Borrowing Against Bitcoin Without Selling It
Bitcoin holders who need cash can borrow against their coins without selling them. However, there's a catch: the loan must be on another network.
The complication arises because blockchain lending applications run on Ethereum, which keeps its own record of ownership. Since Bitcoin owners' coins are recorded on Bitcoin's network, an application cannot simply take the coin as collateral.
One solution is to entrust the Bitcoin to a custodian, which holds it for safekeeping. The custodian issues a digital token that the lending application can accept. This arrangement allows borrowers to unlock a loan without selling their coins, but it changes what they depend on: the custodian holding the coin, the rules for getting it back, and the token's value.
Several companies offer competing versions of this arrangement, including Coinbase, Circle, and WBTC. Each offers a version of the same proposition: BTC held in custody with a transferable token issued against it.