One of the biggest challenges of Ordinal holders is accessing liquidity without selling their NFTs. The liquidity challenge prevents Ordinal owners from leveraging their assets and participating in Bitcoin DeFi.
Bitcoin Ordinal lending-borrowing protocols aim to solve the liquidity barrier for Ordinal holders.
What Is Ordinal Lending?
Ordinal lending is a process where you deposit Ordinals as collateral within a lending-borrowing protocol to take crypto loans.
The Ordinals remain locked in a contract until the borrower repays the loan and interest to the lender. If the borrower fails to repay and defaults on the loan, the collateralized Ordinal goes to the lender.
Ordinal lending helps Ordinal owners borrow against their assets to unlock their liquidity without losing asset custody. Simultaneously, lenders can earn extra yields on their idle crypto assets by offering loans against collateralized Ordinals.
There are several types of Ordinal lending. Some protocols like Arcade wrap the Ordinals to provide loans. Other protocols like OrdinalDAO which ultimately didn’t work, provided wrapped BTC called rBTC on the Bitcoin sidechain, Rootstock.
How Does Ordinal Lending Work?
Different Ordinal lending protocols work in different ways.
For instance, Arcade wrapped a Nodemonke Ordinal into an Ethereum-based NFT and provided a 25 ETH loan worth $80,000. The loan term was for 60 days with a 55% annualized interest rate.
On the other hand, Liquidum is a P2P marketplace where users can borrow BTC against an Ordinal without wrapping them.
The MagicEden API provides a list of Ordinals on Liquidium. Borrowers can choose the asset they own from the available list and use it as collateral to avail of a loan.
Liquidium’s lending-borrowing process occurs through Discreet Log Contracts (DLCs) and Partially Signed Bitcoin Transactions (PSBTs).
The DLC stores the Ordinal as collateral which remains inaccessible to borrowers and lenders during the loan term. DeepLake Oracles verifies on-chain activity to determine the loan outcome and sends the results to DLC after loan period termination.
If the borrower repays the loan plus interest, the DLC automatically executes using a PSBT to return the collateralized Ordinal to its owner. However, if the borrower fails to repay, the collateralized Ordinal goes to the lender.
As a P2P protocol, Liquidium facilitates lenders and borrowers to come together and mutually agree on the loan terms. Liquidium takes a 20% fee from the interest on the BTC loan for operational costs.
The Problem With Ordinal Lending Protocols
Ordinal lending protocols like Arcade wrap Ordinals before transferring the tokens to a different blockchain. However, such token transfers involve additional fees and security vulnerabilities.
Liquidium enables users to borrow BTC against their Ordinals without changing networks or transferring assets to different wallets. Moreover, Liquidium can leverage Bitcoin L1’s privacy and security to ensure the safety of the collateralized Ordinals.
However, since Liquidium works on Stacks, it inherited the problems of the early iteration of the Layer 2 network.
For example, Stacks block production rate was linked to Bitcoin block production in a 1:1 ratio. Since it takes about 10 minutes to produce a Bitcoin block, Stacks-based apps also suffered from delayed block finality.
Slow block confirmation time leads to high network latency which slows down transaction speeds. In a competitive financial ecosystem like an Ordinal lending protocol, delayed block finality can affect loan terms and settlements.
Moreover, Stacks’ initial version used microblocks to improve transaction time. The microblocks stored unconfirmed transactions from the mempool and validated them before writing to the Bitcoin chain.
However, Stacks couldn’t ensure proper transaction data storage in the microblocks since there’s no consensus procedure to build from the latest microblock. Improper transaction data can also affect Ordinal lending protocols by altering loan amounts and periods.
The Stacks Nakamoto upgrade solves the problems by improving scalability, transaction speed, and proper transaction ordering.
How The Stacks Nakamoto Upgrade Can Improve Ordinal Lending Protocols
Post-Nakamoto Stacks uses a tenure-based block production that decouples the Stacks and Bitcoin block production mechanism.
Now, Stacks uses cryptographic methods to select a new miner who begins a fresh tenure with each new Bitcoin block. Unlike the previous version, a single miner can now mine several Stacks blocks instead of a single block within a tenure.
The tenure-based block production speeds up transaction speeds and offers faster block finality on Bitcoin. Thus it helps Ordinal lending protocols like Liquidium to scale their operations and settle loans faster than before.
The Stacks Nakamoto upgrade also enables Stacks apps to write transaction data to the Bitcoin L1 chain with an indexed block hash. The indexed block hash refers to the first block hash of the previous Stacks miner that they mined during their tenure.
Stacks miners can now add the indexed block hash to the Bitcoin chain during the block commit transaction to solve miner connectivity issues. The post-Nakamoto Stacks also uses an Assumed Total Commitment With Carryforward (ATC-C) system to mitigate the Miner Extractable Value (MEV) problem.
These improvements in Stacks architecture resolve miner connectivity issues, prevent transaction manipulation strategies, and ensure fair mining behavior. Thus, post-Nakamoto Stacks bolsters Ordinal lending protocols with robust security to ensure the safety of collateralized Ordinals and correct loan disbursals.
The Future Of Ordinal Lending
Ordinals have emerged as one of the most valuable Bitcoin-native digital assets in recent times. Ordinal lending empowers asset owners to further leverage an Ordinal’s liquidity without losing their asset ownership.
Therefore, Ordinal lending platforms will play a significant role in strengthening Bitcoin DeFi and creating new avenues for yield generation. The future of Ordinal lending looks promising as more innovations advance the Bitcoin DeFi sector.
