Rationals

Traditional crypto lending models expose participants to systemic weaknesses that neither protect borrowers nor fully safeguard lenders.

• Centralized lenders require users to surrender collateral and often rehypothecate assets, creating exposure to counterparty failures.

• Decentralized protocols such as MakerDAO or Aave avoid direct custody but rely on continuous price feeds and liquidation auctions. These mechanisms trigger involuntary liquidations during short-term volatility, frequently punishing solvent borrowers and mispricing collateral.

The core problem is one of risk misallocation. Borrowers are forced to shoulder volatility risk, though they lack tools to manage it effectively. Lenders, meanwhile, remain vulnerable to systemic shocks and uncertain recovery from auctions.

HodlFi addresses these issues by redesigning the borrower–lender relationship:

• Self-Custody & Trust Minimization: Collateral always remains under borrower control in a Taproot script, removing the need for custodians or discretionary intermediaries.

• No Mid-Term Liquidations: Loans run to maturity without margin calls. Borrowers either repay and reclaim their BTC or forfeit it at term, eliminating the stress of forced liquidations.

• Market-Aligned Hedging: Downside risk for lenders is absorbed by an embedded hedge purchased in external markets. This shifts volatility away from borrowers and ensures that protection is transparently priced by professional risk markets.

By structuring loans in this way, HodlFi eliminates liquidation as the default risk-control tool and aligns both sides of the transaction with Bitcoin's principles. Borrowers gain liquidity without fear of losing their long-term position, and lenders earn returns with clear, bounded risk exposure. The specifics of pricing mechanics, cost–leverage trade-offs, and scenario analyses are presented in the Economic Model section.