Custody
5
min read
Bitcoin-backed lending is heating up as the price of Bitcoin soars, offering a way to leverage your Bitcoin without selling it. But not all lending models are created equal. At Firefish, we’ve chosen a non-custodial path for a reason.
In this post, we’ll break down the differences between custodial and non-custodial Bitcoin-backed lending, explore the risks of rehypothecation, and explain why Firefish’s model aligns with Bitcoin’s vision of financial sovereignty.
Whether you’re a Bitcoiner looking to borrow or an investor seeking yield, understanding these models can save your sats.
What is Bitcoin-backed lending?
Bitcoin-backed lending allows you to borrow fiat or stablecoins (like USDC) by using your Bitcoin as collateral, without selling it. Thus, you get to keep your Bitcoin and enjoy long-term appreciation from it while accessing instant liquidity.
However, the way your Bitcoin is handled during the loan process can vary significantly between custodial and non-custodial models.
Custodial Bitcoin-backed lending
Custodial lending involves depositing your Bitcoin with a third-party platform, which holds it as collateral while you receive a loan. Sounds straightforward, right? But there’s a catch: many custodial platforms rehypothecate your Bitcoin.
What is rehypothecation?
Rehypothecation is the practice of reusing your collateral (in this case, your Bitcoin) for the platform’s own purposes, such as lending it out to other borrowers or using it in their trades. This amplifies risk because:
There's lack of transparency: You often don’t know where your Bitcoin is or how it’s being used. The loan agreement can allow them (or their trusted partners) to manage the collateral. This lack of visibility is a red flag.
Counterparty risk: If the platform fails, your Bitcoin could be tied up in their insolvency, making you last in line to recover your funds.
Exchange-like risks: Keeping your BTC on a custodial lending platform is akin to storing it on an exchange. If the platform mismanages your funds, you’re vulnerable.
Why it’s risky
Imagine lending your car to a friend, only to find out they’ve lent it to someone else without your knowledge. If that person crashes it, you’re out of luck. Rehypothecation is similar but with your Bitcoin, an asset that’s supposed to be yours alone.
Non-Custodial Bitcoin-backed lending: The Firefish way
At Firefish, we’ve opted for a non-custodial model since day one. Here’s why:
Your Bitcoin stays yours
In a non-custodial setup like Firefish, your Bitcoin remains in your control via on-chain multisig wallets. You don’t hand over your Bitcoin to a third party; instead, it’s secured by code, not custodians.
This means:
No rehypothecation: Your Bitcoin isn’t reused by anyone else. It stays exactly where you want it, protected by the Bitcoin network itself.
Full transparency: You always know where your Bitcoin is because you control it. There are no “partners” or hidden mechanisms.
Sovereignty: As a Bitcoiner, your financial sovereignty is paramount. Non-custodial lending respects that, aligning with Satoshi’s vision of a peer-to-peer financial system.
How Firefish Works
Firefish’s platform is a P2P marketplace where Bitcoiners can borrow cash (starting at 6% p.a.) while keeping their Bitcoin, and investors can earn fixed interest with Bitcoin-secured loans.
Here’s the breakdown:
For Bitcoiners: Borrow USDC or fiat against your Bitcoin without selling it. Your Bitcoin is held in a multisig wallet, ensuring you retain control. Even if you default, your Bitcoin is only released to the liquidator (to protect lenders) if the loan-to-value (LTV) ratio exceeds 95% or upon non-repayment. Learn more at https://docs.firefish.io.
For Investors: Lend to Bitcoiners and earn yield, knowing your loan is secured by Bitcoin held in multisig. There’s no third-party risk, just pure P2P transactions.
This model ensures that your Bitcoin is always “yours”, and you can HODL while leveraging its value.
Why Firefish chose to be Non-Custodial from Day 1
We at Firefish believe in the power of Bitcoin to democratize finance, but only if it’s done right. Here’s why we chose non-custodial lending:
Aligns with Satoshi Nakamoto's Vision: Satoshi envisioned Bitcoin as a trustless, peer-to-peer system. Custodial lending introduces unnecessary trust in third parties, undermining this vision. Non-custodial lending keeps the power in your hands.
Mitigates risk: By eliminating rehypothecation and third-party custody, we reduce the risk of losing your Bitcoin.
Empowers users: Non-custodial lending lets you borrow against your Bitcoin without compromising your HODL strategy. As Bitcoin’s price rises, you can leverage it for opportunities (like buying real estate or investing in other assets) without selling.
Our decision was driven by a commitment to security, transparency, and user control — values that define Bitcoin itself.
Conclusion
Bitcoin-backed lending is a powerful tool, but it’s not without risks. Custodial models, with their reliance on third parties and rehypothecation, can expose your Bitcoin to unnecessary dangers—much like keeping your coins on an exchange.
At Firefish, we’ve chosen a non-custodial path to ensure your Bitcoin remains yours, secured by code, not custodians. Our P2P platform lets you borrow securely, HODL smarter, and stay true to Bitcoin’s vision of financial sovereignty.
Ready to take control of your BTC while borrowing? Visit firefish.io to learn more and get started.
