lenders willing to accept it. Bitcoin is Flexiblely TransparentBitcoin allows you to have selective transparency of your assets, but also allows for complete anonymity when necessary. In a lending scenario, for example, you can easily prove to a lender that you own and control the collateral under consideration.Bitcoin Is SovereignBitcoin is yours. Your bitcoin keys are yours just as you have keys for your house or car. Bitcoin is your personal property. You don’t own the car or house you used as collateral. Your lender will. You can conditionally still own bitcoin during your loan agreement. You can use the right tools to make sure that you have the right tools to continue using the collateral throughout the loan agreement period. It is reasonable to consider Bitcoin’s lowest level network security expanding to the tools that are built on top of it. You can, for example, distribute ownership of your collateral among multiple independent parties, use offline wallets, and use many more security methods. Bitcoin is a market-driven asset. The market price of bitcoin is determined almost instantly and is not controlled by any one person. It is very difficult to manipulate bitcoin’s price. Bitcoin is almost equal in price in fiat anywhere in the world, and its value is determined by a global marketplace. Not only can we monitor the price of bitcoin collateral in real-time, but Bitcoin’s Blockchain also allows us to track your collateral address in live time. Any price fluctuations can be responded to in a timely manner. There are no weekends or holidays and the market is always open to all. Bitcoin in Miami costs the exact same amount of fiat in Lugano and Riga as it does in Lugano and Riga. Bitcoin doesn’t care if you like it. Your personal views and forecasting abilities cannot determine the price of bitcoin. You only need bitcoin to borrow against bitcoin. Lenders don’t care about your credit history, social scores, or any other factors as long as you have collateral against which to borrow. Let’s take real estate as an example. You can purchase different properties in different countries with different levels of economic or social development for the same amount of money. What is the difference? You can buy a mansion in Spain or Italy on the Mediterranean coast, but you won’t have the money to purchase a house in the Bay Area of the U.S. for the same amount. It is due to human’s irrational valuation abilities. Real estate valuation is largely based on human factors. Banks will assess your property as too expensive or too inexpensive depending on market conditions and plans. Stocks in a company may have great underlying conditions and great growth opportunities. But suddenly, the CEO of that company can tweet some stupid thing and you lose money or get liquidated. Bitcoin is fair. Bitcoin is global. Bitcoin is worldwide accessible and distributed globally. This means that you can borrow money remotely from anyone around the world and can also lend money using bitcoin as collateral. Bitcoin is not limited to any particular local market. Bitcoin is already online. It’s online, on your computer, your phone, and in your cold wallet. You can borrow bitcoin remotely and instantly. You don’t need to digitize bitcoin like you do with real estate, cars, land, or other assets. It is already digital. Bitcoin is DecentralizedThere is no single point for failure in Bitcoin. Bitcoin has been attacked many times and is still growing and expanding worldwide. Bitcoin is not controlled by any one person or committee. Decentralized collateral reduces your dependence on single events or failures of individuals or companies. A distributed network protects you. Is Lending ever going to match Bitcoin’s potential? To create strong collateral, you need powerful tools. Is it possible for lending tools to match bitcoin’s value? To do this, we need to all take a step back to read Bitcoin’s whitepaper. You will see that you need to read the white paper in order to create a profitable lending product. You must meet three main criteria. Congratulations if your product meets all three criteria. Let’s call this “The Satoshi Test.” Your service should not be custodial. Remember, your keys are not your coins. Custodial lending platforms can expose you to the risk that your collateral could be lost completely. Because once bitcoin hits platform wallets, it is no longer yours. This is exactly what happened in 2022 to customers of many trading and lending platforms. Peer to peer. Instead of acting as a middleman, provide technical tools that allow individuals and businesses to interact with one another. You can also be a business that allows customers to interact directly with your platform. A platform that allows customers buy bitcoin directly from their cold storage is an example. Your platform should only accept Bitcoin. This means that you should only work with bitcoin as collateral. Shitcoins can be risky and shitcoins’ codes are a ticking bomb. Integrating multiple blockchains into your product exposes the most valuable to those most vulnerable. An additional criteria that could be met is anonymity. This can be used to build peer-to-peer, non-custodial, Bitcoin only products. It will also allow you to offer anonymity for your customers. Security is not complete without anonymity. Your customers’ data should be protected as well as their money. Multisig is a great way to pass the Satoshi Test. Multisig is a powerful, yet simple tool. Multisig allows you to facilitate peer-to-peer interaction with users, leverage non-custodial Escrows, and use only Bitcoin. It allows you to provide better privacy for your users. For example, consider a multisig setup with three keys. The consensus mechanism can be reached by entering at most two keys. This is known as “two-out of-three Bitcoin multisig”. This setup allows you, as a technical tool provider, to become one of the key holder, but you don’t have full control of customer funds because you only have one key. This ensures that the funds are not moved or rehypothecated. The provider will have the third key, while the borrower will have one and the lender one keys. This setup will allow users verify that funds are used only by them. It also allows them to verify that all parties follow rules to ensure that there is no dubious or shady behavior. There are many platforms that offer peer-to-peer interaction and Bitcoin multisig. These platforms allow lenders and borrowers to connect with each other via easy two-out of-three multisig setups. Each side (including the platform) has one key. The multisig is created on Bitcoin’s public blockchain. This means that you can access your collateral from any block explorer at any time. The best part about the multisig is that funds cannot be rehypothecated as the platform only has one key. This key ensures that all parties are acting professionally and in a professional manner. Proper Lending Platforms May Be Beneficial for HODLers. Although the lending market is currently experiencing turbulence, contagion effects, this is a good opportunity to learn about the proper lending platforms that may be useful for any true HODLer in future. There will be less incentive for bitcoin to be sold once we enter the next bull market. Instead, there will likely be more interest in borrowing against it and holding it long-term. Bear in mind that bear markets won’t last forever. Learn and HODL! Max Keidun contributed this guest post. These opinions are not necessarily those of Bitcoin Magazine or BTC Inc.

 

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