Bitcoin lending is the future of DeFi, settled in the most robust blockchain. Here’s how it works and what you can do to get a bitcoin-backed loan.

Loaning your bitcoin invites an element of risk that you may not need to incur. You should not make any financial, investment, trading or otherwise decision solely based on the information presented in this article.

Bitcoin lending will be the future of decentralized finance (DeFi). Many DeFi projects are currently sitting on Ethereum due to its built-in support for smart contracts and network effects, but this is changing rapidly.

Smart contract platforms are being built on Bitcoin to create a new ecosystem that offers the highest protocol security and the sound money network only an established asset like bitcoin can offer.

A bitcoin-backed loan is a type of secured loan that lets you easily borrow cash using your bitcoin as collateral. Due to their rising popularity, BTC loans facilitate the transition to decentralized finance based on a bitcoin standard, where intermediaries have little to no space and the protocol’s solid foundations ensure security. A new financial system opens up plenty of opportunities for everyone, with no censorship allowed.

Bitcoin’s total value locked (TVL) is $108 million as of October 2022, while Ethereum’s sits at $30.37 billion. Even though the potential of unlocking DeFi on Bitcoin is evidently enormous, there are reasons behind the extreme gap in such comparison.

One of them is Bitcoin’s true decentralization which prevents any central planning or venture capital funds from interfering with its prodigious independent development. While this is the best thing for Bitcoin, it also means that money for development is limited, making it slower than Ethereum, which is backed by big corporate money.

Furthermore, Bitcoin’s base layer is excellent for money transaction settlement, but smart contracts, which are the fundamental components of DeFi, need to be built on upper layers like the Internet is built upon the base TCP/IP layer.

This article will explore the opportunities that Bitcoin lending could open in DeFi, how it works and where you can look for the current services offered.

DeFi vs. CeFi

Centralized finance (CeFi) and decentralized finance (DeFi) are fast-growing branches of the cryptocurrency space that will likely shape the future of financial services.

Not to be confused with TradFi (traditional finance), which is the customary way of borrowing and lending money through the banking system, CeFi is still provided by an intermediary while using cryptocurrency and blockchain technology to offer cheaper, faster and more secure financial products. People must still place trust in an intermediary; in this case, the centralized platform.

DeFi, on the other hand, is peer-to-peer financial services and lending where trust is placed in the protocol and smart contracts without an intermediary (other than, perhaps, an escrow service). This is important because third-party gatekeepers can make transactions inefficient while users lose control over their own money.

„To build DeFi on a centralized protocol, or one that is a protocol managed by rulers, is inherently broken from the start“ – @AlyseKilleen

Within the two branches, there are two main types of bitcoin lending platforms: decentralized and centralized lenders. They both offer high-interest rates for lenders and lower-than-usual rates for borrowers; they typically require borrowers to deposit bitcoin as collateral to access a loan.

However, there are several differences amongst lenders so borrowers should consider carefully when choosing the most suitable platform.

In particular, DeFi provides more privacy than centralized finance platforms, which usually require some form of verification to allow users to access their services. DeFi platforms work directly through smart contracts without having to trust a central authority.

User experience and custody are on the side of CeFi, which usually provides an efficient customer interface while taking custody of the users’ bitcoin. With DeFi, users must take responsibility and complete control over their bitcoin while facing the risk of technology hurdles.

Why Get A Bitcoin-Backed Loan?

Getting a bitcoin-backed loan will help you avoid selling bitcoin — and you’re actually putting your bitcoin to work. HODLing bitcoin is already the best thing you can do if you’re after sound money; however, as a lender or a borrower, you can give bitcoin an additional purpose with the help of DeFi loans.

Just like banks lend you money in exchange for cash, bitcoin DeFi loans allow you to borrow money from other bitcoin peers in exchange for fiat or stablecoins. However, you will only be able to access a bank loan or lend your money if you have an excellent credit score and provide additional guarantees. With bitcoin DeFi loans, everyone can become a lender or a borrower.

As a borrower, you won’t be giving up your bitcoin. Instead, you’ll be paying reasonable loan interest rates in order to purchase products and services using fiat — all while usually paying fewer taxes, depending on your jurisdiction. As a lender, you will earn interest on the bitcoin you’re lending.

In traditional finance, trust between borrowers and lenders must be necessarily ensured by financial institutions that face enormous risks in offering their money to customers. This is why banks and institutions must take strict verification procedures to minimize the chance of losing their money.

By lending cash in exchange for bitcoin as collateral, businesses do not need any other verification; they will hold the cryptocurrency until the loan is paid back entirely, either in installments or in one lump sum at the end of the term.

This type of loan will also satisfy the borrower who enjoys a service that is permissionless and is mostly a private matter. In emerging countries, ordinary people can’t easily get traditional loans from banks. With bitcoin ownership, they finally have the chance to use it as collateral for loans, which is a game changer for billions of people worldwide.

We’ll go into more detail in the “How Does It Work” section. However, what has been discussed up to here should already give you an idea of the impact bitcoin lending can have in the financial world.


Bitcoin lending is rapidly growing in the world of cryptocurrency finance. However, you should keep in mind that the industry is still in its infancy; there are risks associated with the early days of the technology, coupled with financial hazards.

Here are a few of the drawbacks to consider before using bitcoin as collateral to take up a loan:

  • Collateral loss through bugs in the smart contract or peg.
  • Collateral loss through hacks, especially in CeFi platforms.
  • Collateral loss if capital dips below the threshold in the event of a bitcoin price drop. For example, in the case of a margin call, borrowers could lose all or part of their capital if they don’t top up the collateral with more bitcoin.
  • Some of DeFi lenders are decentralized autonomous organizations (DAOs), so if something happens and you lose your bitcoin, there is no corporation or entity you can sue.
  • Rehypothecation and eventual insolvency by the platform.

How Does It Work

The Bitcoin base layer (also referred to as L1 or Layer 1) is the most immutable, trustworthy, robust and decentralized of all blockchains. This is achieved via a tradeoff: the base layer’s capabilities are very narrow by design and can only support a limited number of basic transactions. Bitcoin is unscalable if you’re limited to the base layer. However, its solid foundational structure is perfect for building upon, enabling development on top of its network to build DeFi and smart contract platforms.

Bitcoin was designed to scale in layers; even Bitcoin’s pseudonymous creator, Satoshi Nakamoto, suggested the possibility in 2010, unlocking a new surge of innovation that can massively expand the Bitcoin economy.

Here we look to the future of Bitcoin and how this ecosystem will be built. We’ll highlight some projects that are bringing new use cases to Bitcoin.

The Bitcoin base layer was built to support settlements, not payments. So, for instance, payments are faster and cheaper on the Layer 2 Lightning Network or Liquid sidechain, but remain secure as they settle on Bitcoin’s base layer. Similarly, Layer 2 side chains like RSK or Stacks — they’ll be discussed later — provide functioning smart contract capability that settles on the base layer without changing it.

To sum up, the base layer is the foundation that ensures decentralization, censorship resistance and a sound environment, while experimentation occurs on the upper layers — along with increased risks.

Improving Bitcoin Layers

Major scripts’ improvements on the Bitcoin mainchain, like DLCs (Discreet Log Contracts) and Taproot that allow more efficient and faster transaction verification, inevitably bring benefits to the interaction between the base layer and the multiple Bitcoin layers, too.

How It Works For Individuals

It would be best if you did your research to find the most suitable Bitcoin DeFi lending platform. You are giving your money to a centralized entity or an escrow that will hold it until you pay back the loan, so you should ensure your money is safe.

The lending or borrowing process is usually straightforward, supported by user-friendly interfaces and little to no verification required. Strategies exist to help you save money or reduce fees and the risks of being liquidated. For example, you should try to keep the total portfolio loan-to-value (LTV) ratio at 20% to better withstand a possible 50% drawdown in BTC price.

Your primary strategy should work around the LTV element because you risk getting liquidated if the loan’s bitcoin collateral falls in value, making it a margin loan unless you keep topping up with additional bitcoin. Exploring such strategies will better prepare you for facing loan challenges.

Read More >> Learning From Bitcoin Loan Strategies

Where To Get A Bitcoin-Backed Loan

Bitcoin’s native Script language is technically capable of supporting some limited smart contracts; however, it is cumbersome and restricted to prioritize security over programmability. Hence, side chain solutions that settle on the main chain are preferred methods to manage smart contracts and enable DeFi services like borrowing or lending against bitcoin.

Here are some popular and efficient solutions to choose from if you are considering taking out a bitcoin-backed loan.

Sovryn Zero

Sovryn is a decentralized trading and lending protocol built on RSK (Rootstock). RSK is a Bitcoin sidechain that is simultaneously merge-mined with Bitcoin for enhanced security. It has a native currency called RBTC, which is meant to be a 1:1 BTC peg.

BTC conversion to RBTC is required to access Zero, a decentralized protocol that enables customers to borrow ZUSD — a USD-pegged stablecoin — with zero interest using BTC as collateral. People must still place trust in an intermediary, in this case, the centralized platform.

The Sovryn loan’s minimum collateral ratio (collateral/debt) is 110%, which means that you must keep your loan collateralized above 110% at all times, without exception. BTC must first be converted into RBTC and then transferred to the Rootstock bitcoin sidechain to be used as collateral. Sovryn claims that the Zero protocol is non-custodial, governed by stakers according to the Bitocracy protocol rules, and operated by smart contracts that users interact with in a KYC-free manner.

FUJI Finance

Fuji is a Liquid-based non-custodial protocol that enables the borrowing of synthetic assets (tokens that are digital representations of derivatives), such as stablecoins and synthetic stocks or bonds, against over-collateralized bitcoin positions.

Anyone can use Fuji to borrow any asset offered on the platform after locking L-BTC (Liquid Bitcoin) as collateral in a smart contract. The smart contract creates 1 fUSD (Fuji USD) for each $1.50 worth of BTC locked. More collateral automatically decreases the risk of liquidation.

The borrower can always get the entire collateral back once the debt is settled. Repayment occurs upon burning the same amount of Fuji assets issued for this collateral, plus a small 0.25% payout for the redemption of the locked collateral.


Ledn is a Canadian cryptocurrency platform that provides BTC and USDC savings accounts to its customers, who can earn interest on these assets or borrow against them. Ledn provides Proof-of-Reserve attestations overseen by an independent certified public accountant.

Clients’ privacy is preserved with a unique anonymized ID for every client reference number; the individual’s identity is never revealed to the independent accounting firm. Moreover, Ledn uses BitGo for cold storage of clients‘ deposited bitcoin and doesn’t rehypothecate their collateral assets (i.e. doesn’t lend them to other parties) to earn extra revenue.

Ledn bitcoin-backed loans require an initial LTV ratio of 50%. When it reaches 70%, Ledn starts warning the borrower that it will liquidate enough BTC to repay part of the debt. If the LTV hits 80%, then all of the collateral Bitcoin will be liquidated unless more collateral is added to the loan.

Ledn only requires one payment at the end when the client wants to close the loan and avoids monthly interest payments, which is more convenient for the borrower.

The company has also started rolling out bitcoin mortgages in Ontario, Canada, allowing borrowers to use BTC as collateral in addition to the property’s value to secure the loan. Pairing it with the property’s value, the mortgage becomes overcollateralized, meaning that the collateral backing a loan is worth more than the loan itself, drastically reducing the chances that a loan is liquidated.


In 2023, P2P (peer-to-peer) bitcoin trading and lending company Hodl Hodl will launch the new platform Debifi, which will allow users to borrow long-term loans in stablecoins and fiat currencies using their bitcoin as collateral.

Some financial institutions have already shown interest in joining the platform as lenders. The platform already offers bitcoin-backed loans, but support by better liquidity providers such as banks should be an added benefit for Hodl Hodl and its customers.

Their current offer includes non-custodial P2P bitcoin-backed loans that both lenders and borrowers can benefit from anonymously, and by setting their own terms, including loan duration, interest rates, and currencies used.

The company creates a multisig escrow contract where the borrower’s bitcoin is held. The lender transfers the loan amount to the borrower according to the contract. When the loan is repaid, the lender releases the bitcoin back to the borrower’s wallet.

Unchained Capital

Unchained Capital is a bitcoin-only financial services company offering bitcoin-backed loans in the U.S. The Texas-based company was established in 2017 to offer bitcoin collaborative custody, trading, and lending.

Long-term bitcoin holders can apply for loans and get a decision rather quickly, usually within 24 hours. It provides no rehypothecation and no credit checks; all that is required is a bitcoin deposit as collateral.

Fees and interest rates are variable depending on duration, but annual percentage rates (APRs) start at 12.58%, interest rates at 11%, and origination fee at 0.75%.

Verify 21

This bitcoin-only financial services company was established in July 2022 in Europe to serve bitcoiners worldwide. Verify21 aims at offering a simple and transparent loan set-up, claiming that applying for a loan takes as little as five minutes, although some form of verification will be needed for KYC purposes.

Initially funding is only available in USD stablecoins, with fiat currencies and bitcoin expected to be added in 2023*. Only bitcoin is accepted as collateral on Verify21, the platform has no token and the platform does not rehypothecate client bitcoin or lend out client collateral to other borrowers. Bitcoin collateral is stored with institutional custody partners. Verify21 undertakes a bi-annual proof of reserve audit.

Initial loans are offered for a one year term at an interest rate of 10%, with an origination fee of 2.5%. This brings the total APR on the loans to 12.5%*

The company will notify borrowers that they need to top up their collateral when the bitcoin price falls drastically and approaches a risky LTV ratio. If the bitcoin price continues to fall and no collateral top-up has occurred, Verity21 will be forced to liquidate client loan collateral, settle the loan and return any excess loan collateral to the client“

Atomic Finance

An interesting project that is undergoing its Beta phase is Atomic Finance, a bitcoin-only financial services business that wants to provide sound finance to bitcoin holders.

They are currently testing a way to earn a yield on bitcoin without giving up custody, using Discreet Log Contracts (DLCs) that preserve users’ privacy and self-sovereignty. Such smart contract protocols do not need the creation or use of a native token different from bitcoin to unlock DeFi capabilities on the blockchain.

A DLC consists of two parties sending funds to a multisig address in order to bet on a particular outcome based on some pre-established condition being met. For example, bitcoin’s price at a certain point in the future. An agreed-upon oracle (a party that bridges smart contracts with off-chain data like the price of bitcoin, in this example) — or oracles — sign a transaction that attests the outcome of the event once the result is known. The DLC participant who bet correctly on that outcome will now be the only one who can claim the funds from the DLC multisig.

Other companies looking to follow the same model as Atomic Finance are DG Lab and SuredBits. They are considered the purest forms of bitcoin finance as they allow DeFi to solely use bitcoin without other native tokens to function.


Zest protocol is an on-chain bitcoin capital market that allows clients to borrow cash from liquidity providers (LPs) who join professionally managed lending pools. LPs can earn 4-6% bitcoin yield this way, while borrowers can obtain on-chain bitcoin loans directly against their balance sheets. Zest is exclusive to institutional and corporate borrowers at this stage.

Strict KYC procedures are applied to borrowers who must be approved following a standard process.


Bitcoin’s Layer 2 DeFi lending platforms could shape the future of finance in a way that has never been experienced before. They are less dependent on the banking system and fairer to the participants, with no borders or censorship allowed in a permissionless environment.

All of this is being built before our eyes on top of the immutable, robust and trusted Bitcoin protocol. It’s opening opportunities that everyone will be able to seize.

That being said, to engage in DeFi is to relinquish control of your bitcoin. Losing access to your bitcoin permanently is a risk you must be comfortable with. So caution is advised. If you’re willing to take the risk, then let it be with a small portion of your bitcoin. 


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