The perils of centralization
Why do centralized platforms fail?
As we have seen throughout the current year, and more precisely during November, many centralized lending platforms went bankrupt or are about to do so. While many people still wonder what could have triggered such a debacle. The reality shows us that everything was done wrong from the beginning, mainly for wanting to apply the old recipes of the traditional fiat financial world to something totally new, different, and revolutionary like Bitcoin and for wanting to take advantage of human greed and the ignorance of the general public regarding this new paradigm.
The traditional fiat financial system insists permanently (and has been doing for several decades) that it is essential to obtain a yield from our money in any way possible, whether by placing it at a fixed term in a bank or buying stocks, or sovereign bonds, or anything else that assures some kind of profit. But they never explain why this should be done in the first place, and why not simply save the money earned by working hard and not touching it, as our grandparents or great-grandparents did all their lives. And they do not explain it precisely because they simply have no incentive since they are the ones responsible for the root of the problem.
In collaboration with the corresponding governments, the banking system has destroyed one of the main characteristics of sound money, the Reserve of Value. And they have done it increasingly over several decades by simply creating money out of thin air without any backing or productive counterpart, therefore, our money, like any other good that became abundant, was losing value year after year.
The loss of purchasing power of money due to unsustainable monetary issuance caused the general public, companies, and even entire countries to be forced to “invest” their money in something that would at least allow them to preserve their purchasing power. In this way, the economy was “financialized,” forcing everyone to become financial experts to be able to preserve the value of their work over time. Nothing more perverse!
Nowadays, a doctor has to waste his time learning financial juggling instead of attending the patients, an architect has to study credit risk management instead of designing the next building, and so on with any case we can think of. And those who do not feel qualified for that task are forced to hire some “expert” in the field of finance to assist them, having to use part of their income to pay these professionals, who, if there were sound money, would not be necessary.
Over the years, this perverse financial/government scheme has convinced people that money MUST always be invested. But that is NOT the case with sound money!
Bitcoin’s arrival took virtually everyone by surprise, and its intrinsic good-money characteristics, even today after 13 years of existence, are misunderstood by most. Much of the public treat Bitcoin the same way they treat fiat money, and they “invest” it to make a profit on it, when in the case of Bitcoin, this is NOT NECESSARY!
Bitcoin can NOT be inflated!
Bitcoin cannot be created out of thin air!
Bitcoin cannot be printed without effort!
Bitcoin cannot be generated to pay deficits!
Bitcoin cannot be diluted by monetary emissions!
Therefore, Bitcoin should only be treasured, not invested in, as it represents something that has not been in human history before: absolute scarcity!
Since Bitcoin cannot be devalued via issuance, and its monetary fundamentals cannot be degraded in any way, the idea that Bitcoin has to generate yields is meaningless. Bitcoin is a “Digital Rarity” and, as such, can be “collected” or hoarded as an extraordinary commodity that is becoming increasingly difficult to obtain and will become even more so in the future.
However, as most people still believe that Bitcoin should be invested as if it were fiat money, many unscrupulous individuals created platforms where they offered very attractive interest rates to anyone who “invested” their BTC holdings in their companies and then offered “soft” loans against their clients’ Bitcoin. All this was already in itself the breeding ground for the scam. Still, not content with capturing their users’ money and BTCs, these platforms created their own tokens out of thin air and unilaterally assigned them a fictitious value, and then would use those crap tokens, together with their customers’ BTCs, as collateral to take even more credits in other companies that in some cases belonged to the same group.
The perfect recipe for total disaster!
Everything was going very well during the bull market, and these fraudulent schemes multiplied like bacteria in the perfect breeding ground of the moment, which was enhanced by the zero or negative interest rates offered by the traditional financial market, already drowning in its debts. But as everything that goes up then has to come down, when the strength of the bull market weakened, and we started to move into a bearish situation, all those tokens created out of thin air lost value before anything else, so the alarms and margin calls started to ring load everywhere. The holders of the junk tokens began to get rid of them quickly, which caused them to lose even more value and triggered a cascade effect that collapsed the whole scheme like a house of cards.
Those companies that had re-hypothecated their users’ BTC could no longer recover them. Desperate people tried to withdraw as much as possible from exchanges and lending platforms. Still, it was too late, and those centralized companies decided to suspend all withdrawals and declare bankruptcy. Billions were lost in this process, and we may still see more defaults in the remainder of the year.
Why didn’t Lend at Hodl Hodl suffer from any of this? Simply because things were done right from the start.
Lend at Hodl Hodl is a P2P platform that connects lenders and borrowers and does not put any custody on the funds of either of them but instead hosts them in multi-signature addresses on the Bitcoin blockchain in the public eye.
Moreover, having only one signature of the two needed to move the funds from the escrow address makes it impossible for Lend at Hodl Hodl to re-hypothecate the BTC placed as collateral by borrowers.
More importantly, Hodl Hodl is a Bitcoin-only company. We don’t have our tokens and never will. From day one, at Hodl Hodl, we focus on developing the technical tools necessary for our users to perform exchange and lending operations in a secure and transparent way.
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