Rehypothecation

What is 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. Lygos makes rehypothecation cryptographically impossible. Because your Bitcoin is locked in a Discreet Log Contract on the Bitcoin blockchain, not held in a custodial wallet, no one can access or re-lend your collateral. The 2-of-2 contract structure means your BTC physically cannot be moved except via the pre-signed outcome transactions. Lygos's rehypothecation rate is 0%, guaranteed by code rather than policy.

Full Definition

Rehypothecation occurs when a financial institution takes collateral posted by a borrower and uses it for its own transactions, such as lending it out, pledging it to other parties, or using it to generate yield. In traditional finance, rehypothecation is common in brokerage and prime lending. In crypto lending, custodial platforms like Celsius, BlockFi, and Nexo have historically rehypothecated deposited Bitcoin to fund yield programs. When a platform becomes insolvent, rehypothecated collateral may be lost or frozen in bankruptcy proceedings, as Celsius creditors experienced in 2022.

How Lygos Uses This

Lygos makes rehypothecation cryptographically impossible. Because your Bitcoin is locked in a Discreet Log Contract on the Bitcoin blockchain, not held in a custodial wallet, no one can access or re-lend your collateral. The 2-of-2 contract structure means your BTC physically cannot be moved except via the pre-signed outcome transactions. Lygos's rehypothecation rate is 0%, guaranteed by code rather than policy.

How Lenders Compare

	Lygos	Ledn	Nexo	Unchained
Rehypothecation	0% (impossible by design)	100%. Your BTC may be lent out	Yes, platform re-lends assets	No
Custody	Non-custodial (DLC)	Custodial	Custodial	Collaborative multisig
Technology	Discreet Log Contracts (Bitcoin-native)	Centralized custody	Centralized custody	2-of-3 multisig (manual)

Full comparison

Why this matters for borrowers

Understanding Rehypothecation helps you assess the real risks of Bitcoin lending. The difference between custodial and non-custodial models isn't just marketing. It's the difference between trusting a company and trusting cryptography.

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