There’s a new platform for Bitcoin-backed borrowing and it’s courting banks to lend

The collapse of big cryptocurrency lenders like Celsius Network and Voyager Digital this summer may have chilled the market, but Max Keidun says his new lending platform will be different – ​​and has a chance to endear bitcoin (BTC) to people. banks.

“My dream is to make banks live by the bitcoin standard,” says Max Keidun, CEO of peer-to-peer bitcoin exchange Hodl Hodl.

Its new platform, Debifi, announced on Saturday at the Baltic Honeybadger conference, is expected to launch next year. It will allow users to borrow long-term stablecoin and fiat loans using their bitcoin as collateral. Some banks have already shown interest in joining Debifi as lenders, Keidun said, declining to name any.

“We already have liquidity providers, but fiat loans will be added six months after the launch of the platform,” Keidun said, adding that Debifi will take off in the first quarter of 2023.

Lenders, both fiat and stablecoins, will all be institutions, Keidun said, and fiat lenders will need to have the appropriate licenses to join the platform.

“We’ll know them all, do our due diligence on them,” he said.

So far, two companies have agreed to work with the new platform to provide liquidity, Keidun said: centralized exchange Bitfinex, which is also a sister company to the largest stablecoin issuer Tether; and XBTO, a crypto finance company that also provides bitcoin-backed fiat loans itself. Both are investors in Hodl Hodl, a non-custodial bitcoin exchange that Keidun operates: Bitfinex invested an undisclosed amount in Hodl Hodl in July 2021 and XBTO participated in Hodl Hodl’s Series B funding round in October 2021.

Both companies have confirmed their involvement in Keidun’s upcoming project. “Bitfinex is excited to partner with Debifi and support a premier bitcoin institutional liquidity pool,” the Bitfinex spokesperson told CoinDesk in an email.

There has also been support from bitcoin-focused venture capital: according to Keidun, the Ten31 fund has invested in Debifi.

four keys

Keidun is no stranger to lending: in 2020, he launched a peer-to-peer lending marketplace called Lend, which allows users to lend and borrow stablecoins anonymously and non-custodially. Much like Hodl Hodl, Lend uses multisignature escrows. When a deal is initiated, whether it’s a bitcoin sale on Hodl Hodl or a bitcoin-backed loan on Lend, the user’s bitcoin is locked into the multisig which requires two keys on three to unlock it.

Each side of the deal (buyer and seller or lender and borrower) gets a key. The third is controlled by Hodl Hodl or Lend. If there is a dispute between the parties, the company arbitrators and the bitcoin are sent to the winning party. This way, users do not have to trust the platform with their bitcoin, which is not stored in a large central wallet, nor do they have to verify their identity. Until now, the broad consensus in the crypto industry has been that non-custodial platforms are not considered money transmission businesses. obligated and therefore are not obligated to do KYC (know your customer) checks on their users.

Read more: Bitcoin Hodlers get KYC-free lending option

Debifi will work differently.

Unlike Hodl Hodl and Lend, Debifi users will likely need to go through KYC verification for most loan offers. However, this will be up to each lender and personal information will be collected by the lenders, not Debifi, Keidun said.

Debifi, for which Keidun is now building a different team, separate from those of Hodl Hodl and Lend, will also have a different design: instead of two out of three multisigs, it will use three out of four. .

As Keidun explains, an additional key will belong to a fourth holder who, together with Hodl Hodl, will provide security for the funds. These fourth keyholders, as Keidun calls them, will be part of the small group of reputable bitcoin companies, including Casa Hodl, Blockstream and Jan3, a startup by former Blockstream Chief Strategy Officer Samson Mow. All three companies have confirmed their involvement.

The addition of the fourth key aims to strengthen the security of the new platform: if a scammer or hacker wanted to abuse the protocol and steal money from the escrow, he would have to compromise not only the platform key but also that owned by Casa, Blockstream or Jan3, Keidun explained.

The multisignature escrow for Debifi will be coded from scratch instead of using existing code for Lend’s multisigs, Keidun said, adding, “It’s better to write a new thing than fix what you already have.” (Hodl Hodl and Lend will also get an upgrade, he said.)

“When we launched our lending platform, some people criticized us, saying that the platform could collude with one party to the deal, pull bitcoin from escrow and scam the other party. “, said Keidun. “And now there is one more key. And the holders are big, reputable companies. They won’t scam people.

Other new features will be loans with expiration terms of up to five years (Lend allows users to open loan contracts for up to 12 months) and native integration of hardware wallets. Users will be able to create escrow wallets using their own hardware wallets, so they would use a signature generated by their own device, not the platform, as is currently the case for Hodl Hodl and Lend .

New approach

Unlike 2018-2019, when cryptocurrency-backed lending was taking off and companies like BlockFi and Celsius were emerging and growing rapidly, 2022 would seem like an inopportune time to start a business in this market. The collapse of Terra and LUNA, along with a general downward trend and reckless gambling by market players, brought down a whole host of multimillion-dollar companies, including Three Arrows Capital, Voyager and Celsius.

However, Debifi’s partners believe that the crisis has been a useful lesson, which Debifi can learn from.

“If you look at the recent series of implosions with centralized lending platforms based on opaque relationships and unsecured lending, it’s clear that the old system is fundamentally broken,” said Mow, a former director of the Blockstream strategy and founder of a bitcoin-focused company. start on January 3.

Centralized crypto lenders, he added, have not used blockchain technology to improve their businesses. “Debifi actually relies on real technology to provide a better solution and will make the whole ecosystem stronger and more respectable,” Mow said.

Nick Neuman, CEO of Casa, said Debifi’s “hybrid custody” approach, when there is no single third party in charge of users’ money, will give people more control over what happens to their bitcoin than companies like BlockFi and Celsius. .

“What you need is transparency about the risks you’re taking. When customers hold the keys to the collateral they’re using, they can see on-chain where those funds are and whether those funds are in danger,” Neuman said.

And while with Debifi’s three-of-four multisig setup, funds can be withdrawn from escrow without user permission, as Keidun acknowledged, they are “not sitting in a massive custodian pool, where you don’t know what they’re doing,” Neuman said.

Adam Back, co-founder and CEO of Blockstream, said the integration of traditional banks would bring a “huge pool of capital in conventional capital markets with relatively low interest rates” into the bitcoin ecosystem, which would reduce rates in the bitcoin lending market. .

“The reason borrowing interest rates are high in the bitcoin ecosystem is that most of the capital at stake is bitcoiner capital, and they tend to be heavily invested in BTC and short of USD. , so as a borrower, you are bidding against their alternative of buying bitcoin themselves,” Back said.

‘The Next Big Thing’

One of Keidun’s motivations with this new project was to look at the explosive growth of non-bitcoin decentralized finance (DeFi) products, primarily on Ethereum, which he considers a system that is at least inferior as a bitcoin maximalist.

“I see bitcoin lending losing to s**tcoin lending. If we want bitcoin to be the main asset, we have to compete with these projects,” he said.

Debifi’s concept will be clear and appealing to maximalists like Keidun himself, he said: No one entity has full control of bitcoin collateral and there is no rehypothecation – meaning escrow bitcoin is not used by the platform to earn additional yield.

“This solution will be easy to understand for both bitcoin maximalists and banks,” Keidun believes.

Debifi will operate as a marketplace and not provide any loans itself, Keidun said. This would offer technology ready for institutional crypto firms and traditional banks that want to work with bitcoin, so those banks won’t have to tackle the new technology themselves.

“They will speak directly to their bitcoiner customers and finally see what a great collateral asset bitcoin is. It’s 24/7, it’s seamless,” Keidun said.

According to him, a handful of banks from Europe, parts of the United States, Asia-Pacific and the Caribbean have already shown interest in the platform. Keidun said luring banks down the bitcoin rabbit hole will change bitcoin’s role in the financial system.

“Bitcoin has already proven itself as an unstoppable trading asset. My theory for bitcoin for the next 10 years is that it will become a lending asset, a kind of super collateral,” Keidun said.

It’s a vision that at least some top bitcoiners might share, like Samson Mow. “Noncustodial lending platforms for institutions will be the next big thing,” he said.

UPDATE: (September 3, 2022, 4:50 PM UTC): Adds information about Ten31’s involvement.

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