🪞Reflections🪞 on @lava_xyz, @MarediaShehzan, DLCs & Bitcoin-backed borrowing: I’ve had my disagreements with Shehzan, but I respect the guy; great product instincts, smart, and genuinely pushing to find real PMF for Bitcoin. I think Lava will succeed and frankly a lot of us are chasing a frontier he is pushing. -- That said, the recent situation looks a bit like decentralization theatre. Some users reported Lava moving funds unilaterally. In his announcement for BLOC, Shehzan claimed they’d found critical DLC vulnerabilities (I'm skeptical, more below) and were shifting their stack for more robust security. Fair enough, but that likely means either: 1) Users’ keys weren’t truly theirs (custodied by Lava) or 2) Lava controlled the oracle data to move funds. Not a great look, either way. Are funds SAFU? As far as I can tell, yes. Is going custodial the end of the world? No, honestly, it’s probably the right move for Lava. Are DLCs dead? Yes and no. My bigger read (total speculation) is Shehzan realized you can’t build a Tier-1 BTC-backed loan product with a pure DLC stack and has instead claimed DLC's have critical vulnerabilities. The UX and operational constraints are tough. A few examples: • In DLC loans, lenders can block borrowers who wish to repay loans early. Lenders could put up stake which is slashable to prevent this, but they don't want to do this, nor do borrowers want to pay higher interest rate to offset the cost of posting stake. So you have a scenario of don't ask, don't tell. • In DLC loans, liquidations are slow. Imagine waiting six (6) confirmations to move BTC to an exchange during a crash before a liquidator can sell and recoup the loan amount. This is suicide risk for lenders. Or it requires robust OTC deals, floating of BTC and just an overall headache. • Big borrowers expect soft-liquidations and discretion. If you're borrowing $1-10M+ you don't want to get liquidated from a random flash-crash. You want the lender to give you a little grace-period. This is very common in institutional lending world. DLCs don’t easily allow that. • Most lending companies (Unchained, Ledn, Lava, etc) sell some or part of loan book in the secondary market. This allows them to recycle money faster. To be clear, they don't rehypothecate or re-use the underlying BTC collateral. Instead, they literally sell the rights to the loan to big players, like Ross Stevens. My intuition is these players on the secondary market who Lava may be selling loans to are unwilling to buy loans encumbered by DLC's. That massively hinders the behind the scene economics of Lava, heavily restricting the ability to recycle dollars. • DLC's require a bunch of pre-signed Bitcoin TX's. If you want to change anything you need to re-sign all of it. During times of stress like a market down-turn you'll have a lot of borrowers wanting to add collateral, or modify their terms. This could be massive operational over-head that could legitimately overwhelm Lava. This setups Lava up for a lot of backlash from borrowers who may get liquidated because they couldn't add collateral or pay-down a loan due to overwhelming requests for pre-signing. -- All this is to say, my intuition is Lava quietly moved to a custodial model to smooth this over. DLCs just don’t scale for real production lending, and that’s okay. Lava’s still pushing the frontier in BTC-backed loans. That makes the rest of us push harder and drive down costs, improve UX for users. But long-term, for me personally it's easy to see that BTC-backed borrowing on a fully programmable Bitcoin L2 is simply better. You'll have: fixed rates, structurally lower interest rates, clean UX, non-custodial (subject to ZK verifier risk) and none of these constraints. Again, consider all of this speculation and not gospel. I'm keen to hear whether these points are true or not, but unfortunately I'm blocked by Shehzan and Lava. 🙄