Bitcoin Lending Terms, Explained
85 terms explained in plain English. Everything you need to understand before borrowing against your Bitcoin, from DLCs and LTV ratios to custody models and liquidation mechanics.
Understand the terms. Then borrow on your terms.
Starting at 10% APR, $0 origination fees, and DLC-secured collateral on the Bitcoin blockchain.
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Popular Terms
Collateral
An asset pledged by a borrower to secure a loan, which the lender can claim if the borrower defaults.
Loan-to-Value (LTV) Ratio
The ratio of a loan amount to the value of the collateral backing it, expressed as a percentage.
Discreet Log Contract (DLC)
A Bitcoin-native smart contract that enables conditional payments based on oracle-attested outcomes without revealing contract details on-chain.
Rehypothecation
The practice where a lender re-uses or re-lends a borrower's posted collateral for its own purposes, such as generating yield or securing other obligations.
Non-Custodial
A model where the user retains control of their private keys and assets are not held by a third-party custodian.
Liquidation
The forced sale of a borrower's collateral when its value drops below a threshold, used to repay the outstanding loan.
Multisig (Multi-Signature)
A Bitcoin security scheme requiring multiple private keys to authorize a transaction, commonly used in m-of-n configurations like 2-of-3.
HODL
A crypto community term meaning to hold Bitcoin long-term rather than selling, originating from a 2013 misspelling of 'hold.'
Satoshi (sat)
The smallest unit of Bitcoin, equal to 0.00000001 BTC (one hundred millionth of a Bitcoin).
Cold Storage
Keeping Bitcoin private keys offline, disconnected from the internet, to protect against hacking and theft.
Wrapped Bitcoin (wBTC)
An ERC-20 token on Ethereum that represents Bitcoin 1:1, requiring a custodian to hold the underlying BTC.
Self-Custody
The practice of personally holding and controlling the private keys to your Bitcoin, without relying on any third party.
Bitcoin Dominance
Bitcoin's share of the total cryptocurrency market capitalization, used as a measure of Bitcoin's relative strength in the market.
Bitcoin Halving
A programmatic event occurring approximately every four years that cuts the Bitcoin mining reward in half, reducing new BTC supply.
Lightning Network
A Layer 2 scaling solution built on top of Bitcoin to enable fast and inexpensive microtransactions.
Taproot
A major Bitcoin network upgrade that improved privacy, scalability, and smart contract flexibility.
UTXO (Unspent Transaction Output)
The unspent outputs of Bitcoin transactions that serve as the fundamental accounting model of the network.
Mempool
A waiting area for unconfirmed Bitcoin transactions before they are included in a block.
Block Confirmation
The process of a transaction being permanently added to the blockchain within a newly mined block.
Hash Rate
The total combined computational power being used to mine and process transactions on a blockchain.
Difficulty Adjustment
A protocol feature that automatically alters how hard it is to mine a block based on current network power.
Sidechain
An independent blockchain that runs parallel to a main chain, connected via a two-way peg.
Layer 2
Secondary protocols built on top of a base blockchain to dramatically improve transaction scaling.
Base Layer
The foundational blockchain network upon which all secondary applications and scaling solutions are built.
Blockchain Explorer
A search engine allowing users to view real-time data on blocks, transactions, and addresses on a blockchain.
Network Fee
The cost paid by a user to incentivize miners to include their transaction in a blockchain block.
Bear Market
A prolonged period of declining asset prices, typically accompanied by widespread market pessimism.
Bull Market
A financial market condition characterized by rising asset prices and high investor confidence.
Collateral
An asset pledged by a borrower to secure a loan, which the lender can claim if the borrower defaults.
Loan-to-Value (LTV) Ratio
The ratio of a loan amount to the value of the collateral backing it, expressed as a percentage.
Liquidation
The forced sale of a borrower's collateral when its value drops below a threshold, used to repay the outstanding loan.
Margin Call
A notification that the collateral value has dropped close to the liquidation threshold, requiring the borrower to add collateral or reduce the loan.
Bitcoin-Backed Loan
A loan where Bitcoin is used as collateral, allowing the holder to access cash liquidity without selling their BTC.
Tax Efficiency (Borrow vs. Sell)
Borrowing against Bitcoin instead of selling it may avoid triggering capital gains taxes, preserving more of the holder's wealth.
Annual Percentage Rate (APR)
The yearly interest rate charged on a loan, expressed as a percentage of the principal amount.
Origination Fee
A one-time fee charged by a lender at the start of a loan, typically expressed as a percentage of the loan principal.
Total Cost of Borrowing
The complete cost of a loan including interest, origination fees, and any other charges over the full loan term.
Overcollateralization
The practice of requiring a borrower to pledge more asset value than the actual loan amount.
Interest-Only Loan
A loan structure where the borrower only pays the interest during the term, with principal due at maturity.
Loan Maturity
The final date by which a borrower must repay the outstanding balance of a loan in full.
Refinancing
The process of replacing an existing loan with a new one, often with different terms or interest rates.
Prepayment
Paying off all or part of a loan balance before its official maturity date.
Amortization
The process of spreading out a loan into a series of fixed payments over a specific period.
Peer-to-Peer Lending
A decentralized financial model where individuals lend directly to other individuals without a bank intermediary.
Fiat Currency
Government-issued money that is not backed by a physical commodity like gold or silver.
Institutional Investor
A large organization, such as a hedge fund or pension fund, that invests massive amounts of capital.
Default Risk
The possibility that a borrower fails to make required payments on their debt obligations.
Collateral Ratio
The proportion of the collateral asset's value compared to the value of the issued loan.
Undercollateralized Loan
A loan where the value of the pledged collateral is less than the total outstanding debt.
Fiat On-Ramp
A platform or service that allows users to convert traditional government money into cryptocurrency.
Wire Transfer
An electronic method of moving funds rapidly between traditional banking institutions.
Credit Check
A review of a borrower's financial history to determine their reliability and risk of default.
Principal Amount
The original sum of money borrowed in a loan, separate from any interest or fees incurred.
Discreet Log Contract (DLC)
A Bitcoin-native smart contract that enables conditional payments based on oracle-attested outcomes without revealing contract details on-chain.
Oracle
A trusted data feed that provides external information (like BTC price) to a smart contract so it can determine outcomes.
Adaptor Signature
A cryptographic technique that locks a digital signature behind a secret, enabling conditional transaction execution in Discreet Log Contracts.
Contract Execution Transaction (CET)
A pre-signed Bitcoin transaction that executes a specific outcome of a Discreet Log Contract based on the oracle's attestation.
Funding Transaction
The initial Bitcoin transaction that locks collateral into a Discreet Log Contract, creating the 2-of-2 multisig output.
Time-Locked Contract
A blockchain transaction that restricts the spending of funds until a specific time or block height is reached.
Escrow
A financial arrangement where a trusted third party holds assets until specific contract conditions are met.
PSBT (Partially Signed Bitcoin Transaction)
A standard format allowing multiple parties to collaboratively sign a single Bitcoin transaction.
Schnorr Signatures
A cryptographic signature scheme that enhances Bitcoin's privacy, efficiency, and smart contract capability.
Rehypothecation
The practice where a lender re-uses or re-lends a borrower's posted collateral for its own purposes, such as generating yield or securing other obligations.
Non-Custodial
A model where the user retains control of their private keys and assets are not held by a third-party custodian.
Custodial vs. Non-Custodial Lending
Custodial lending means a third party holds your assets; non-custodial lending means your assets remain under your control or locked in a verifiable smart contract.
Counterparty Risk
The risk that the other party in a financial transaction will fail to meet their obligations, potentially resulting in loss of funds.
Proof of Reserves
An audit mechanism where a custodian cryptographically proves they hold sufficient assets to cover all user deposits.
Seed Phrase
A list of 12 to 24 randomized words used to recover access to a cryptocurrency wallet.
Hardware Wallet
A physical device designed to securely store cryptocurrency private keys offline.
Paper Wallet
A printed piece of paper containing public and private keys, typically via QR codes.
Hot Wallet
A cryptocurrency wallet that remains actively connected to the internet.
Custody Risk
The danger of losing assets because a third-party platform holding them is hacked, goes bankrupt, or acts maliciously.
Private Key
A secret alphanumeric code that grants ultimate control and ownership over cryptocurrency funds.
Public Key
A cryptographic code allowing users to receive cryptocurrency without compromising their private keys.
DeFi (Decentralized Finance)
Financial services built on blockchain protocols that operate without traditional intermediaries like banks or brokerages.
CeFi (Centralized Finance)
Crypto financial services operated by centralized companies that custody user funds, as opposed to decentralized protocols.
Yield (on Bitcoin)
A return earned on Bitcoin holdings, typically generated by custodial platforms through lending out deposited BTC.
Stablecoin
A cryptocurrency designed to maintain a fixed value, typically pegged 1:1 to a fiat currency like the US Dollar.
Yield Farming
A high-risk DeFi practice where users move crypto between different protocols to maximize interest earned.
Liquidity Pool
A collection of digital assets locked in a smart contract used to facilitate decentralized trading or lending.
Smart Contract
Self-executing computer code deployed on a blockchain that automatically enforces agreement terms.
Gas Fees
The transaction costs paid to network validators for executing operations on a blockchain.
Atomic Swap
A peer-to-peer exchange of two different cryptocurrencies without relying on a centralized exchange.
Slippage
The difference between the expected price of a trade and the actual executed price.
KYC (Know Your Customer)
A standard regulatory process where financial platforms verify the identity of their users.
AML (Anti-Money Laundering)
A set of laws and regulations designed to stop criminals from disguising illegally obtained funds.
Securities Law
Legislation governing the creation, sale, and trading of financial investment instruments.
Money Transmitter
A licensed business entity that provides money transfer services or payment instruments.
Tax Reporting
The process of declaring income, capital gains, or losses to government tax authorities.
VASP (Virtual Asset Service Provider)
A regulatory designation for businesses conducting exchanges or transfers of digital assets.
Accredited Investor
An individual or entity allowed to trade securities that may not be registered with financial authorities.
Ready to put these terms into action?
Now that you understand the terminology, explore loan scenarios or calculate your own Bitcoin-backed loan.