Atomic Loans is releasing a Decentralized Finance (DeFi) product that is likely to be the nearest to a Bitcoin (BTC) chain direct implementation. It doesn’t completely stop using an external smart contract platform, but it allows for collateral directly using Bitcoin.

On April 14, the company announced it had raised $2.45 million in seed funding in a round led by Initialized Capital, with the participation of ConsenSys, Morgan Creek Digital, and Joe Lallouz and Aaron Henshaw from Bison Trails.

Around the same time, the Bitcoin component of the DeFi network is being launched as a public beta mainnet.

Atomic loans work like MakerDAO or Compound. A borrower must lock his BTC collateral upon the Bitcoin blockchain in a special multi-signature contract. Smart Ethereum contracts then read the data and sell the loan to the other blockchain through stablecoins.

Atomic Loans co-founder and CTO, Matthew Black, pointed out that the device doesn’t mint its stablecoins, making it closer to Compound than Maker.

Like other DeFi systems, in which the lender may cause liquidation, there is a minimum requirement for collateralization. It was set at 140 percent for BTC — just 10 percent below what Maker demands Ethereum, but on Compound, 7 percent more than the same percentage.

Motivating the decision, Black said they looked at these rivals and “decided to go somewhere in the middle.” The team thought that Bitcoin “was a much more stable asset” and could sustain criteria slightly lower than this.

The discount on the Bitcoin market price is 7 percent for liquidators, which is higher than 5 percent for Compound and 3 percent for Maker.

Not Permissionless

As other cross-chain solutions operating on Bitcoin, as Black noted, there’s an element of confidence involved:

“There’s two main points of trust within the system. One is oracles and other is an arbiter on the Bitcoin side. […] Basically [the arbiters] sign along with the lender in order to move Bitcoin from its current location to the atomic swap contract.”

Trustworthy oracles are normally present on Ethereum at most DeFi platforms, although some may be more distributed than others. Because of its restricted script features the need for an arbiter is unique to Bitcoin.

Though the startup has a strategy to overcome this, the arbiter will be Atomic Loans itself:

“For V2 we’re planning to remove that arbiter. And that’s in the works to be removed using the discreet log contracts.”

Discrete log contracts, initially implemented by the MIT Digital Currency Project, allow for the use of oracles when determining how to allocate a transaction. Essentially, when the contract entered, the users create all possible combinations of transactions based on expected oracle performance.

The oracle serves as the third party to the multi-signature contract and the transaction triggered when it eventually submits the right public key for a specific combination.

For Atomic Loans, these may be used to divide the funds between the liquidator and the borrower in a liquidation situation, Black explained.

Black predicted a six-month timeframe for the launch of V2. Although he acknowledged that the input from the first version would also depend upon that.

Quest for Bitcoin DeFi

The absence of complex smart contract scripting has historically been a serious challenge for Bitcoin. To introduce some form of lending or a DeFi product. Just taking BTC as an asset into a specific chain typically involves a trustworthy, or “federated,” bridge. Where the Bitcoin owned by corporate entities.

“I think there are a couple of ERC-20 Bitcoin solutions that are working on coming to Ethereum,” Black noted. One is Wrapped BTC (BTC), which live on websites such as Compound.

“But we’ve seen that there hasn’t been that much adoption of it. To be honest, since it is a custodial solution,” added Black.

While Black has pointed to some more decentralized bridging approaches. He has criticized the idea of using such wrapped assets for collateral:

“I think any time that you move an asset to another chain. And it requires some type of external validation or bonding, you will always run into liquidity issues.”

Recent MakerDAO events have highlighted that DeFi platforms can be very vulnerable to liquidity problems:

“I think that’s where a model like Atomic Loans is really favorable. Because we have access to the entire liquidity of the Bitcoin network.”

In his opinion, this is better than wrapped Bitcoin on Ethereum. Which he called “bringing Bitcoin to DeFi.” Atomic loans, on the other hand, will “bring DeFi to Bitcoin.”

However, Black admits that much of the Atomic Loans code is on Ethereum. As pure Bitcoin DeFi is possibly impossible to implement. “It’s bringing DeFi to both [Ethereum and Bitcoin],” he summarized.