• Bitcoin lending has recently experienced several major issues, such as the Terra/Luna crash, liquidity crunches, and accusations of market manipulation.
• The mainstream media blamed these crises on Bitcoin itself, however it is actually the lenders that have failed due to poor incentives and design.
• Bitcoin is actually a super collateral when used in the right way, and lenders must understand how yield is generated in order to be successful.
The Bitcoin lending space has seen a rollercoaster of highs and lows 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, Bitcoin lending has been rocked by several major issues. These have led to significant losses, bankruptcies and a complete reshaping of the lending market, with many users losing faith in Bitcoin-based lending products and the market appearing to be at its historical bottom, both in terms of volumes and public confidence.
As is often the case with Bitcoin, the mainstream media blamed these crises on Bitcoin itself. However, on closer inspection, the truth is quite different. The problems associated with Bitcoin lending are not the fault of Bitcoin, but rather the fault of the lenders themselves. Bitcoin itself is actually a super-collateral when used in the right way, but many lenders lack the understanding of how yield is generated in order to be successful.
The code behind Bitcoin is law, and while it has been properly audited and is verifiably secure, it is the custodial lending platforms that are the security holes. These are owned and managed by private entities, and are often poorly conceived, poorly developed and poorly managed. This can lead to poor incentives emerging from the design of the lending platforms, and if the focus is to treat Bitcoin as if it were a yielding asset, this is likely to lead to trouble.
In order for Bitcoin lending to be successful, lenders must first understand how yield is generated. Yield is not generated from Bitcoin itself, but from the custodial platform managing the Bitcoin. The platform must have the right incentives in place, and must be properly managed in order to generate yield in a trustworthy and secure manner. Furthermore, lenders must also understand the risks associated with Bitcoin, as it is a highly volatile asset and can result in major losses if not managed properly.
Ultimately, Bitcoin is not to blame for the recent crises in the lending space. It is the lenders themselves who have failed to properly understand the technology and the risks associated with it. If lenders can learn from these mistakes, they can use Bitcoin as a super-collateral to generate yield in a safe and secure manner.