"decentralized instrument" is not technically descriptive, this is how DeFi scams and Fake L2's come to be... sounds good conceptually until reality is considered

Also there's no such thing as a smart contract, there's always some externally oracalized information tantamount to a signer

You can't simultaneously secure a loan with Bitcoin and maintain unilateral self-custody, either the lender has rights or they don't. 3rd party escrows enter the chat for trust distribution, a borrower could "self-custody" 1/3 signatures for example that really only serves for them to know the lender hasn't yet colluded with the escrow to steal the collateral.

Facing those realities, the best option for borrowing against bitcoin while maintaining price exposure is margin loans against ETFs in a brokerage setting. Institutions will surely start to offer non-ETF margin loans but its effectively the same thing (if like-kind exchanges are permitted under tax law then even those become unnecessary). P2P "DeFi" loans could use the 2/3 escrow scheme, but are likely to cost more because people will pay it for non-KYC platforms.