Original SPEECH TITLE: bitcoin is a super collateral
Amended title: 12 reasons why bitcoin collateral is super
SPEAKER: Max Keidun
CONFERENCE: Plan B Forum 2022

Introduction

Bitcoin collateral lending space in 2022 has suffered from several major issues like Luna crash, FUD, manipulations and more. All of this led to significant losses, bankruptcies and the complete reshaping of the lending market. In fact, most users actually lost their trust into bitcoin lending products and I believe that at the moment, bitcoin lending space is actually at the historical bottom, both in terms of volumes and public confidence.

This is only a part of lending platforms that actually suffered in 2022 but the worst part is that actually their customers also suffered as well. Celsius alone at the moment of stopping their activity had more than hundred thousand of bitcoin with more than 60 000 bitcoin being lost forever. As a result, once again, our favorite mass media blamed bitcoin for not being perfect enough. But is it a bitcoin’s fault? Does it make bitcoin less attractive? Does it mean that bitcoin is not super collateral? No, it’s not.

While on the Bitcoin base layer code is law, this doesn’t apply to custodial lending platforms or trusted third parties that are owned and managed by private entities. Trusted third parties are in fact security holes and this was true long before bitcoin and it’s still true.

Furthermore, most bitcoin lending platforms are actually poorly developed and poorly managed. I’m not saying about the code. Code can be very good written, secure, audited, etc, etc, the problem is that incentive on top of which these lending platforms are built, they focus more on bitcoin as the yield generation asset while bitcoin is actually super in terms of borrowing against that. Managers of these platforms actually know that the most people want to have extra without doing anything, yet only some of you and some of us understand how the yield is generated and if you don’t understand how yield is generated this only means that you are actually the yield. This effectively means that your bitcoin is used for risky investments and it’s only a matter of time before the house of cards starts falling apart. The main reason people actually use bitcoin to earn yield is that they don’t understand how valuable unique bitcoin is.

Bitcoin, in fact, is a super asset while majority of people treat it as any general asset but what makes bitcoin so unique? I delivered a speech in September and outlined five main features of bitcoin as a super collateral, preparing for this presentation actually outlined seven more so in total it’s 12 super features of bitcoin what makes this a super collateral. Let’s dive in:

1.    Bitcoin is liquid

One of the most crucial things that bitcoin has, it’s highly liquid, it’s a super liquid asset. It’s traded 24/7, no weekends, no banking holidays. You have massive liquidity pools in different currencies and they are available globally. For a lender that means that if your borrower gets liquidated and you need to do something with collateral (for example, you want to exchange it for fiat) you can do it almost instantly and you cannot do it with the majority of lending assets that’s been used for collateral;

2.    Bitcoin is programmable

You can create different lending products and ownership mechanisms with your bitcoin. This features actually allow you to solve the problem of trusted third parties to some extent. For example, you can build on top of multi-sig and create a non-custodial lending mechanism and storage system;

3.    Bitcoin is scarce

We know there will be only 21 million of bitcoin. We know this, they know that and your collateral is actually getting more valuable over the time which means there’s less incentive for you to sell and more lenders are willing to accept it;

4.    Bitcoin is transparent

I call it flexible transparency. It actually allows you to show complete transparency of your asset when needed, it’s on the blockchain, it’s there but it also allows you to be completely anonymous if you don’t want to. In case of lending, you can easily prove to the lender that you actually own the asset;

5.    Bitcoin ownership

Bitcoin has keys and you have keys to bitcoin (just like you have keys to your car or to your house). Bitcoin is yours. Bitcoin is your personal property and if you use a house or a car as a collateral, it’s not your property, you can only use that. Lender has your property at that point. With bitcoin is a bit different. You can actually partially own bitcoin during the lending agreement. In fact, we are building some tools and I know that different teams are building tools that you will be able not only to own bitcoin while lending but also use it while being in a lending agreement. So, bitcoin can not only be used but also can be owned by you during your lending agreement;

6.    Bitcoin is secure

It’s protected cryptographically, socially, economically. It is logical that bitcoin’s core security can be expanded to the set of tools built on top of Bitcoin. As I mentioned already, you can distribute ownership of your collateral between multiple independent parties, use offline wallets and do many more things;

7.    Bitcoin is market-driven

It’s actually the essence of a market-driven asset. The price of bitcoin reflects the market almost instantly and it’s not deterred by one or several individuals. There’s no CEO in Bitcoin (although some people claim that they are). Bitcoin has so many price conditions that it’s not easy to manipulate it. Bitcoin costs almost the same amount of fiat in any part of the world;

8.    Bitcoin is real time

Not only the price of collateral (you can follow that in real time) but you can also use Bitcoin blockchain and track your collateral address in the real time (if you’re using non-custodial solution). It allows you to react to any price fluctuation and the best part is, nobody will close the markets on Friday evening and open it on Monday. The price won’t be different. There’s no off-exchange market in bitcoin;

9.    Bitcoin is honest (objective)

Bitcoin in Miami costs the same amount of fiat as in Lugano or in Riga. It’s market driven. It’s real time. It’s code. Bitcoin doesn’t care whether you like it or not. The price of bitcoin cannot be determined by your personal feelings, views or your perception and forecast capabilities. To borrow against bitcoin, you only need to have bitcoin. Your credit history, social score and anything else is irrelevant to the lender as long as you can prove that you actually own the asset. For example, take the real estate when I say that bitcoin is honest and objective. These are two real estate pieces, one in San Francisco, California, another one in Spain, near Valencia. They almost cost the same but the difference is actually astonishing. The San Francisco property is twice smaller. No pool, no land plot and master bedroom window is actually looking at the wall of the neighbour. It’s a nice view but in Spain, you can get a huge villa for the same price, with the view to the sea, with pool, with everything you want. Why is it happening? It’s actually because of human’s irrational valuation capabilities. Because real estate valuation is primarily based on human perception and factors. For example, banks will evaluate your property as either too expensive or too cheap, depending on the market conditions and their plans. Same goes with stock. CEO of your favorite company can tweet something about nukes and the only thing that he will nuke is the price of asset that you own. So bitcoin is pretty fair;

10. Bitcoin is global

Bitcoin is globally accessible and globally distributed for lending. It means that you can borrow remotely from anyone in the world and you can lend money using bitcoin as a collateral to anyone in the world;

11. Bitcoin is already digital

You don’t need to digitize it the way you digitize real estate, cars, etc. Bitcoin is already on your machine, your phone, your cold wallet, etc. It allows you to borrow remotely and instantly. It’s already there;

12. Bitcoin is decentralized

One of the most important thing is that Bitcoin is actually decentralized. There’s no single point of failure in Bitcoin. Bitcoin has been attacked multiple times and yet it’s growing, expanding globally. There’s no committee or person responsible for Bitcoin and having decentralized collateral is actually pretty important and great because it significantly decreases your dependence on single events and failures of companies or people;

Conclusion

Powerful collateral actually requires powerful tools. Is it possible to build lending tools that will match bitcoin’s value? In order to do so, we need to take step back and check bitcoin’s whitepaper. “Bitcoin is an electronic peer-to-peer cash system” as stated in the beginning of Satoshi’s whitepaper and in order to build a successful lending product, you need to meet at least three main criteria. In fact, in order to build any successful platform in Bitcoin you need to meet main three criteria. Let’s call it the Satoshi test.

[1] First of all, your service needs to be non-custodial (not your keys, not your coins), when using custodial lending/trading platforms you’re exposed to the risk of losing your collateral (or your funds completely) because as soon as bitcoin hits the platform wallets these are not yours, these are theirs.

[2] Bitcoin is a peer-to-peer electronic cash system once again it’s peer-to-peer instead of acting like a middleman, you should focus as a builder on building and providing tools to the people or companies to interact with each other.

[3] Your project should be Bitcoin only, meaning that the only collateral you should work with or one of the few assets you should work with should be bitcoin. Remember, shitcoins are risky and bad for your health and shitcoins code actually is a time bomb. So, it’s a security threat. A good way to pass the Satoshi test is actually to build on top of bitcoin multi-sig. Multi-sig is a very secure, simple and powerful tool. It allows you to offer peer-to-peer interaction to users, a leveraged non-custodial escrow and use only bitcoin. In fact, there are already some lending platforms in the market that use bitcoin multi-sig and offer peer-to-peer interaction. One of them is a platform that I’ve been contributing to for the last two years. It’s actually Lend at Hodl Hold and another one is DebiFi that is going to be launched next year Q1, 2023 and bring bitcoin multi-sig institutional liquidity providers.

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Also read: Bitcoin lending and yield

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