Economic Model

The economic foundation of HodlFi can be understood by viewing each loan as equivalent to a structured option position. This framing makes clear how risk and return are distributed between borrower and lender, and how the protocol balances both sides without liquidations.

• From the lender's perspective, a loan works like selling a cash-secured put option on Bitcoin. The principal is the strike price, and the lender receives interest plus a volatility premium. If repaid, the yield is earned; if defaulted, the lender takes the collateral. With an external protective put, even a deep crash is covered, keeping outcomes predictable and capped.

• From the borrower's perspective, interest and the option fee act as an insurance premium. The borrower gains liquidity while keeping the right to reclaim Bitcoin at maturity. There are no margin calls or forced liquidations, since volatility is absorbed off chain. The cost is transparent and varies with external option markets.

This design separates time value from volatility cost. Interest is tied solely to the duration of the loan, while the option fee reflects the level of volatility implied by markets. A higher loan-to-value ratio or a longer tenor raises the premium, because the lender must absorb greater potential risk. Lower LTVs or shorter terms reduce costs. Borrowers can therefore choose their leverage on a continuum, paying proportionally for the protection they require, while lenders are compensated in line with the exposure they underwrite.

The logic becomes clearest when examined through concrete scenarios:

• 50-Day Loan Term: At ~50% LTV, insurance cost is negligible (≈0%). As LTV rises, the premium grows non-linearly, steeply after ~75%. At 95% LTV, the fee is ~4–5% of loan amount for 50 days, reflecting the thin collateral buffer and sharply higher default risk.

• 106-Day (≈3.5 Month) Term: Longer duration raises volatility risk, so premiums increase across all LTVs versus the 50‑day loan. Around 75% LTV, the premium is ~2% (vs. near 0% for 50 days). Near 100% LTV, the premium reaches ~7–8%. The curve remains gentle at low LTVs then steep after ~75%, showing that high‑LTV, longer loans become much more expensive as time exposure grows.

• 288-Day (≈9.5 Month) Term: For loans approaching a year, insurance costs rise steeply. Even 50–60% LTV may carry a few percent premium. By ~85% LTV, fees reach double digits, and near‑100% LTV over 9 months demands 15–20% upfront. In short, borrowing almost the full BTC value for nearly a year is very costly, reflecting the extreme risk of such leverage.

These examples, based on real option data, highlight the principle that avoiding interim liquidations carries a predictable, market-based cost. High leverage or long maturities demand higher premiums, while conservative borrowing remains inexpensive. Both borrowers and lenders clearly see the trade-offs. Borrowers pay transparent market prices for protection, and lenders earn fixed returns with hedged downside.

What HodlFi provides is flexibility. Borrowers can choose between higher leverage at greater cost or lower leverage at reduced cost, and they may roll or extend loans at suitable times rather than only at maturity. Adding collateral to reduce LTV functions like proactively topping up before a margin call, but the key difference is that the borrower acts by choice rather than under forced liquidation. Traditional margin systems can trigger liquidations during network congestion or volatile crashes, creating systemic risks. By contrast, HodlFi transforms these risks into predictable costs, allowing borrowers to manage positions actively and lenders to remain protected.