Bitcoin's Liquidity Protocol

Granite Protocol is an autonomous Bitcoin Liquidity Protocol on the Stacks blockchain. The protocol allows borrowers to take stablecoin loans using Bitcoin as collateral, without exposure to counterparty or rehypothecation risk. Liquidity providers can earn yield on stablecoins by providing liquidity to the pool, which is then lent to borrowers.

Loans in Granite are best thought of as lines of credit, without set terms or repayment schedules. As long as the borrower maintains an adequate loan-to-value ratio (LTV), keeping their account in good health, they are not subject to liquidation. If a borrower’s LTV falls too low, a portion of their capital will be liquidated to bring their account back to solvency.

Rehypothecation is the lending of users’ collateral assets to earn yield - it’s how the vast majority DeFi and CeFi liquidity protocols generate returns. But it also creates a “pooled-risk” problem where all users are exposed to the riskiest asset in a protocol’s collateral pool, resulting in outcomes where users cannot withdraw collateral even after a loan is repaid. Protocols attempt to manage this risk by carefully selecting collateral assets and choosing good oracle partners, but it is always present.

Granite never rehypothecates collateral: your BTC stays in the protocol and is never lent out. This eliminates “pooled risk”, making Granite far safer than most liquidity protocols. As a result, though, collateral does not earn yield - a small price to pay for peace of mind.

sBTC is a non-custodial, programmable 1:1 Bitcoin-backed asset that enables decentralized movement of BTC in/out of Bitcoin layers, issued on the Stacks Bitcoin L2 and built by the Stacks developer community. sBTC bridges Bitcoin into DeFi without swapping or exposure to centralized custodians, and is secured and managed by Stacks validators via a threshold signature script on the Bitcoin blockchain, minimizing counterparty risk. sBTC leverages the unique proof-of-transfer (PoX) consensus mechanism of Stacks, a Layer 2 blockchain that connects directly to Bitcoin for enhanced security.

The health of a borrower’s position in the protocol is determined by the loan-to-value ratio: the value of borrowed capital / collateral value. Healthy accounts have lower LTVs, meaning there is enough collateral value to cover the debt + an adequate safety buffer. Unhealthy accounts have smaller safety buffers, and will be subject to liquidation if collateral values fluctuate and the collateral value no longer covers the debt position.

In a liquidation, liquidators repay a portion of the borrower’s debt in exchange for an equal-value portion of their collateral (plus a small reward paid from their collateral). Liquidations allow the protocol to maintain solvency where all debts are adequately collateralized.

Granite Protocol is unique in that liquidations are only permitted back to the point of borrower account solvency - liquidators are not allowed to liquidate more than is required to regain solvency. This is different than most DeFi lending protocols, where liquidators can take 50-100% of a borrower’s collateral if their account becomes insolvent (which is very detrimental to borrowers). Granite’s approach of limiting liquidations to the minimum amount of capital required to return an account to solvency reduces the impact of liquidations for the borrower while also maintaining protocol solvency.