How to Earn Up To 351% APY on BTC With Collateralized Peer-to-Peer Lending

Several years ago, I researched peer-to-peer (P2P) lending platforms such as Prosper.com and Lendingclub.com (which no longer offers P2P lending). It seemed like a really poor investment choice because you were loaning people with bad credit your good money for a less-than-ideal interest rate. Or, if they have good credit, you aren’t making that much on your loans. I decided against allocating my funds to these platforms.

One of the biggest problems with traditional online P2P lending platforms is that they rely on a person’s credit score. Banks make billions annually by gouging people with bad credit and giving themselves plenty of padding to ensure they make a lot of money. Why wouldn’t you rather invest in a bank and let them spend the time and hassle researching the creditor and making much more profit?

I am quickly seeing a world where P2P lending will be turned on its head. With tokenization, smart contracts, and the right platforms, P2P lending will be available on a scale that is hard to imagine. For example, let’s say I own a piece of tokenized real estate in Florida. I could get an immediate loan collateralized by the property to anyone worldwide. If I default on the loan, they will automatically get my property. No credit checks. No background checks. No approvals or denials depending on arbitrary human decision-making.

I’ve recently found a new platform, Liquidium.fi, using Bitcoin Ordinals (NFTs on Bitcoin) for real-time collateralized peer-to-peer lending where lenders can earn up to 351% APY on their BTC loans. Unlike crypto lending platforms such as Aave and Compound, which have corruptible liquidity pools and various smart contract risks, Liquidium connects the lender with the final borrower.

How Liquidium Works

First, there are two types of Liquidium users: lenders and borrowers. Lenders loan their BTC to the borrowers. In return, the borrower uses either an Ordinal or Rune as collateral. The lender competes with other lenders to try to get the loan accepted. The primary lever on which the lender competes is the loan-to-value ratio. Here’s an example.

Imagine I am interested in owning a Wizards of Ord ordinal if I can buy it for 0.01209 BTC. Today, the floor price is 0.01475 BTC. I can move the orange LTV slider to the maximum amount I am willing to buy that particular ordinal for. The more I’m willing to lend, the greater the chance of the borrower accepting my offer and the higher interest I earn.

In the example above, let’s say this offer gets accepted; I get the 0.01209 BTC withdrawn from my wallet. The borrower releases their Wizards of Ord ordinal to Liquidium, who holds it for seven days. At the end of the term, the borrower pays back the loaned amount, 0.01209 BTC, the interest, and a fee to Liquidium- an additional 0.0002832 BTC. The lender earns 2.34% for a one-week loan. Compounded and annualized, it equates to a 351% APY.

If the borrower chooses not to repay the loan, the lender can liquidate the borrower, and Liquidium will release the Wizard of Ord ordinal to the lender's wallet.

‘But Scott, $17 worth of BTC isn’t worth the trouble for me.’

One great aspect of Liquidium is that it works for borrowers and lenders at all price points. The Wizards of Ord is an example of a loan worth $750 (at current BTC prices). Below is an example of the most popular blue-chip ordinals, Ordinal Maxi Biz.

As you can see, the best loan offer today is 2.3 BTC worth $14000, and the lender is asking for 0.0525056 BTC interest. The Ordinal Maxi Biz is a longer-term loan at sixteen days, and the APY is lower.

There are dozens of collections to lend/borrow, and the APYs range from 90–351%.

Why P2P Lending is Great

As stated earlier, most crypto lending platforms are decentralized pools of liquidity. Smaller, less liquid tokens risk liquidation at prices lower than their liquidation limits. We saw this recently when the Curve founder defaulted on a massive loan of $140 million in CRV tokens.

When he took the loan, he couldn’t have sold so many Curve tokens in the open market because it would have ruined the price. By lending the tokens, he artificially propped up the price (since the CRV was lent and not sold) and got access to $100 million in stablecoins.

Further, adding a collateralized element, such as we see with Liquidium, allows ordinal collectors to potentially purchase their favorite collections at a discount from the floor price at the time of the loan. If the floor drops during the period, it’s likely the borrower will default, and the lender ideally ends up with an ordinal they want.

Finally, over $100 million worth of BTC loans have occurred on Liquidium illustrating the proof of concept. Imagine the possibilities in the future where nearly anything could be loaned peer-to-peer worldwide, trustless and anonymous.

Key Takeaways

Liquidium charges the borrower approximately 0.5% when the loan is repaid. Overall, the Liquidium model is a win for the borrower who needs funds and has collateral, for the lender earning a nice collateralized APY, and for the platform, which earns a reasonable fee.

Additionally, the loaned funds add potential liquidity to the entire ordinals ecosystem. For example, imagine I had a Bitcoin Puppet ordinal and borrowed 80% of the floor value. I can buy a second Bitcoin Puppet with only 20% of the cost out of my pocket. If the floor price of Bitcoin Puppets increases by more than 3%, I can sell the Bitcoin Puppet, pay back the loan, and pocket the difference. It’s a high-risk strategy but can be extremely profitable in a healthy market.

I have used the Liquidium platform, which has been a user-friendly experience. My only issue is that I manually had to sign the loan agreement in my digital wallet and missed offers while away from the computer. I’m excited to see the P2P lending space flourish as more assets become tokenized.

What do you think of this new use case for crypto? Will collateralized tokenized loans be a big business? What would you most like to see collateralized or be able to use as collateral? Am I overplaying this and seeing it as something bigger than it is? Share your opinions in the comments section.

I have a Runestone ordinal at the time of writing, but none of the others mentioned or shown in this article. This information should not be taken as investment advice. I am no more qualified to give financial advice than to dance like a ballerina. Digital assets like crypto and ordinals involve risk, so you should always perform due diligence before investing.

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