Why holding 1 of 3 keys to a collateralized bitcoin loan keeps you safer

First published: 09/20/2023
| Last updated: 09/20/2023
| -- min read

Taking a bitcoin-backed loan can be an effective way to hold onto more bitcoin for longer when you’re faced with US dollar expenses today. Using an Unchained loan to pay down expenses lets you benefit from the increase in value of your bitcoin and can ultimately mean you’re spending less bitcoin to purchase the things you need. 

That said, not all bitcoin-backed lenders are the same. The risky practices of lenders like BlockFi and Celsius turned out to be existential risks. Meanwhile, Unchained is not only growing but thriving. The contrast between Unchained—which has originated over $500 million in loans and has never sustained a loan loss—and these collapsed crypto lenders is stark, and it shows that it’s possible to safely lend dollars against bitcoin collateral. So what’s the difference?

Unchained has always offered over-collateralized loans, but there was a time when we offered to control all the keys to our clients’ bitcoin loans. As the saying goes, not your keys, not your bitcoin. And while the nature of collateralized loans means you have to give up unilateral control of your bitcoin, it’s possible to improve security with multisig. Unchained deprecated originating loans where we held all keys in 2022 in order to de-risk the offering further for both our clients and Unchained. 

As we learned in the years since we started offering bitcoin-native financial services, controlling 1 of 3 keys to your bitcoin-backed loan is not some gimmick; it is the most critical component of what made Unchained loans secure a 100% success rate for the last 5+ years. 

Why control 1 of 3 keys if you don’t have control of the bitcoin? 

Participating in the security of your bitcoin loan collateral gives you significantly stronger guarantees than giving up full control of your keys. 

  1. Your bitcoin is isolated: You can cryptographically verify that you are sending your bitcoin collateral to your dedicated loan collateral wallet, and not into a black box. At any time, you can check the bitcoin blockchain to see that your collateral has not been moved. You can sleep well knowing that Unchained and its third party key agent are not doing anything nefarious with your bitcoin.  
  2. Your login credentials aren’t a single point of failure: Your Unchained loan account is not a single critical point of failure for your bitcoin. If someone were to gain access to your account by stealing your username and password, they would not have the ability to close your loan and withdraw funds.
  3. You’re protected in the worst case scenario: Your lender is not a critical point of failure. If they go out of business due to a mistake with another product, you can recover this wallet by using the multisig config file in an open source tool after acquiring another signature from the third party key agent.

None of these are possible unless you control one key to your loan address. Keep in mind when you are taking a bitcoin-backed loan, someone, somewhere is controlling the keys—and an Unchained loan affords you the opportunity to be one of those people. There is no such thing as a loan where you post collateral without risk. If you believe bitcoin is a perfectly finite asset and generational wealth, it should be obvious how it’s beneficial for you to know how that key is secured and what happens if the company runs into problems. 

Beware of opaque language around how your bitcoin is handled. Oftentimes, “decentralized” finance companies and social media influencers try to get you to give up control of your private keys behind the guise of decentralization, but there are strong security assurances that you can only receive by participating in the security of your bitcoin. 

This article is provided for educational purposes only, and cannot be relied upon as tax or investment advice. Unchained makes no representations regarding the tax consequences or investment suitability of any structure described herein, and all such questions should be directed to a tax or financial advisor of your choice. Statements regarding market or other financial information, are obtained from sources that we believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information.

Unchained Capital, Inc. is not a bank. Loans may be originated by Lead Bank and subject to approval. Rates and fees vary by term lengths between 90 and 360 days. All loans have a maximum loan-to-value ratio based on required bitcoin collateral. Fees may be assessed on overdue amounts. A loan application is required. May not be available in all states and may be subject to local restrictions where available. California loans may be made or arranged by Unchained pursuant to a California Financing Law license. To learn more about Unchained’s licensing, see our legal and regulatory page.

Lead Bank is an FDIC insured Missouri state-charted bank. Lead Bank is an equal opportunity lender.

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