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.
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 constrains rehypothecation through its Discreet Log Contract design and contract flow rather than relying only on policy controls. Collateral is locked on the Bitcoin blockchain and can move only through the contract's pre-signed outcome transactions.
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.
Lygos constrains rehypothecation through its Discreet Log Contract design and contract flow rather than relying only on policy controls. Collateral is locked on the Bitcoin blockchain and can move only through the contract's pre-signed outcome transactions.
| Lygos | Ledn | Nexo | Unchained | |
|---|---|---|---|---|
| Rehypothecation | Constrained by DLC design | May be re-posted to an institutional funding partner | Yes, platform re-lends assets | No |
| Custody | Non-custodial (DLC) | Custodial (segregated) | Custodial | Collaborative multisig |
| Technology | Discreet Log Contracts (Bitcoin-native) | Centralized custody | Centralized custody | 2-of-3 multisig (manual) |
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.
Starting at 10% APR, $0 origination fees, and DLC-secured collateral on the Bitcoin blockchain.