Loans are as old as money. Throughout history, whether seeds or gold, every form of currency has had its lending market. Now, Bitcoin, with its decentralized and transparent nature, has staked its own claim in the financial landscape. And just like the currencies that came before it, for Bitcoin to truly thrive, it also needs a robust lending market.
Mauricio Di Bartolomeo is the co-founder of Ledn, a digital currency lending company.
However, thus far, most attempts to create a bitcoin credit market have failed spectacularly, with disastrous repercussions.
The demand for bitcoin and digital asset lending services surged during the 2020 run-up, with 10s of billions of client assets flowing towards both centralized and decentralized lending platforms.
Fueled in part by lax macroeconomic monetary policies and the crypto sector’s explosive growth, this environment allowed bad actors to operate recklessly, misleading consumers without facing significant checks and balances.
This lack of oversight ultimately led to the collapse of the digital asset lending industry beginning in 2022, including the cascading bankruptcies of lenders including BlockFi, Celsius and a unit of Genesis.
Although accusations of fraud in some of these cases will be a matter for the courts to decide, the sudden domino-like collapse of dozens of digital asset lending firms highlighted an underlying flaw: their operating structures were inherently unsustainable.
These structures lacked a crucial “ring-fencing” of lending risk, and lenders did not provide the transparency needed for clients to understand their credit underwriting process or the concentration risks in their lending activities.
This outdated structure, coupled with insufficient risk management, was akin to dry wood eagerly awaiting a spark — and Terra/Luna, Three Arrows Capital (3AC) and FTX were an entire box of matches.
See also: A Timeline of the Meteoric Rise and Crash of UST and LUNA | Opinion
Historically, a lending model without ring-fenced risks is viable only when a lender of last resort exists, such as the Federal Reserve in the context of traditional banks.
This backstop doesn’t exist for Bitcoin, which means the industry needs to develop a new model — one that doesn’t lean on government or state institutions.
Why Bitcoin needs a…
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