Granite: A New Era For Bitcoin Liquidity

Granite is a Bitcoin liquidity protocol that challenges the centralized and custodial solutions currently available to Bitcoin hodlers.

Incubated by Trust Machines and launching on the Stacks Bitcoin layer, Granite addresses the core risks for both borrowers and LPs in today’s Bitcoin DeFi landscape, giving users a secure, reliable, and decentralized way to borrow against their Bitcoin. 

Bitcoin Liquidity Today: The Woes of Centralization

Bitcoin lacks native smart contracts. This forces users to turn to custodial services when seeking liquidity without selling, either centralized lenders or wBTC in DeFi.

In both cases, users must trust third-party custodians with their assets, exposing themselves to custodial risk, mismanagement, and potential security breaches. These vulnerabilities highlight the need for non-custodial and trust-minimized alternatives in the Bitcoin ecosystem.

For most users, these tradeoffs are unacceptable. Bitcoin lending requires a significant upgrade, and Bitcoin users deserve decentralized and secure solutions with which they can safely deploy their BTC. 

The Pitfalls of Traditional DeFi Models

Outside of the centralization risk of wBTC, the traditional DeFi lend/borrow model creates unacceptable vulnerabilities that most hodlers would not expose their Bitcoin to (we certainly wouldn’t).

Rehypothecation of collateral leads to borrower liquidity risk

Liquidity risk refers to the possibility that a liquidity provider (LP) may be unable to withdraw their deposited assets from a protocol when desired, due to those assets being lent out to borrowers. DeFi lending protocols manage this risk using interest rate curves. But this is imperfect and still entails risk, which is why LPs are paid a return on their capital. By supplying capital to be lent out, LPs opt in to liquidity risk and the commensurate returns.

Rehypothecation refers to the practice of lending out a borrower’s collateral to generate returns. On most lending platforms, this process happens by default, effectively turning borrowers into de facto lenders. This means that borrowers face the same liquidity risk as LPs, but often without knowing that they are opting in to that risk.

So how can this manifest? A borrower might repay their loan and attempt to withdraw their collateral, only to discover that insufficient collateral remains in the protocol since it has been lent out.

Borrowers must remember: returns come from risk. Any protocol that gives a return on collateral (outside of token incentives) is taking risks with that collateral. 

Multi-asset borrowing creates “pooled risk”

Most DeFi lending protocols operate as multi-asset borrowing pools, where multiple assets of varying “quality” are combined together into a single pool. This is capital-efficient for borrowers since they can borrow many different types of assets. However, LPs are exposed to the risks of the lowest-quality asset in the pool, not just the asset they originally deposited.

This means that if an LP deposited USDC, their ability to withdraw that USDC down the line would be impacted by every borrowable asset in the protocol. They may not be able to withdraw their USDC due to another token that they never owned.

And because borrowers are lenders by default through the rehypothecation of their collateral, pooled risk impacts borrowers as well. Everyone is exposed to the risk of the weakest asset in the pool.

Liquidations are catastrophic for borrowers

Most DeFi lending protocols allow liquidators to liquidate 50-100% of a borrower’s debt and receive a commensurate amount of their collateral as a reward. While this benefits liquidators (and protocols), it is catastrophic for borrowers and makes liquidation events something that must be avoided at all costs. In a single liquidation, a borrower could potentially lose all of their collateral.

Granite’s Approach to Bitcoin Liquidity

Granite has focused on mitigating the biggest risks associated with lending and borrowing in order to build the protocol that we would use with our Bitcoin. To us that means:

• Decentralized and non-custodial: Granite is a decentralized protocol built on the Stacks Bitcoin layer that uses Stacks’ sBTC bridge to bring Bitcoin into DeFi, allowing users to avoid the centralization risk of custodial lenders and custodial wrappers.‍
• No rehypothecation or “pooled-risk”: Granite never lends out collateral and only has a single borrowable asset per market, eliminating liquidity risk for borrowers and the “pooled-risk” that exposes all users to the downside of the riskiest pool assets.‍
• Liquidation to solvency: Granite uses “soft liquidations” that limit liquidation size to only the amount that restores account solvency, minimizing losses for borrowers even if they breach liquidation thresholds.‍
• Push position tracking: Granite’s first frontend uses push notifications to alert users to account health drops prior to liquidation, allowing borrowers to relax and receive push alerts instead of staying glued to collateral prices.

On top of that, Granite is built on the Stacks Bitcoin layer, whose Clarity smart contract language limits attack surface by prioritizing security over expressivity, full decidability, and user-centric features such as post conditions and human-readable interpreted code. This makes Clarity uniquely suited for high-stakes DeFi and the perfect bedrock for Granite.

The Next Phase of Bitcoin-Based Lending Starts with Granite

Granite changes the game for every Bitcoin hodler seeking liquidity. The next phase of Bitcoin lending must address the critical vulnerabilities in CeFi and DeFi that expose users to unnecessary risk. We need to prioritize solutions that mitigate the specific dangers in Bitcoin lending, especially around liquidity and collateral management, and do away with custodial solutions.

By rethinking old practices like rehypothecation, risk pooling, and liquidations, Granite is ushering in a new era for Bitcoin liquidity — one where users have greater security, transparency, and control over their assets. We strive to empower Bitcoin hodlers without compromising on trust or safety, and hope to set a new standard for decentralized finance.