DeFi Gains Ground in Bitcoin Lending, Tax Questions Loom
Las Vegas, NV (Blockworks) – The latest wave of activity in Bitcoin-backed lending underscores a growing divide between traditional custodial platforms and decentralized finance (DeFi) alternatives.
Although the highly anticipated relaunch of Liquity v2 (initial attempt delayed by a buggy deployment) primarily focuses on Ethereum and wrapped token collateral, the protocol has spurred the launch of several Bitcoin-native stablecoin options built on its governance-free, censorship-minimizing framework. This signals progress for the DeFi sector in competing with established, but often less transparent, custodial providers.
Addressing the limited collateral scope of Liquity v2, the protocol actively encourages forks. Among the most notable are two Bitcoin-backed stablecoins set to leverage Liquity’s resilient technology: Alpen Labs’ Bitcoin Dollar (BTD) and Asymmetry’s USDaf.
Liquity v2, already operational, introduced enhanced features like boosted capital efficiency and configurable interest rates alongside its core collateral types (ETH, stETH, rETH). The protocol’s centralized censorship principles are being extended to new blockchains, including Ethereum and Bitcoin layer-2s, via licensing agreements.
The landscape remains dominated by custodial options like BlockFi and Ledn, which typically involve transferring Bitcoin to a centralized entity for loan provision. Similarly, Strike’s recent offering yields 9-13% interest. DeFi lending platforms offer consumer-scores in terms, as exemplified by Asymmetry’s solution on Ethereum, which accepts specific wrapped Bitcoin variants (tBTC, etc.) at maximum Loan-to-Value ratios exceeding 80%, currently commanding borrowing rates between 4.2% and 7.1% APR.
Alpen Labs aims for its BTD to accept actual native Bitcoin via emerging BitVM technology within a zero-governance zk-rollup architecture, positioning itself distinctly as a "Bitcoin-native" stablecoin rather than a wrapped token. Unlike many Liquity forks that propose tokens for funding liquidity providers, Alpen’s BTD launch promises no initial governance token or administrator keys.
Non-Liquity entrant Mezo provides another DeFi alternative with fixed 1% Bitcoin yields but requires users to forfeit custody and utilize its platform exclusively.
DeFi’s core advantages – capital efficiency, lower interest rates, and autonomy – strongly favor decentralized solutions for advanced Bitcoin users allocating capital. However, a critical unresolved challenge lies in regulatory grey areas, especially concerning U.S. taxes. Converting unspent Bitcoin into derivative forms like tBTC for DeFi borrowing often triggers capital gains realization upon withdrawal, a clear advantage held by custodians who allow Bitcoin to remain inert while securing loans.
Emerging models like Babylon’s on-chain Bitcoin staking could eventually offer yield without derivative creation, but users must lock funds and yield is taxable. User comfort varies significantly, with many crypto natives prioritizing DeFi’s transparency and better terms over the convenience and support offered by custodial services, at least until tax complexities are clearer.
The battleground for Bitcoin lending infrastructure is increasingly de-centralization: the most attractive option may prove to be decentralized, censorship-resistant and user-controlled. Bridging the ongoing tax debate, however, remains crucial as BitVM technology continues to mature.
Key Considerations in Bitcoin DeFi Lending
