I mentioned a week or so back on @siggy47's post "The Future Of Bitcoin Lending?" that there's a European option for this called Firefish.io. I promised a write-up—and I'll have more to say in the future.
So, today was the seminar day between Firefish and Relai (a Swiss noncustodial bitcoin exchange) where Igor Neumann of Firefish walked us through the protocol, explained how it all works, and ran a Q&A with a good number of stackers. (Relai staff promised that the webinar would be available online tomorrow).
Darth is gonna complain (ugh, "just earn more fiat, bro!"): Purist Bitcoiners get their panties in twist about financialization of everything, but pretty inevitable… and business, if we ought to believe Firefish’s own public data, has been good, with something like 500 BTC in completed transactions. It was always going to go this way—speculative attack, interregnum monetary chaos, borrowing in depreciating money while investing in appreciating money.
This niche between early bitcoin and declining fiat will necessarily give rise to solutions like this.
And it's pretty convenient + economically interesting.
Compared to other ways of collateralizing bitcoin (banks, defi protocol, Coinbase shitcoinery), Firefish is very sleek and very clean — "efficient," if you wish. You don't have a lender rehypothetacing assets, you don't have a weird DeFi implementation with USD (coin) over questionable rails, with token problems on Ethereum etc. All you have is a transparent protocol, presigned transactions and designated return addresses. I.e., Firefish couldn't rug you even if they wanted to (check with resident programmer; I'm merely a humble writing pleb and economist—fuck do I know about code.)
"We're not doing the wizardly of the Ethereum or other chains" -- Igor Neumann
It's native Bitcoin transactions with spending conditions (multisig + PSBTs): even if Firefish disappears, there's a way for the borrower to retrieve their BTC. (I wonder exactly who the arbiter or oracle for repaying the loan would be, but whatever...tail-risk.)
The bitcoin deposited on-chain only have two ways out:
- borrower, returning BTC back to you; or in a recovery transaction
- lender, liquidation through price liquidation or at the end of the loan by nonpayment
It's a 2x overcollateralized loan, so you deposit 2 units of bitcoin for every 1 unit of fiat loan you wish to obtain. (There's also an origination fee to Firefish at the beginning of the loan, of, I believe, 1.5%—discounted, or something, with referral link)
Considered as a pure loan, it's pretty expensive for the borrowers (8.5-14.5%); and very lucrative for lenders (7-13%) so we should expect these rates to be competed down over time. Also, always the economist's question: Compared to what?! To a mortgage, sure; but you don't have that kind of legal/physical collateral and long history of banks financing it—and translating the bitcoin you may or may not have into that has taxable impacts on you. Compared to a credit card, these deals are incredibly cheap.
And that's exactly it: Bitcoin is situated in a real world with taxes and banks and payment rails and financial considerations. In the absence of regulatory hurdles/taxation obstacles people would just hold and spend bitcoin and there'd be no need for monetary engineering like this. But we do live in that transitionary world and so monetary/financial engineering is here, whatchagonna do about it?!
Now, bitcoin is just excellent collateral: verifiable; always and immediately available; price directly observable in the market. Banks haven't quite caught on on that yet, and so Firefish is front-running them. And plebs can benefit from that? Sign me the eff up... Also, rich people don't "sell assets"; they borrow, defer taxes, deduct interest payments, and roll loans over and over and over. Nice to have the plebs able to do so as well.
Anyway, here are some slides I snatched from the presentation:
According to standard finance/econ, overcollateralized loans are inefficient; you don't get anything extra from it, just liquifying a portion of wealth that's already there.
Fiat banks loans are "efficient" in this sense because they create money (liquidity) on trust/future income, where there was none previously. That's why we say printing "out of thin air" etc, because in contrast to these types of overcollateralized loans, it's new monetized assets coming into existence.
Collateral is tied-up capital, which could have been used elsewhere, hence it has an opportunity cost. So if we could have the same loan with lower cost, that sounds more efficient for society at large.
Overcollateralized loans are economically inefficient; I'm locking up something and monetizing less than that. Now that money can't be used, and a borrower can only spend half the amount.
What's so magic about banking—hashtag alchemy of money—is that it monetizes non-existent assets (faith, future incomes or profits). It becomes economically efficient in that we're getting more for less.
Now, two consideration:
- What's the impact on all of society? There's a fragility vs efficiency trade-off going on here, where heavily overcollateralized loans like these do seem safer than the cascading credit cycles/bubbles or bank runs that happen in fiatland. The risk in a Firefish loan is just that much more transparent and obvious, and doesn't have spillovers on payment mechanisms or rest of society This is debt, yes, but it's debt that doesn't entail risk elsewhere in the financial system.
- Compared to what?! There's a monetization of bitcoin going on, and as long as that asset increases faster than the interest expense (without insane drawdowns in-between), what's not to like? An realistically speaking (see scenario below), the option is selling BTC.
Let's take this example (entirely hypothetical, of course—I see you, Feds).
As a matter of personal financial planning—unadjusted for risk?— it’s a no-brainer to use these products. If Bob had fiat bills to pay before the runup last year, he could have faced two simple choices:
- sell bitcoin at 50k-something to cover bills;
- try Firefish (at the then-very high rate of 11%, plus about 2% in origination and on-chain fees).
A betting man might go with the second option. Even though that risked
a) the counterparty/platform would somehow rug him, or
b) that the bitcoin exchange rate would move against him (and then ultimately liquidate his funds),
but for b), compared to the scenario in which he sold sats for dollars at 50k—he would have lost those sats anyway!
In fact, what happened was that bitcoin appreciated some 70% since—and even more in euro terms, which is the currency in which most loan are denominated.
Economically, what took place is that Bob took a risk on a new technology and paid ~13% interest for it, but managed to hang out to sats that, in the meantime, appreciated 70%.
Who’s to say this was “bad”?
Bob now has more sats than he otherwise would have, all things equal; and in the process learned about a new platform and tech that will become much more frequent in the future. After all, rich people don’t sell assets or “have” a bunch of money, Scrooge McDuck style; they borrow weak fiat against hard(er) assets—and sometimes finance consumption out of those gains (hashtag Elon; hashtag Ohtani).
if you can perpetually roll debts forward while holding an appreciating asset, what’s not to like?
There was an interesting question in the Q&A about whether banks frown upon such transactions. Some banks might block certain such transactions if they differ significantly from your usual activity.
Igor explained on the livestream that there is a form with all the relevant details that you can download as a PDF and present to the bank, and that in all the instances where banks have stopped payments, this documentation had been enough to solve the payment issues: "This is not an illegal activity."
I also wonder what a regulator or tax inspectors would see/think about these payment flows. When small enough, they probably don’t attract any sort of attention but on larger sizes (I’ve seen deals on Firefish in the tens of thousands of euros), I’d be surprised if they didn’t at least show up in some register/flag some compliance attention somewhere.
Anyway, nice little presentation and I bet we'll see plenty of similar such frameworks in the future. Given how the financial system is embracing bitcoin (kicking and screaming in some cases), I wouldn't be surprised if high street banks start offering some similar version of this.
Finally, here's my referral code: https://firefish.io?ref=satoshi609
Go have fun. (...and play with your bitcoin?)