This guest piece was written by Thomas Heller, the Global Business Director at F2Pool, a large bitcoin mining pool.
I was first introduced to Atomic Loans last year at the Bitcoin 2019 conference. The Atomic Loans cofounders, Tony and Matt, approached me and asked me what challenges we and our miners run into at F2Pool.
One of the topics that we discussed in depth was the constant need for cashflow and liquidity that our customers require on a regular basis.
Miners earn revenue in bitcoin, but pay expenses in fiat. As we all know, bitcoin is a very volatile asset, so choosing when to liquidate bitcoin to pay for expenses is always a challenge.
This is where the bitcoin-backed loan gets interesting. Rather than selling my bitcoin, I could choose to use BTC as collateral in a loan, and get the cash to pay off my mining expenses. During the course of the loan, I could then wait for more favorable market conditions to liquidate my Bitcoin and repay the loan.
This allows me to take advantage of BTC price appreciation while still having access to liquidity up front to pay my mining bills. This was an idea that caught my attention.
But why Atomic Loans?
The idea of a loan backed by Bitcoin is not necessarily new. There are a number of existing centralized platforms that provide bitcoin borrowing and lending services - services like Celsius Network, SALT Lending, BlockFi, and Babel Finance come to mind. These platforms solve the needs of many, however as a believer of "not your keys, not you coins", giving up custody of my bitcoins is something I prefer not to do.
"Not your keys, not your coins."
So when the guys at Atomic Loans told me there was a way to get access to a bitcoin-backed loan without giving away custody of my Bitcoin, I was definitely intrigued.
Prior to Atomic Loans, I had heard about the concepts of Decentralized Finance (DeFi). The DeFi ecosystem offers financial tools (eg. saving and borrowing) that run entirely using smart contracts on the blockchain. More importantly, they're financial tools where all the rules are written in code that is transparent and open-source, instead of humans. There's also no need to get approval from or trust a company to use these tools. DeFi platforms are accessible from anywhere, anytime, and by anyone - as long as they have an internet connection. They're essentially financial tools that share the open, transparent, and borderless value propositions of the currencies they support.
The problem is, as interesting a proposition as DeFi was, it only really existed on ethereum. And considering that I'm a big bitcoin fan, I've never really bothered to do a deep dive on DeFi. Atomic Loans was the first time I heard of someone working on bringing DeFi to Bitcoin.
The Atomic Loans team designed a solution that allows you to place your bitcoin in a non-custodial escrow that is locked throughout the duration of your loan, and get access to a loan denominated in a stablecoin such as USDC or DAI. This would allow miners from across the globe to access the value of their BTC without liquidating, or giving away custody of their hard earned digital gold.
My first loan
February 29th, 2020 (Noi Bai International Airport, Hanoi, Vietnam)
Despite traveling frequently for work, I do own a small number of mining rigs hosted in China, because I love bitcoin and love stacking sats!
On this particular day, my monthly hosting bill was coming up. I had made around 0.75 BTC over the previous month, but the BTC price had recently dropped from around $10,000 USD to $8556.70 USD.
So while in a layover heading to Ho Chi Minh City at the Noi Bai International Airport, I found a sleep pod, and before heading to bed, I couldn't stop thinking...
Wouldn't this be a perfect time to go online and try an Atomic Loan? The price just dipped ...
I proceeded to load some bitcoin onto my Ledger Nano, and connect to the Atomic Loans dashboard.
I needed around $3,900 for my monthly hosting expenses. I decided to collateralize 1 BTC and get a loan for 4000 DAI.
At the time, this gave me a collateralization ratio of 213%, and a liquidation price of $4068.76. This means, if the bitcoin price hits $4068.76, my bitcoin can be liquidated. Little did I know that Black Thursday was right around the corner.
Unfortunately, as of today, being able to pay off mining expenses using a stablecoin like DAI is still rather difficult. So after receiving my 4000 DAI, I needed a way to convert it to RMB to pay off my mining bill.
There are a number of OTC platforms in China that allow you to convert USDT to RMB. I generally use CoinCola or Huobi OTC.
Luckily, on Ethereum there's an easy tool for converting DAI to USDT called y.curve.fi. Just like Atomic Loans, the Curve platform platform is decentralized and non-custodial, allowing for quick and easy conversions between Ethereum-based stablecoins (including USDT and DAI) without the need for KYC or giving away custody.
On Curve, I was then able to convert my 4000 DAI to 4057.61 USDT (since DAI seems to be trading at a premium these days).
I then took this 4057.61 USDT, and converted it to RMB and paid off my mining hosting costs for the month! 🎉 🎉 🎉
Black Thursday and Bitcoin's downward spiral
At around 6PM that fateful day, I received an email notification from Atomic Loans letting me know that my loan was getting risky. I immediately looked at the Bitcoin price chart and it appeared something like this:
"What the hell....", I thought. I had to do a double-take to make sure I was seeing things correctly!
Despite the price drop, I wasn't too concerned about my loan getting liquidated. After all, it still had to drop $1800 US before I would hit my liquidation price of $4068.76.
That comfort was short-lived. Late at night, I received a call from the Atomic Loans co-founders. As soon as I picked up, the first thing that came out of their mouth was, "Thomas, have you checked the price?"
Little did I know that we were in the midst of what ended up being the largest price drop in Bitcoin since 2013. As you could imagine, I was just about in full-blown panic mode. A ~$200 price difference between the current price and the liquidation price was much too close for comfort. And I was not about to go down and let my Bitcoin get liquidated without a fight.
So with the Atomic Loans team still on the line to give me pointers through the process, I immediately began the process of repaying part of my loan in order to increase the collateralization ratio to something I was more comfortable with.
After I purchased some DAI from an exchange, I returned to the Atomic Loans interface and was guided through the process of partially repaying my loan.
But after clicking "Repay DAI" and confirming the transaction on Metamask, something strange happened - nothing changed. The transaction kept showing as pending.
Together with the team, we then discovered that the reason my repayment transaction wasn't going through was because of the sky-high transaction fees on Ethereum that day. Luckily, as I learned from Tony and Matt, Metamask wallet has a "Speed Up" feature perfect for these types of circumstances - allowing me to pay a higher gas price in order for the Ethereum miners to prioritize my transaction!
At last, my transaction got confirmed and my bitcoin is safe!
For me personally, the entire process of taking out a loan from Atomic Loans has been very interesting.
Overall, the process of taking out a loan was very smooth. The fact that I could have gone through that entire process without ever needing to interact with a human, wait for someone to "approve" my loan, or give up my personal details via KYC – it reminded me of the magical experience of first transacting in BTC.
That being said, considering that this was the first time I have tried using a decentralized finance application, there was certainly plenty to learn – especially around some of the Ethereum-side interactions. Unsurprisingly, with Atomic Loans being an earlier-stage project, there were also some miner bugs that surfaced, as well as areas where I thought the UI and user communication could be improved. Examples include the limited amount of notifications and communication I received despite the massive drop in bitcoin price, as well as the lack of a guide or FAQ section in case something wasn't happening as expected.
Throughout the process, I was in constant communication with Tony and Matt from the Atomic Loans team and they were eager to listen to my feedback and brainstorm ways to improve the platform.
Despite Bitcoin price declining since I first initiated the loan, I still enjoy tremendous flexibility around when to liquidate my Bitcoin. With the volatile macro-economic conditions, and the halving coming up, having this flexibility to crucial to optimizing my bottom line as a miner and improve my chances of benefiting from bitcoin price upside.
For bitcoin miners across the globe, this represents a huge leap in the access to financial tools, not to mention the increased transparency and security that Bitcoin DeFi brings over existing centralized tools.
For Atomic Loans and their mission to bring DeFi to Bitcoin, this is just the beginning. The project has evolved a lot over the past year – going from just idea stage when I first met the team, to a fully functioning closed beta product on mainnet.
I look forward to seeing what's next!
Final note from Thomas: To all prospective users it's very important to consider your financial state when determining when to take out a bitcoin-backed loan. The bitcoin price can be very volatile, and liquidation is a real possibility if risk is not managed properly.
A special thanks to Thomas for taking the time to write up this piece about his experience using Atomic Loans. His feedback was very helpful as we continue to improve and iterate the product.
If you're interested in taking out a loan from Atomic Loans, we would love to have you in our mainnet beta! Feel free to reach out to us on our Telegram @atomic_loans to get access. For the latest updates and news on Atomic Loans, follow us on Twitter @Atomic_Loans