Atlas21 interviews the COO of Firefish who explains how the marketplace is bringing Bitcoin lending to retail users and traditional institutions through a non-custodial model.
Igor Neumann, COO and co-founder of Firefish, explained to Atlas21 how the platform works, why banks are starting to take an interest in Bitcoin lending, and what the next steps are to bring the market towards a maturity phase.
Why did you decide to found Firefish?
“Martin, my co-founder, had an investment opportunity but didn’t have sufficient liquidity because part of his assets was in BTC. He started looking for ways to get value from bitcoin without selling it. This was happening a few years ago, during the BlockFi and Celsius period which weren’t the best platforms for loans.
Both of us asked ourselves: how can we get a loan against BTC, minimizing counterparty risk? Two models existed: the centralized custodial one, where you entrusted your bitcoins to a central counterparty having to trust that they would return them to you. The other alternative was DeFi, where you had to bridge or wrap on a different network.
We looked for alternatives and realized there weren’t any. So we decided to create a solution that reflected bitcoiner values: on-chain, without bridging or wrapping, minimizing the risks of theft or counterparty failure.”
How does your non-custodial model work?
“It’s a combination of 3-of-3 multisig combined with partially signed transactions. There are transactions that are pre-signed by the debtor and by what we call oracles, and there’s a timelock.
The debtor defines an escrow contract where their funds will be kept for the duration of the loan. They pre-agree on what can happen to their BTC. The bitcoins can only move from the escrow address to the debtor once the loan is repaid, or to the liquidator in case of default. We can’t steal the funds because there are predefined addresses where the bitcoins can move. This is positive because there are still concerns like ‘what happens if a government says to send them these bitcoins?’ We can’t do it.”
How does your model differ from non-custodial competitors?
“There are two or three non-custodial platforms I’m aware of. Most use DLCs, Discreet Log Contracts, or some combination of multisig with various parties signing. In our case there are a couple of differences. One of the advantages is that as a debtor you don’t have to store any seed phrase. Otherwise, if you take a two-year loan and then lose the seed you generated at the beginning, you have to trust other parties to recover your BTC. We use a specific key called ephemeral key. The debtor uses a disposable key to pre-sign all transactions and the key is then destroyed. You don’t have to use hardware wallets to store anything.
We wanted to bring traditional finance and its liquidity into the market. For many people in the TradFi market, signing transactions, storing seeds and making backups is still a barrier. The way we thought about Firefish is that the lenders themselves don’t have to be Bitcoin native. Their only role is to send funds to the counterparty and receive funds back.”
Have you already had interactions with banks or financial institutions?
“Banks are now considering entering the Bitcoin lending market. We’ve had discussions with traditional banks that are approaching Bitcoin. On the platform we already have institutions like family offices, which are more flexible, or even SMEs. The advantage is that traditional institutions have access to cheaper liquidity. If now rates on the platform go from 8% to 12%, these banks can borrow euros much more cheaply. We want to bring traditional liquidity into the market so that bitcoiners can benefit from low interest rates.”
New Hampshire approved a $100 million bond backed by BTC. Do you think it could set a precedent for governments?
“I believe progress is inevitable. I think we’re past the tipping point where Bitcoin was seen only as a toy for nerds. The Czech National Bank was the first to have purchased BTC for testing. Everywhere you look there are steps towards wider adoption in various forms, whether it’s direct ownership, through ETFs or lending. And then you see projects like New Hampshire or even mortgages, where you can partially finance your mortgage through your bitcoins.
I think we’re still in the early stages, but the fact that we’ve already seen government or semi-government entities experimenting is a sign that there will be enormous growth, especially from the government sector and the broader public. Popular stories are the treasury companies, Strategy or others. That’s also an indirect exposure to BTC for many entities. The challenges that governments or financial institutions have are from a regulatory perspective. For them having an ETF on the balance sheet is easier than having direct exposure, without considering the challenges of self-custody. But I believe that with time this will improve and we’ll see much wider adoption.”
Some criticize the KYC requirement. Do you intend to introduce services without KYC?
“If we could do our business without KYC, it would perhaps be a better way to do it. We operate in European jurisdictions, so we unfortunately have to follow the rules that apply here. It could potentially be possible to run a platform without KYC. But then no bank would agree to provide liquidity without knowing their counterparties. I think it’s a trade-off we had to consider. And if you think about no-KYC, there are options. Go to DeFi, go to other non-custodial platforms. But when things go wrong, there’s no one to protect you. You won’t take the code to court.
I think that on one hand we don’t like the KYC element as such. At the same time we believe it partially brings more security for both counterparties, because one of the differences between Firefish and some platforms is that we also have a legal layer in the contract. The user is signing a legal document with their counterparty where Firefish acts as the flow and technology provider. If things go wrong, even if Firefish disappears, there’s still a legal claim you could use. There are trade-offs, but we believe it was worth pursuing and we’ve seen it on the platform: interest rates are falling and the fact that we require KYC opens doors for us to other institutions, especially from the TradFi sector.”
Do you intend to integrate solutions like Lightning, ARK or Liquid?
“We are 100% focused on Bitcoin. We’re monitoring developments in this area, particularly ARK, which seems like a very interesting project, as well as RGB or Liquid. At the beginning we focused on the protocol functioning, on our escrow technology, on the flow and on users. We’re planning to improve the offering in terms of new features and new services. We’ve launched an alternative fund which is a vehicle for institutions to invest in BTC-backed loans. At the moment we’re focusing on the core of our proposition, but we’re certainly not ignoring these developments. If we think there are opportunities to realize services or features for the community using these technologies on Bitcoin, we’ll definitely go in that direction.”
How is Firefish Prime proceeding?
“The Prime service will give institutions the option to gather larger loans, greater liquidity and perhaps even through different models. At the same time we were surprised by the traction we’ve had from the p2p marketplace, where we understood that the theme of collateralization is really welcomed by the broader public. Currently some of the largest banks are starting to promote BTC-backed loans. But in most cases you have to be a high net worth individual. On Firefish the minimum ticket is €800, which is really accessible to almost every bitcoiner. It’s a very rapidly growing segment. But at the same time we understand that there are many opportunities also in the institutional space.”
Braiins used Firefish to obtain a $400,000 loan. How does managing a loan for a large debtor differ from retail loans?
“The biggest difference is the size. A private individual keeps their bitcoins in a cold wallet or similar. Institutions like Braiins use various Bitcoin tools and services or solutions like multisig. It’s a much more complex operation. And at the same time they have many more opportunities in terms of loans. They can go to a bank, there are Bitcoin native centralized lenders that have served institutions for years. The fact that Braiins chose us for a loan I think is a big win. And it’s proof that the non-custodial model works even with Bitcoin native institutions.”
What is the typical liquidation frequency?
“I should differentiate between two types of liquidations. One type is default liquidation, which means the debtor doesn’t repay the loan. In that case part of the collateral to cover the amount with interest is liquidated. The second type of liquidation is what we call price liquidation. The platform logic provides that loans are overcollateralized with a 2 to 1 ratio. Our users never want to be liquidated. We saw this in recent market movements: BTC price dropped from highs to current levels by 20-30%. We saw many debtors who added collateral. Bitcoiners never want to lose their BTC. Speaking of price liquidations, since the platform launch we haven’t seen a single liquidation. And this is a combination of two factors: the price has never dropped more than 50% from its peak. And the other thing is that our debtors are very conservative and don’t want to be liquidated.
In terms of defaults, I think the current default rate when debtors don’t repay the loan is about 0.0002 or something like that. We’ve processed about $130 million in notional value of loans and liquidations have been an absolute fraction of the total.”
Does the roadmap include products like BTC-backed mortgages?
“I think people perceive this term in different ways. Sometimes people talk about using part of BTC funds in addition to the mortgage to cover the loan. The biggest challenge in this area is that mortgages are usually very long-term. Structuring a solid bitcoin-backed mortgage could be a bit challenging. In the end a mortgage is a loan against your house. If you take a loan against your BTC you could also potentially call it a mortgage. If you want to use it to buy a house no one will ask you questions. Whereas in the mortgage market when you take a loan the bank has to evaluate liquidity, assets, income, credit history, house value and potential appreciation. Getting a mortgage is a process of a couple of months. Taking a loan against BTC is super fluid.
Even when it comes to mortgages, the market will evolve. We’ll see in what form. I think that with wider adoption and the different products that will be realized, this will become a natural way to support home purchases.”
What are you working on?
“We’re working on a process that will improve the current fiat transaction flow. We’re studying a credit card concept that would use BTC collateral only as a credit line. You wouldn’t be spending your bitcoins but would use the collateral as security against any payment you make. The collateral would be the limit. You pay with the card, your fiat liability grows and you can repay it whenever you want.
We’ve applied for the MiCA license. We’re waiting for final comments from the National Bank. I think MiCA will help us in the future to bring Bitcoin-related services. From a regulatory perspective it’s a huge headache. But it’s something we have to accept as a necessary evil. If you want to do Bitcoin business in the EU you have to be MiCA compliant. If we didn’t have the license, we’d be the first on the regulator’s radar. And finally, overseas expansion: we just returned from Latin America where we’re exploring the market in Argentina, Colombia and El Salvador. There’s definitely potential to expand in these markets.”
