Lava’s Self-Custodial Bitcoin Borrowing Platform

Lava has developed a self-custodial Bitcoin borrowing platform. Unlike traditional crypto loan services that take custody of users’ assets (and sometimes engage in risky practices like rehypothecation), Lava is self-custodial and leverages native bitcoin smart contracts (DLCs) to enable a more secure borrowing experience. The platform’s primary product is the Lava Vault, available on mobile and desktop, which serves as a secure, self-custodial wallet and borrowing interface. It uses advanced security features, such as device-based secure chips for private key management and biometric/two-factor authentication, to ensure user funds remain safe. Lava also offers encrypted backups to mitigate the risk of fund loss from a single point of failure.

Lava’s Loans product enables users to borrow dollars against their Bitcoin holdings, providing liquidity without requiring them to sell their Bitcoin. This is particularly appealing to Bitcoin HODLers who want to maintain long-term exposure to BTC’s potential appreciation while accessing cash for immediate needs. Lava’s unique Discreet Log Contract (DLC) technology enables it to provide these loans on a self-custody basis, reducing counterparty and rehypothecation risk.

Stablecoin Integration – LavaUSD

Lava has launched its own stablecoin offering – LavaUSD – to combine Bitcoin with dollar-based spending. LavaUSD is redeemable 1:1 for the US dollar via reserves invested in cash and highly liquid instruments. The reserve portfolio contains a mix of short-dated US Treasuries, overnight US Treasury repurchase agreements, and money market funds all custodied with partners such as BlackRock and Fidelity. LavaUSD enables users to make payments anywhere in the world frictionlessly.

Why They Launched It:

• Instant and Global: LavaUSD extends the stability of the US dollar to a global user base while maintaining the trustlessness and security of modern cryptography. All transactions are instantaneous and settle 24/7/365, with support for instant on and off-ramps to fiat currencies around the world.
• Lower Cost: As programmable digital dollars, transactions are much cheaper and more efficient to process, avoiding unnecessary fees and friction in the fiat banking system.
• Rewards: LavaUSD makes it easier to distribute yield, points, and other exclusive benefits to users.
• Security: Lava provides larger institutions with detailed reports attesting to the backing of LavaUSD on demand. The reserves are held in segregated, bankruptcy-remote accounts with regulated financial institutions, ensuring that they are fully protected.
• Cross-Chain Swaps: The platform supports stablecoins on other networks, using atomic swaps to secure Bitcoin collateral for borrowers while providing stablecoins to lenders. Lava plans to expand support for multiple networks.

The team has attracted significant investment, having raised $30 million from investors including Khosla Ventures and Founders Fund. In December 2024, they secured $10 million in a Series A funding round.

The Case for Spending BTC vs. Spending Dollars

Recently, a tweet by Caitlin Long, amplified by Congresswoman Cynthia Lummis, received pushback from Bitcoin proponents who favor using BTC directly rather than perpetuating the fiat system. Spending BTC directly with merchants strengthens Bitcoin’s network effect and encourages adoption but faces hurdles, including:
– BTC’s price appreciation potential may be jeopardized; spending now forgoes future gains, especially as its price could rise to $200,000 by 2030.
– Tax implications in many regions, including the U.S., treat BTC as property, making spending it potentially taxable, which discourages its use.

Why Holding BTC Outweighs Spending Now

Given BTC’s upward trajectory, spending it could undermine wealth preservation. Analysts suggest retaining BTC maximizes appreciation, while using Lava’s lending model offers immediate liquidity without selling. A buy-back strategy can allow users to access cash by borrowing against their Bitcoin without losing long-term exposure.

Mitigation Strategy: Buy-Back Mechanism

By borrowing dollars against BTC through Lava, users can maintain their cryptocurrency holdings while spending, allowing them to repurchase BTC later under favorable conditions. This strategy alleviates tax liability and aligns with the goal of wealth preservation. As Hyperbitcoinization approaches, the challenge between holding Bitcoin and using traditional currencies is pivotal, reflecting Bitcoin’s evolution as a dominant global currency.

Disclaimer: The author’s views are his own and do not represent the opinions of his employer or its affiliates, nor should they be considered financial advice. Always conduct your own research before making financial decisions.