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The lending is dead, long live the lending

The difference between custodial and non-custodial lending

The Money Changers by Marinus van Reymerswaele

In recent months, market participants saw multiple dramatic events that affected Bitcoin price. However, it not only impacted the price but many custodial crypto lending companies: some of them halted withdrawals, leaving customers with no options, some faced liquidity issues, and some lowered the withdrawal limits.

Unfortunately, while alternative — non-custodial — lending solutions have existed on the market for several years now, many bitcoiners and newcomers still don’t understand the real benefits of these services.

We believe it is time to remind market participants about the benefits of using non-custodial services and encourage our readers to share this post and educate people around you.

The Mona Lisa with keys by Fernand Leger

“Not your keys — not your coins”.

Bitcoiners’ favorite mantra has been criticized by many dubious market participants in the last couple of years. Some even said that people lost their holdings because of “crazy maximalists” who promote self-custody or a non-custodial approach. In fact, lately, people have been losing their bitcoins mostly because they trusted 3rd parties and stored their holdings with them.

The non-custodial approach can be applied to any custodial platform, not only lending but also exchanges and wallets. Speaking of lending, where the custodial approach means that you store your coins within the service provider’s wallets to be able to take a loan against your bitcoins or earn yield. As a result, you lose control over your funds, which in fact, is one of the cornerstones of Bitcoin’s idea. Effectively storing your bitcoins within a 3rd party means transferring them the ownership of your holdings. They can block withdrawals, limit your actions, and generally do whatever they want. The most crucial part is that if the custodial lending platform goes down for whatever reason, you will lose your coins with no opportunity to restore them.

Of course, self-custody is hard. And sure, non-custodial services still lack simplicity and a good UI/UX. But you either learn the lesson the hard way, or you get educated about non-custodial solutions. What is your choice?


One of the main selling points of custodial lending platforms was an opportunity to earn yield using your Bitcoin. On the surface, it looked very promising: you deposit your coins to their platform, stake them and receive regular interest payments. While in the bull market, everything worked well; people received their interest payments and were prone to not hear warnings from other market participants.

But how do you actually earn a yield on top of someone’s Bitcoin? You either re-lend them to other market participants for a higher yield, or you invest them in assets with higher returns. And this is called rehypothecation. This approach works well when everything is growing, and the market is booming. Greed drives individuals and companies to invest more and forget about risk management.

What has happened now is that many lenders appear to have been reckless with their customer’s holdings. Companies that borrowed from them failed to repay their loan obligations because they literally gambled and lost, which created a liquidity crisis. Now many lenders are either closing their withdrawals or trying to borrow to continue operating normally.

The moral of the story is that if you don’t understand where the yield is coming from, most likely, you are the yield.


While not obvious for many, custodial lenders don’t offer you that level of transparency as non-custodial do.

The Cardsharps by Michelangelo Caravaggio

“Don’t trust, verify”.

Another important Bitcoin mantra that fails in case third parties are involved. When you deposit your coins to a custodial lender’s wallet, you will have to rely on the information they share. This means that you cannot verify with 100% certainty that the information known to you is accurate and up to date. In fact, custodial lenders can show you anything they want, protecting their interests and not yours.

Non-custodial service providers, on the contrary, allow full transparency. For example, suppose you borrow against your Bitcoin using a multisig address. In that case, you can always access this address not only through the platforms’ interface but also using any blockchain explorer. With that, you can always double-check that your collateral is stored in the same place and even monitor your escrow account in real-time.


When you use a custodial lending platform, you use it on their terms. Meaning you don’t get to choose rates, LTV, or other conditions, and you just accept what they offer. You don’t have complete flexibility, with minimal options offered.

However, most non-custodial platforms allow you to make your own offers on your terms, allowing you to participate in the open market and choose the best option.

In the first part of our blog, we have outlined the main disadvantages and risks when using custodial lenders. But how do non-custodial lending platforms solve all those issues? Lend at Hodl Hodl can help you solve all the above-stated points.

Every time the contract is started on lend.hodlhodl.com, we create a unique multisignature Bitcoin address for the collateral. This address has 3 keys — one goes to the lender, one to the borrower, and one goes to the platform. The funds from this escrow address can only be moved by having at least 2 out of 3 keys. This means that no party involved has full control over the collateral, which also means that if the platform goes down, 2 remaining keys will be enough to unlock the collateral from the escrow. A few months ago, we published an instruction on how to extract your key, and we are planning to simplify this even more by allowing you to do it easily from the platform’s interface. Furthermore, in August, we will release a special utility allowing borrowers and lenders to release the collateral from escrow without Hodl Hodl’s involvement. Because of our multisig setup, no party, including Hodl Hodl, has complete control over collateral, meaning that we can not move your coins and, as a result, can’t rehypothecate them.

Multisig address is created on the public Bitcoins’ blockchain. This effectively means you can easily monitor your address via any available blockchain explorer, which ensures full transparency and the opportunity to verify the state of your collateral at any point in time.

Finally, Lend at Hodl Hodl is a P2P lending platform. This means that it operates on the core principles of a free market, where lenders and borrowers can create their offers on their terms.

All these advantages allow you to control your funds, verify critical information and play by your own rules.

As a final thought, we believe Bitcoin is super collateral and should be used only to borrow against it, not to earn yield. Earning a 1–2% yield while being able to lose it all is not worth it. And for borrowing purposes, you can use non-custodial solutions that are available out there on the market.

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Hodl Hodl

Hodl Hodl

P2P cryptocurrency trading platform that doesn’t hold funds