Bitcoin Can Be Super Collateral If Lenders Understand Its Value

Published

2 years ago

January 10, 2023

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This is an opinion editorial by Max Keidun, the CEO of peer-to-peer bitcoin exchange Hodl Hodl.

The bitcoin lending space has suffered from several major issues in recent months and years, from the fallout of the Terra/Luna crash, impacting Celsius and BlockFi, and now FTX as well, to liquidity crunches given the sustained price drawdown, varying accusations of market manipulation and more.

All of these have led to significant losses, bankruptcies and a complete reshaping of the lending market. Many users have lost faith in bitcoin-based lending products and the market appears to be at its historical bottom, both in terms of volumes and public confidence.

As usual, the mainstream media blamed these crises on Bitcoin itself. But is any of this Bitcoin’s fault? Does it make Bitcoin any less attractive? Does it even mean that we shouldn’t consider bitcoin as lending collateral? No!Bitcoin Is Super Collateral, It’s The Lenders Who Have Failed

While Bitcoin's code is law, custodial lending platforms are trusted third parties, owned and managed by private entities. Trusted third parties are security holes. This was true before Bitcoin, and it is still true today.

Furthermore, most bitcoin lending platforms are poorly conceived, poorly developed and poorly managed. This doesn’t necessarily imply bad code. The code can be well written, properly audited and verifiably secure, but there may still be poor incentives that emerge from the design of the lending platforms. If the focus is to treat bitcoin as if it were a yielding asset, we are likely in for trouble.

The longer the “bitcoin lending” industry goes on, the clearer it becomes that most involved do not really understand how yield is generated. And as the saying goes, if you don’t know where the yield comes from, then you are the yield. What it really means is that your bitcoin is being used as the principal for risky investments, and it is likely only a matter of time before the house of cards starts to collapse.

I believe that the proper focus for integrating bitcoin into intermediated lending is to appreciate how valuable and unique bitcoin is, and to treat it as something to be borrowed against: to understand that bitcoin is super collateral. But what makes it so unique?

We can identify twelve characteristics that make it so:Bitcoin Is Liquid

Bitcoin is an extremely liquid asset. It is traded 24/7, with no weekend breaks and no banking holidays. Massive liquidity pools across a variety of fiat currencies are available globally. For lenders, this means that if you want to convert your collateral into fiat, you can do it instantly — either because the borrower has been liquidated or because the loan was repaid from the collateral.

This also allows for the hedging of risks. Bitcoin may be the only kind of loan collateral which can be instantly and dynamically hedged: a serious competitive advantage.Bitcoin Is Programmable

Bitcoin enables the creation of programmable lending products and ownership mechanisms. Among other benefits, this feature allows us to solve the problem of trusted third parties by building non-custodial lending mechanisms and storage systems. For example, we can distribute collateral claims or create conditional logic for redemption that will be automatically executed by the Bitcoin network, not the whims of a centralized financial institution.Bitcoin Is Scarce

There will only be 21 million bitcoin.Your collateral is getting more valuable over time, which means there is less incentive for you to sell, and likely more lenders who are willing to accept it. Bitcoin Is Flexibly Transparent

Bitcoin allows us to enable selective transparency of your assets when useful, but also allows complete anonymity when desired. In a lending scenario, for example, you can easily prove to a lender that you own and control the collateral under consideration.Bitcoin Is Sovereign

Bitcoin is yours. You have keys to your bitcoin just like you have keys to your house and your car. Bitcoin is your personal property. If you use a house or a car as collateral, you won't own it — your lender would. With bitcoin, you can still conditionally own it during your lending agreement. In fact, with the right tools, you can not only use but continue to use this collateral during the period of the lending agreement.Bitcoin Is Secure

Bitcoin is protected cryptographically, economically and socially. It is sensible to think of Bitcoin's lowest-level network security expanding to the set of tools built on top of it. For example, you can distribute ownership of your collateral between multiple independent parties, use offline wallets and utilize many more security methods.Bitcoin Is Market Driven

Bitcoin is the essence of a market-driven asset. The price of bitcoin reflects the market almost instantly, and it's not determined by one or several individuals. It is extremely difficult to manipulate the price of bitcoin. Bitcoin costs almost the same in fiat in any part of the world and is determined by a global market. Bitcoin Is A Real-Time Asset

Not only can we track the price of bitcoin collateral in real time, but Bitcoin's blockchain allows you to track your collateral address in real time also. Any price fluctuation can be reacted to appropriately. As mentioned, there are no weekends or holidays, and the market is always open to everyone, so nobody will close the market on a Friday and open on a Monday with different prices.Bitcoin Is Objective

Bitcoin is honest. Bitcoin in Miami costs the same amount of fiat as it does in Lugano or Riga. Bitcoin doesn't care whether you like it or not. The price of bitcoin cannot be determined by your personal views or your forecasting capabilities. To borrow against bitcoin, you only need to have bitcoin. Your credit history, social score or anything else is irrelevant to the lender as long as you have the collateral to borrow against.

Take real estate, for example. The same amount of money can buy you different properties in different countries with the same levels of economic and social development. What makes the difference then? Why can you buy a mansion on the coast of the Mediterranean in Spain or Italy and, for the same amount of money, you won’t be able to afford a proper house in the Bay Area in the U.S.?

It’s due to humans' irrational valuation capabilities. Because real estate valuation is primarily based on human factors, banks evaluate your property as either too expensive or too cheap, depending on market conditions and their plans.

Or take stocks, for example. Your stocks in a certain company can have good underlying conditions and great potential growth opportunities, but suddenly the CEO of this company can tweet some stupid thing, and you are losing money or getting liquidated. Meanwhile, Bitcoin is fair.Bitcoin Is Global

Bitcoin is globally accessible and globally distributed. For lending, this means that you can borrow remotely from anyone in the world, and you can lend money using bitcoin as collateral to anyone in the world. Bitcoin is neither limited to, nor exclusively exposed to, specific local markets.Bitcoin Is Digital

In a digital age, with digital commerce, we need digital collateral. Bitcoin is already online. It's here, on your machine, your phone, your cold wallet. Bitcoin allows you to borrow remotely and instantly. There is no need to digitize bitcoin as you need to do with real estate, land, cars or any other assets. It's already digital. Bitcoin Is Decentralized

There is no single point of failure in Bitcoin. Bitcoin has been attacked multiple times, and yet it is growing and expanding globally. No committee or person is responsible for Bitcoin. Having decentralized collateral significantly decreases your dependence on single events and failures of companies or people. You are protected by a distributed network. Will Lending Ever Match Bitcoin’s Potential?

Powerful collateral requires powerful tools. Is it possible to build lending tools that will match bitcoins' value? In order to do so, we all need to take a step back and check Bitcoin's white paper.

After reading Bitcoin’s white paper, you will understand that in order to build a successful lending product (in fact, any type of Bitcoin product!), you need to meet three main criteria. If your product has all three, congrats you have passed the test. Let's call it “The Satoshi Test.”Your service should be non-custodial. Remember: not your keys, not your coins. When using custodial lending platforms, you are exposed to the risk of losing your collateral completely. Because, as soon as bitcoin hit platform wallets, they are no longer yours. This is exactly what happened to customers of the many lending and trading platforms that have failed in 2022.Bitcoin is a peer-to-peer, electronic cash system. Once again: peer to peer. Instead of acting like a middleman, you need to provide technical tools for individuals or businesses to operate with each other. Or you can be a business that will allow customers to directly interact with your platform. A good example is a platform that allows customers to buy bitcoin directly into their own cold storage. Your platform should be Bitcoin only, meaning that the only collateral you should work with should be bitcoin. Shitcoins are risky, and shitcoins' code is a ticking time bomb. By integrating many blockchains into your product, you are exposing the most valuable to the most vulnerable.

There is an extra criteria that could be met: anonymity. If you are building non-custodial, Bitcoin-only, peer-to-peer products, this can and will allow you to offer anonymity and better privacy for your customers because security is not full without anonymity and the data of your customers should be protected, as well as their funds.

A good way to pass The Satoshi Test is to utilize multisig. Multisig is a simple and secure yet powerful tool. It allows you to offer peer-to-peer interactions to users, leverage non-custodial escrows and use only Bitcoin. It also allows you to offer better privacy for your users.

Take, for example, a multisig setup with three keys where the consensus mechanism is reached by entering at least two keys. This is called “two-out-of-three Bitcoin multisig.” In that type of setup, you — as a technical tool provider — can become one of the key holders, but you won’t have full control over customer funds (because you only have one key!), thus ensuring that these funds won’t be moved and rehypothecated. For example, the lender will have one key, the borrower will have another one, and the provider will have the third key. This kind of setup will allow users to verify that funds are only used by them, and that all parties must act according to rules in order to reach consensus, and that no single party can act in a dubious and shady way.

In fact, there are already powerful platforms that use Bitcoin multisig and offer peer-to-peer interactions. These platforms can provide lenders and borrowers from all over the world with easy two-out-of-three multisig setups, where each side (including the platform itself) has one key. The multisig is created on Bitcoin’s public blockchain, meaning that you can check your collateral at any time through any block explorer. And the best part is that no funds can be rehypothecated because the platform itself only has one key that ensures that every involved counterparty is acting in a good and professional way. Proper Lending Platforms Might Be Useful For HODLers

Although the lending market at the moment is experiencing turbulence and contagion effects, it is a good time to educate yourself about proper lending platforms that might be useful for any true HODLer in the future. As soon as we enter the next bull cycle, there will be less incentive to sell bitcoin and more interest in holding it for the long term and borrowing against it. Be prepared, because bear markets don’t last forever. HODL and learn!

This is a guest post by Max Keidun. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

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MPs back legalising assisted dying in England and Wales after historic Commons vote

Published

2 hours ago

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MPs back legalising assisted dying in England and Wales after historic Commons vote

MPs have voted to approve a historic bill that would legalise assisted dying in England and Wales.

The Terminally Ill Adults (End of Life) Bill was approved by 314 votes to 291 at its third reading in the House of Commons – a majority of 23.

Politics Live: MPs back legalising assisted dying in historic Commons vote

Labour MP Kim Leadbeater, who proposed the legislation, was seen crying in the chamber as it went through.

Campaign group Dignity in Dying hailed the result as “a landmark moment for choice, compassion and dignity at the end of life”.

“MPs have listened to dying people, to bereaved families and to the public, and have voted decisively for the reform that our country needs and deserves,” said Sarah Wootton, its chief executive.

The bill will now go to the House of Lords, where it will face further scrutiny before becoming law.

Due to a four-year “backstop” added to the bill, it could be 2029 before assisted dying is actually offered, potentially coinciding with the end of this government’s parliament.

The bill would allow terminally ill adults with fewer than six months to live to apply for an assisted death, subject to approval by two doctors and a panel featuring a social worker, senior legal figure and psychiatrist.

MPs have deliberated the proposals for months, with a vote in November passing with a bigger majority of 55.

Since then it has undergone some significant changes, the most controversial being the replacement of a High Court Judge’s approval with the expert panel.

Ms Leadbeater has always insisted her legislation would have the most robust safeguards of any assisted dying laws in the world.

Opening the debate on Friday she said that opposing the bill “is not a neutral act. It is a vote for the status quo”.

She warned that if her plan was rejected, MPs would be asked to vote on it again in 10 years and “that fills me with despair”.

MPs have brought about historic societal change

A chain of events that started with the brutal murder of an MP almost 10 years ago has today led to historic societal change – the like of which many of us will never see again.

Assisted dying will be legalised in England and Wales. In four years’ time adults with six months or less to live and who can prove their mental capacity will be allowed to choose to die.

Kim Leadbeater, the MP who has made this possible, never held political aspirations. Previously a lecturer in health, Ms Leadbeater reluctantly stood for election after her sister Jo Cox was fatally stabbed and shot to death in a politically motivated attack in 2016.

And this is when, Ms Leadbeater says, she was forced to engage with the assisted dying debate. Because of the sheer volume of correspondence from constituents asking her to champion the cause.

Polls have consistently shown some 70% of people support assisted dying. And ultimately, it is this seismic shift in public opinion that has carried the vote. Britain now follows Canada, the USA, Belgium, Switzerland, the Netherlands and Australia. All countries with sophisticated health systems. Nowhere has assisted dying been reversed once introduced.

The relationship between doctor and patient will now also change. The question is being asked: Is an assisted death a treatment? There is no decisive answer. But it is a conversation that will now take place. The final answer could have significant consequences, especially in mental health settings.

There are still many unknowns. Who will be responsible for providing the service? The NHS? There is a strong emotional connection to the health service and many would oppose the move. But others will argue that patients trust the institution and would want to die in its arms.

The challenge for health leaders will be to try and reconcile the bitter divisions that now exist within the medical community. The Royal Colleges have tried to remain neutral on the issue, but continued to challenge Ms Leadbeater until the very end.

Their arguments of a failure of safeguards and scrutiny did not resonate with MPs. And nor did concerns over the further erosion of palliative care. Ms Leadbeater’s much-repeated insistence that “this is the most scrutinised legislation anywhere in the world” carried the most weight.

Her argument that patients should not have to fear prolonged, agonising deaths or plan trips to a Dignitas clinic to die scared and alone, or be forced to take their own lives and have their bodies discovered by sons, daughters, husbands and wives because they could not endure the pain any longer was compelling.

The country believed her.

The assisted dying debate was last heard in the Commons in 2015, when it was defeated by 330 votes to 118.

There have been calls for a change in the law for decades, with a campaign by broadcaster Dame Esther Rantzen giving the issue renewed attention in recent years.

Supporters have described the current law as not being fit for purpose, with desperate terminally ill people feeling the need to end their lives in secret or go abroad alone, for fear loved ones will be prosecuted for helping them.

Ahead of the vote, an hours-long emotionally charged debate heard MPs tell personal stories about their friends and family.

Maureen Burke, the Labour MP for Glasgow North East, spoke about how her terminally ill brother David was in so much pain from advanced pancreatic cancer that one of the last things he told her was that “if there was a pill that he could take to end his life, he would very much like to take that”.

She said she was “doing right by her brother” in voting for it.

How did MPs vote?

MPs were given a free vote, meaning they could vote with their conscience and not along party lines.

The division list shows Prime Minister Sir Keir Starmer voted in favour of the bill, but Conservative leader Kemi Badenoch voted against.

Health Secretary Wes Streeting and Justice Secretary Shabana Mahmood, who will have to deliver the bill, also voted no.

Read more: Find out how your MP voted

Bill ‘poorly drafted’

Opponents have raised both practical and ethical concerns, including that people could be coerced into seeking an assisted death and that the bill has been rushed through.

Veteran Labour MP Diane Abbott said she was not opposed to the principle of assisted dying but called the legislation “poorly drafted”.

Former foreign secretary James Cleverly echoed those concerns, saying he is “struck by the number of professional bodies which are neutral on the topic of assisted dying in general, but all are opposed to the provisions of this bill”.

Recently, the Royal College of Psychiatrists, the Royal College of Pathologists and the Royal College of Physicians have raised concerns about the bill, including that there is a shortage of staff to take part in assisted dying panels.

However, public support for a change in the law remains high, according to a YouGov poll published on the eve of the vote.

The survey of 2,003 adults in Great Britain suggested 73% of those asked last month were supportive of the bill, while the proportion of people who feel assisted dying should be legal in principle stood at 75%.