It’s a new platform for Bitcoin-backed lending, and it’s tempting banks to lend

The collapse of major cryptocurrency lenders such as Celsius Network and Voyager Digital this summer may have cooled the market, but Max Keidun says his new lending platform will be different — and has a chance to make banks love bitcoin (BTC).

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

His new platform, Debifi, announced at 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, declining to name any.

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

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

“We want to 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 also provides bitcoin-backed fiat loans itself. Both are investors in Hodl Hodl, a non-custodial bitcoin exchange Keidun runs: 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 in Keidun’s upcoming project. “Bitfinex is pleased to partner with Debifi and support a bitcoin-first institutional liquidity pool,” a Bitfinex spokesperson told CoinDesk in an email.

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

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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 in an anonymous and non-custody-based manner. Just like Hodl Hodl, Lend uses multi-signature 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 in the multisig that requires two of three keys to unlock it.

Each side of the agreement (the buyer and the seller or the lender and the borrower) gets a key. The third is controlled by Hodl Hodl or Lend. If a dispute arises between the parties, the company’s referees and bitcoin are sent to the prevailing side. In this way, users do not have to trust the platform with bitcoin, which is not stored in a large central wallet, nor do they have to verify their identity. The broad consensus in the crypto industry so far has been that non-custodial platforms are not considered money transmitting businesses. obliged and therefore not obliged to do KYC (know-your-client) checks on its users.

Read more: Bitcoin Hodlers get a KYC-free lending option

Debifi will work differently.

Unlike Hodl Hodl and Lend, users on Debifi will likely have to go through a KYC check for most loan offers. However, it will be up to each individual lender, and the personal information will be collected by the lenders, not Debifi, Keidun said.

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

As Keidun explains, an additional key will belong to a fourth holder, who together with Hodl Hodl will ensure the security of the funds. Those fourth key holders, as Keidun calls them, will be among a small number 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 commitment.

The addition of the fourth key is intended to strengthen the new platform’s security: if a fraudster or a hacker wanted to abuse the protocol and steal money from the escrow, they would have to compromise not only 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 to fix what you already have.” (Hodl Hodl and Lend will also undergo some upgrading, he said.)

“When we launched our lending platform, some people criticized us, saying that the platform could cooperate with one of the sides of the deal, take the bitcoin out of the escrow and cheat the other party,” Keidun said. “And now there is one more key. And the holders are big reputable companies. They don’t want to deceive people.”

Other new features will be loans with expiry terms of up to five years (Lån allows users to open loan contracts for no longer than 12 months) and built-in integration of hardware wallets. Users will be able to create escrow wallets using their own hardware wallets, so they will use a signature generated by their own device, not by the platform, as it is now for Hodl Hodl and Lend.

New approach

Unlike in 2018-2019, when cryptocurrency-backed lending took off and companies like BlockFi and Celsius emerged and grew rapidly, 2022 appears to be an inauspicious 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, which Debifi can benefit from.

“If you look at the recent wave of implosions of 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 3 Jan.

The centralized crypto lenders, he added, were not using 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,” said Mow.

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

“What you need is transparency around the risk you’re taking. When customers have the keys to the security they’re using, they can see down the chain where those funds are and if those funds are being compromised,” Neuman said.

And while with Debifi’s three-by-four multisig setup, funds can be moved out of escrow without a user’s permission, as Keidun acknowledged, they “don’t sit in a massive escrow base, 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 a “huge pool of capital in conventional capital markets with relatively low interest rates” into the bitcoin ecosystem, which would lower interest rates in the bitcoin lending market.

“The reason lending rates are high in the bitcoin ecosystem is that most of the capital at stake is bitcoin capital and they tend to be heavily invested in BTC and short on USD, so as a borrower you’re bidding against their option to buy .bitcoin itself,” Back said.

“Next Big Thing”

One motivation for Keidun with this new project was to see 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 bitcoin lending losing out to s**tcoin lending. If we want bitcoin to be the biggest asset, we have to compete with these projects,” he said.

The concept of Debifi will be clear and attractive to maximalists like Keidun himself, he said: No single entity has full control over bitcoin security, and there is no rehypothecation – meaning that bitcoin in escrows is not used by the platform to earn extra returns .

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

Debifi will act as a marketplace and will not provide any loans itself, Keidun said. It will offer a clear technology to institutional crypto companies and traditional banks interested in working with bitcoin, so that these banks do not have to contend with the new technology themselves.

“They want to talk directly to their bitcoin clients and finally see what a great security asset bitcoin is. It’s 24/7, it’s transparent,” Keidun said.

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

“Bitcoin has already proven to be an unstoppable means of commerce. My theory for bitcoin in the next 10 years is that it will become a loan asset, a kind of super security,” Keidun said.

This is a vision at least some prominent bitcoiners can share, like Samson Mow. “Non-custodial lending platforms for institutions will be the next big thing,” he said.

UPDATE: (September 3, 2022, 16:50 UTC): Adding the information about Ten31 engagement.