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 might have cooled the market, but Max Keidun says his new lending platform will be different – and has a shot at making banks love bitcoin (BTC).
“My dream is to get the banks to live by the bitcoin standard,” says Max Keidun, the CEO of peer-to-peer bitcoin exchange Hodl Hodl.
His new platform, Debifi, announced during the Baltic Honeybadger conference on Saturday, is scheduled to launch next year. It will allow users to borrow long-term loans in stablecoins and fiat using their bitcoin as collateral. Some banks have already shown interest in joining Debifi as lenders, Keidun said, refusing to name any.
“We already have liquidity providers, but fiat loans will be added half a year after the platform launches,” Keidun said, adding Debifi will take off some time in the first quarter of 2023.
The lenders, both of fiat and stablecoins, will all be institutions, Keidun said, and the fiat lenders will need to have appropriate licenses to join the platform.
“We will know them all, do our due diligence on them,” he said.
For now, two companies have agreed to work with the new platform to provide liquidity, Keidun said: centralized exchange Bitfinex, which is also a sister company of the largest stablecoin issuer Tether; and XBTO, a crypto financial company that is also providing bitcoin-backed fiat loans itself. Both are investors in Hodl Hodl, a non-custodial bitcoin exchange Keidun is running: 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 confirmed their involvement with Keidun’s upcoming project. "Bitfinex is excited to collaborate with Debifi and support a bitcoin-first institutional liquidity pool,” Bitfinex spokesperson told CoinDesk in an email.
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 in an anonymous and non-custodial way. Just like Hodl Hodl, Lend uses multisignature escrows. When a deal is initiated, be it a bitcoin sale on Hodl Hodl or a bitcoin-backed loan on Lend, the user’s bitcoin gets locked in the multisig that requires two out of three keys to unlock it.
Each side of the deal (the buyer and the seller or the lender and the borrower) gets a key. The third one is controlled by Hodl Hodl or Lend. If there is a dispute between the parties, the company referees and the bitcoin is sent to the prevailing side. This way users don’t have to trust the platform with their bitcoin, which is not stored in a big central wallet, and also don’t have to verify their identities. The broad consensus in the crypto industry so far has been that non-custodial platforms are not considered money transmitting businesses.obliged and so are not obliged to do KYC (know-your-client) checks on their users.
Debifi will work differently.
Unlike Hodl Hodl and Lend, on Debifi users will probably need to go through a KYC check for most of the loan offerings. However, it will be up to each lender and the personal information will be collected by lenders, not Debifi, Keidun said.
Debifi, for which Keidun is now assembling 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 ones.
As Keidun explains, one additional key will belong to a fourth holder, which, together with Hodl Hodl, will ensure security of the funds. These fourth key holders, as Keidun calls them, will be one of the small pool of reputable bitcoin companies, including Casa Hodl, Blockstream and Jan3, a startup by Blockstream’s former chief strategy officer, Samson Mow. All three companies confirmed their involvement.
The addition of the fourth key is meant to strengthen the new platform’s security: if a scammer or a hacker wanted to abuse the protocol and steal money from escrow, they would have to compromise not just the platform’s key but also the one held by Casa, Blockstream or Jan3, Keidun explained.
The multisignature escrow for Debifi will be coded from scratch instead of using the 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 undergo some upgrading, too, he said.)
“Back when we launched our lending platform, some people criticized us, saying that the platform could collude with one of the sides of the deal, take the bitcoin out of escrow and scam the other party,” Keidun said. “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 up to five years (Lend lets users open loan contracts for no longer than 12 months) and native integration of hardware wallets. Users will be able to create escrow wallets using their own hardware wallets, so that they would use a signature generated by their own device, not by the platform, as it is now for Hodl Hodl and Lend.
Unlike in 2018-2019, when cryptocurrency-backed lending was taking off and companies like BlockFi and Celsius were emerging and growing fast, 2022 would appear to be an inopportune time to start a business in this market. The collapse of Terra and LUNA, along with a general bearish trend and some reckless gambling by market participants, took down a whole bunch of multimillion-dollar companies, including Three Arrows Capital, Voyager and Celsius.
However, Debifi’s partners believe the crisis was a useful lesson, of which Debifi can take advantage.
“If you look at the recent spate of implosions with centralized lending platforms that are based on opaque relationships and unsecured loans, it's clear that the old system is fundamentally broken,” said Mow, Blockstream’s former chief strategy officer and founder of a bitcoin-focused startup Jan3.
The centralized crypto lenders, he added, didn't use blockchain technology to improve their businesses. “Debifi actually leverages real technology to deliver a better solution, and will make the entire ecosystem stronger and more respectable,” Mow said.
Nick Neuman, CEO of Casa, said the “hybrid custody” approach of Debifi, when there is no single third party in charge of users’ money, will give people more control over what is happening to their bitcoin than companies like BlockFi and Celsius did.
“What you need is transparency around the risks that you are taking. When customers are holding the keys for the collateral that they use, they can see on-chain where those funds are sitting and if those funds are being put at risk,” Neuman said.
And while with Debifi’s three-out-of-four multisig setup, funds can be moved out of the escrow without a user’s 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 getting traditional banks on board would bring an “enormous pool of capital in conventional capital markets with relatively low interest rates” into the bitcoin ecosystem, which would lower the rates on the bitcoin lending market.
“The reason borrowing interest rates are high in the bitcoin ecosystem is that most of the capital at play 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.
‘Next big thing’
One motivation for Keidun with this new project was watching the explosive growth of non-bitcoin decentralized finance (DeFi) products, mostly on Ethereum, which, as a bitcoin maximalist, he considers an inferior system to say the least.
“I see that bitcoin lending is losing to the s**tcoin lending. If we want bitcoin to be the top asset, we need to compete with those projects,” he said.
The concept of Debifi will be clear and attractive for maximalists like Keidun himself, he said: No single entity has full control over the bitcoin collateral and there is no rehypothecation – meaning, the bitcoin in escrows is not used by the platform to earn additional yield.
“This solution will be easy to understand both for bitcoin maximalists and banks,” Keidun believes.
Debifi will work as a marketplace and will not provide any loans itself, Keidun said. It would offer a ready technology to the institutional crypto companies and traditional banks that are interested in working with bitcoin, so those banks won’t have to grapple with the new technology themselves.
“They will be talking directly to their bitcoiner clients and finally see what a great collateral asset bitcoin is. It’s 24/7, it’s transparent,” Keidun said.
According to him, a handful of banks from Europe, the U.S., Asia-Pacific and Caribbean regions have already shown interest in the platform. Keidun said that luring banks down the bitcoin rabbit hole will change the role of bitcoin in the financial system.
“Bitcoin has already shown itself as an unstoppable trading asset. My theory for bitcoin for the next 10 years is that it will become a loan asset, a kind of super collateral,” Keidun said.
This is a vision at least some prominent bitcoiners might share, like Samson Mow. “Non-custodial lending platforms for institutions will be the next big thing,” he said.