Hodl Hodl, a non-custodial bitcoin exchange, is launching a lending product. The exchange claims it will be “the first true bitcoin DeFi” (decentralized finance) product.
Starting this month, bitcoiners can borrow USDT, USDC, PAX or DAI stablecoins in a peer-to-peer fashion, without going through know-your-customer (KYC) procedures, leaving their bitcoin as collateral for a period ranging from one day to one year.
The launch is following a larger crypto lending boom that took off in 2018, when venture-backed companies like Genesis Capital and BlockFi came to market. Genesis boasted $1.4 billion in active loans this August and BlockFi CEO Zac Prince told CoinDesk the company had $1.75 billion worth of crypto assets under management in October.
Both firms offer fiat loans backed by cryptocurrency collateral to retail borrowers and crypto loans to institutional investors. The market still has room for newcomers, Prince believes. “I think the space overall still has tons of opportunity, and the more smart folks building things with user value creation in mind the better.”
Now, Hodl Hodl is trying to introduce “true P2P lending in bitcoin.” Hodl Hodl CEO Max Keidun told CoinDesk: “Almost all (if not all) existing lending platforms are centralized, require KYC, don’t allow you to play by your own rules.”
Keeping those keys
Unlike existing crypto lending services, Hodl Hodl’s Lend marketplace will not act as a custodian and won’t store bitcoin collateral. Instead, the borrowers will lock their bitcoins in two-out-of-three multisig escrows for the time of the loan, and get it back when they pay back the stablecoins they borrowed. To release the funds from escrow, a transaction will need to be signed by two keys.
All stablecoin transactions will happen outside of the platform, Keidun said.
There is no option to borrow or lend fiat money on Lend. The platform’s goal is “to eliminate fiat-related risks for its clients, which is impossible using a middleman such as a bank,” according to the Terms and Conditions draft shared with CoinDesk.
This approach is not widespread, nor is building DeFi products on the Bitcoin blockchain. Roderik van der Graaf, founder of Lemniscap, a venture fund that recently invested in Hodl Hodl, said it’s no surprise: “Bringing complex financial use cases to a constrained and secure ecosystem like Bitcoin’s is not an easy feat – which is evidenced in the lack of projects currently offering such use cases in production.”
The lender and the borrower will agree on the amount, time period, interest rate of the loan and the loan-to-value (LTV) ratio, which can be anywhere between 30% and 70%. Lend will take a 2% commission from each deal. When the two parties agree on the terms, each will get one key from the multisig, with Lend holding the third one.
That third key, held by the platform, will come into play if there is a dispute between the two parties, in which case Lend will act as an arbiter and release the funds to the party that proves itself right. Or, if the price of bitcoin goes down, the collateral value depreciates and the borrower fails to fix it, Lend will use the third key to liquidate the collateral, which is, to release it to the lender and close the loan.
The Lend team will be monitoring the price of bitcoin on exchanges like Coinbase, Huobi, Binance and Bitfinex and notify borrowers that their LTV ratio is approaching the threshold and they need to top up their collateral.
If Hodl Hodl sees the LTV in a loan is rising above 75%, the borrower will get a first alert, followed by two margin calls if they fail to add collateral or repay part of the loan to get the LTV ratio back to the agreed level.
At 90% LTV, Hodl Hodl will force liquidation of the collateral and release bitcoin to the lender, said Maria Geiko, COO of Hodl Hodl. If the bitcoin amount locked in escrow is greater than the debt, the difference will go back to the borrower.
Stefan Jespers, Belgium-based bitcoin advocate known as WhalePanda on Twitter, invested in Lend last fall and believes the project can ride the DeFi wave launched recently by the Ethereum community, but this time with bitcoin.
“If you have some stablecoins laying around that you aren’t using, it’s a nice way to make some extra money with it. And you know beforehand what the interest rate will be. With most other products on the market, those rates can change frequently, here it’s locked for the entire duration,” Jespers said.
Unlike Hodl Hodl itself, which says it’s not serving clients from the U.S., Lend will be available globally, including to American bitcoiners, though not immediately. For the first two weeks, Keidun said, U.S. customers won’t be able to use Lend. “It’s a technical thing, we need to tweak settings on the backend,” Keidun said.
Gabriel Shapiro, partner at the Belcher, Smolen & Van Loo law firm, told CoinDesk that a multisig approach practised by Hodl Hodl is currently in the “gray area” under the existing regulation in the U.S., as the law does not currently say anything about such specific situations.
However, the fact that the platform is adjudicating disputes and determining which party the money should go to might potentially make it look like a money services business in the eyes of the Financial Crimes Enforcement Network (FinCEN), Shapiro said: “They are playing an essential role in the transmission.”
Over the past years, U.S. regulators have been coming after crypto businesses that served American users without following the rules that a mainstream financial business would follow, including obligatory KYC/AML checks and licensing procedures. The latest high-profile victim is BitMEX, a major crypto derivatives exchange.
Keidun believes that not touching fiat money or holding custody of clients’ funds puts the exchange beyond the FinCEN supervision. When asked what Hodl Hodl would do if FinCEN does not agree with this approach, Keidun said they would leave the U.S. market.