TLDR:

• Lava is the superior option for bitcoin-secured loans because it is the most:

Simple: Answer 2 questions and get a loan within seconds — all through your vault.

Reliable: Lava is bug-minimized and trust-minimized, offer a secure alternative to custodial services which have lost over $24B in customer funds.

Borrowing against your bitcoin is a strategic move as means to streamline tax commitments or amplify BTC exposure. Yet, accessing bitcoin-secured loans is costly and slow, and all available solutions require users to trust centralized entities, which in 2022 alone lost over 24 billion in user funds. People need a better solution: the Lava Loans Protocol. Borrowing using Lava is:

• Simple:

  • Fast: No documentation required, just answer 2 questions and get a loan in less than 5 seconds.

  • Low-Cost: By reducing loan costs and risks, we’re able to offer the lowest rates in the market.

  • Flexible: You can request any loan amount.

• Reliable:

  • Trust-Minimized: Eliminating points of failures increases security of the systems we use. At Lava, we build our systems to offer cryptographic security, so our protocols are robust beyond mere legal or reputational assurances.

    • Custodial Risk: Traditional platforms expose you to bridge, custodian, or bank risk. Lava lets you borrow against native-BTC directly in your vault. This means there can’t be rehypothecation, funds lost in custodial hacks, and asset confiscation.

    • Loan Initiation Risk: While other platforms require blind trust during loan initiation, Lava uses atomic swaps to ensure your BTC collateral only moves to the escrowed smart contract once the loan is in your hands.

    • Loan Repayment Risk: The uncertainty of receiving collateral post-repayment is a concern with many platforms. Lava uses cryptographic guarantees to ensure that once you fulfill your repayment, your BTC is promptly returned.

    • Liquidation Oracle Risk: Why trust a lender who can liquidate your BTC unjustly? With Lava, you choose your off-chain, blinded oracles per loan to provide price data, drastically reducing risks from malicious entities.

    • Verification: You can check on-chain that your collateral is secure (not being rehypothecated).

  • Bug-Minimized:

    • Security: Lava’s bitcoin smart contract is formally-verified, meaning the output conditions to the contract are known ahead of time, minimizing technical risk. DLCs, the underlying technology Lava uses, use pre-signed, encrypted transactions to specify the output conditions to a contract ahead of time. Since all the output conditions to the contract are specified ahead of time, and then encrypted using adaptor signatures, the output conditions are known (money can only move to borrower/lender).

Below, you can find two charts comparing Lava with other bitcoin-secured loans options in the market. Since these other fragile loan providers go bust every few months, some of the options listed here might not be available anymore.

How it Works

In the Lava Loans Protocol, a loan goes through several states:

• Initialized: The loan is initialized via a trustless swap, resulting in the bitcoin collateral being locked in the bitcoin smart contract and the loan capital being accepted by the borrower.

• Active: The loan is active, meaning the bitcoin collateral is locked in a smart contract and the borrower has received their loan capital. After a loan is active, it can terminate in one of the following ways:

  • Repaid: If the borrower repays the loan, the collateral is released to the borrower atomically.

  • Liquidated: If the loan value reaches a pre-determined LTV, the collateral is immediately released to the lender for liquidation.

  • Expired: If the borrower does not repay the loan before the loan term ends, some of the collateral, equivalent to principal plus interest, is released to the lender, and the rest is sent to the borrower.

  • Fail-safe: In rare scenarios where the loan process cannot be completed as expected due to unresponsive oracles, the protocol has built-in fail-safe mechanisms. These mechanisms ensure that the collateral is not lost.

FAQ

• What are oracles?

  Oracles are independent parties attesting to the price of bitcoin. At Lava, we’ve built Sibyls, an open-source oracle implementation for bitcoin. Users can choose their own oracles, and oracles have zero knowledge about the contracts they influence. In the case of the Lava Loans Protocol, oracles also make off-chain attestations, and in doing so, this helps us avoid the increased fees and miner manipulation that comes from on-chain oracles. Learn more about oracles here.

• Why does Lava use digital dollars?

  The Lava Loans Protocol requires from the system the ability to support smart contract functionality, such as HTLCs. This is necessary for trust-minimized initiation and repayment. Since dollars (and generally speaking, any fiat money) do not provide this functionality, we have to use digital dollars, for example on Solana, to let you borrow dollars. You can instantly withdraw digital dollars to your bank account using the Lava Vault.

• What are bitcoin smart contracts?

  Bitcoin smart contracts (also known as discreet log contracts) enable conditional (oracle-based) contracts on bitcoin. The way it works is that each party to a contract creates and shares encrypted signatures for each output condition to the contract. Each counterparty has confidence they can decrypt the encrypted signatures and use them correctly at the right time because they can verify the encryption: verify when they can decrypt the signatures and that the signatures are valid.

  Bitcoin smart contracts are a better way to do smart contracts because they are secure, private, customizable, and scalable. They mitigate bug risk because they are formally verified, meaning the output conditions of the contract are known from the beginning. This helps avoid exploits you constantly see in Ethereum. Since these contracts use off-chain oracles, they aren't susceptible to oracle manipulation by miners. Not only that, but these contracts are private, customizable (choose your own oracle), and scalable (minimal on-chain cost because execution happens off-chain).

  These contracts are zero knowledge in that the blockchain has zero knowledge about the contract, the oracles have zero knowledge about the contract, and the counterparty can verify the encryption without needing the decrypted material.

• Where can I learn more?

  If you want to learn more about the Lava Loans Protocol, check out the loans paper here: https://github.com/lava-xyz/loans-paper/tree/main