• Bitcoin itself is not to blame for the various crises in the bitcoin lending space, but instead it is the lenders who have failed.
• Trusted third parties are security holes, and this was true before Bitcoin.
• Most bitcoin lending platforms are not well conceived, developed or managed, resulting in poor incentives and difficulty to generate yield.
The bitcoin lending space has been affected by a number of major issues in the recent past, ranging from the fallout of the Terra/Luna crash that impacted Celsius, BlockFi, and FTX, to liquidity challenges due to the sustained price drawdown, and varying accusations of market manipulation. All of these have led to substantial losses, bankruptcies, and a reshaping of the lending landscape. As a result, many users have lost faith in bitcoin-based lending services, and the market appears to be at its historical low in terms of both volumes and public confidence.
The mainstream media has often blamed the BTC itself for such issues. However, this is not the case – Bitcoin itself is not at fault, but rather the lenders who have failed. This is due to the fact that custodial lending platforms are trusted third parties, owned and managed by private entities. As such, these entities are security holes, just as it was true before the advent of Bitcoin.
Even more significantly, many bitcoin lending services are not well constructed, developed, or managed. This is not necessarily due to bad code, as the code may be well written and sufficiently secure, but instead it is the incentives that arise from the design of the lending platforms that are often the issue. If the focus is to treat Bitcoin as a yielding asset, it is likely that there will be problems.
As time goes on, it is becoming increasingly clear that many parties involved do not understand how yield is generated. This is why it is essential to have a well-conceived, developed, and managed approach to lending Bitcoin. Otherwise, it is likely that the same issues will arise again and again.
