Zero Fixes This: Borrowing Against Bitcoin with Zero vs. CeFi

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September 13, 2022

If you are a bitcoiner, you HODL. Through ups and downs in the price, through an onslaught of FUD, bitcoiners tenaciously keep their bitcoin. But HODLing is hard. Just like everyone else, bitcoiners need to eat. Bitcoiners need to buy clothes and cars and houses and phones too. How can you hold on to as much bitcoin as you can and still pay for living expenses and big-ticket items?

Bitcoin-Backed Loans

One solution is to borrow against your bitcoin as collateral. Just as you can take out a home-equity loan, you can get a bitcoin-equity loan. Financial institutions offer an array of loan products to address this need. 

Sovryn also offers a way to borrow against your bitcoin—Zero. Zero allows you to borrow ZUSD, a dollar stablecoin, at 0% interest. How does Zero stack up against the lending products of centralized financial (CeFi) institutions? We conducted some research into these programs and made some interesting discoveries. The information we found is summarized in the table below.

DeFi Versus CeFi Loans

The most obvious difference between Zero and CeFi lenders is the cost. If you’re borrowing as a way to continue holding bitcoin, the interest rate must be very low, or you’ll have to sell your collateral to pay the interest. CeFi interest rates typically vary from 1% to 14%, depending on the loan-to-value (LTV), the length of the loan, and other conditions. However, for long-term loans, the rates are typically 9-14%. Zero charges no interest.

Another difference is the LTV. Most lenders will not allow an LTV higher than 50%. Zero allows an LTV as high as 90.9%, although 67% is the recommended upper limit. So you can borrow more money against your collateral with Sovryn.

Most CeFI lenders have a payback schedule and limit the loan to 3 to 5 years. Zero has no payback schedule, and you can hold the loan as long as you like. 

Most CeFi lenders require KYC especially for larger loans, and many restrict their products to certain jurisdictions. Zero allows you to take out a loan with complete privacy. In addition, the loan protocol is permissionless and is not restricted to specific jurisdictions.

Bitcoiners understand “not your keys, not your coins.” This became painfully clear when Celsius, one of the lenders in our table, lost the collateral of borrowers by making risky loans. They were unable to give back the collateral at the end of the loans. Celsius has now filed for bankruptcy.

In contrast, Zero does not require you to give up custody of your keys. Your collateral is locked into a smart contract in a trust-minimized Bitcoin sidechain (RSK). The smart contract acts programmatically exactly as you have instructed it to do according to the terms of the loan. No third party can access your collateral, and it is not used in any way while you have a loan. When you are ready to unlock your collateral, you repay your loan as agreed and the bitcoin is free for you to use again.

Zero Tradeoffs

Zero has its own tradeoffs as well. Zero charges a one-time up-front origination fee of 0.5%. This amounts to about one month or less of interest at typical interest rates. Some CeFi lenders have this charge as well; others don’t. Most of the ones that don’t have an origination fee have an early withdrawal penalty to guarantee a minimum fee regardless.

Most of Zero’s disadvantages occur when your collateral ratio is too low. If your collateral value falls below 110% of the loan value, your collateral will be liquidated. You can keep the ZUSD, but you will lose 110% of that value in collateral. Furthermore, anyone who holds ZUSD can redeem it for the equivalent value in bitcoin from the collateral of the user with the lowest collateral ratio. This doesn’t represent a loss in value, but it represents an involuntary swap of assets. The solution to both of these disadvantages is to maintain a higher collateral ratio.

Zero also has potential risk in terms of an undiscovered bug in the smart contracts that execute it. These have a strong track record as well as a record of successful audits and detailed internal code reviews. All these factors confirm the security of Zero.

Back to Zero

The information above shows that Zero compares favorably to CeFi bitcoin lending in almost every category—no interest, no payback period, high LTV, privacy, and no third party who takes custody of your bitcoin. Zero is the obvious choice for bitcoiners who want to retain ownership of their bitcoin while tapping into some of its value now.

If you’re interested in how Zero can offer interest-free loans with no payback period, see If Bitcoin Is Magic Internet Money, Zero Is Magic Internet Borrowing.

Stay Sovryn

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