What is X2?
nstitutional BTC can’t be used in DeFi today because it sits on the Bitcoin Network which doesn’t have full-scale smart contract capabilities. X2 is a protocol that enables cross-chain lending with owned collateral. A decentralized lending and borrowing protocol that is built on top of the Odsy Network’s dWallet (One of our marquee investments). The protocol allows users to borrow and lend Bitcoin and other cryptocurrencies without having to trust a centralized party.
- $600B+ in BTC can’t be used in DeFi solutions right now in a decentralized way, X2 has the potential to unlock all that liquidity
- The current TVL of lending markets is around $10B with an all time high TVL of around $22B.
- No other lending markets have tapped native Bitcoin for lending and X2 will have the first-mover advantage to access billions worth of liquidity.
- A lot of institutions have started accumulating Bitcoin as it is one of the best store of value, these institutions will have the option to borrow against their holdings but they can’t in a decentralized way.
Why we invested?
X2 presents a unique opportunity to capitalize on the growing demand for decentralized financial solutions built on top of the Bitcoin network. Here are the key factors that influenced our investment decision:
- Visionary Approach:
X2 has demonstrated a visionary approach by recognizing the untapped potential of the Bitcoin network. While Bitcoin is widely recognized as a robust and secure digital asset, it has inherent limitations that restrict its utility in the rapidly evolving DeFi landscape. X2 aims to address these limitations by providing innovative solutions that unlock the value of Bitcoin, such as accessing liquidity.
- Market Potential:
The market potential for X2 is significant. With $530B market cap and the growing adoption of decentralized finance, there is a clear demand for solutions that enhance the functionality and accessibility of Bitcoin.
- Unique Value Proposition:
X2's value proposition lies in its ability to bridge the gap between the Bitcoin network and other blockchain networks.By enabling interoperability and cross- chain lending, X2 offers users the ability to leverage Bitcoin's liquidity in combination with other assets and networks.
Investing in X2 at this stage allows us to capitalize on the early-mover advantage. As the DeFi ecosystem expands and evolves, being at the forefront of Bitcoin-focused DeFi solutions positions X2 to capture significant market share and establish itself as a leader in the space.
- Strong Team and Expertise:
We were impressed by the experienced team behind X2. The team members possess a deep understanding of the Bitcoin network, decentralized finance, and blockchain technology. Their expertise and track record in the industry provides confidence in their ability to execute the project's vision and navigate the complex challenges associated with building innovative solutions on top of Bitcoin.
Challenges in the Current Landscape
- Limited access to idle liquidity on the Bitcoin network:
Despite the vast amount of value locked in the Bitcoin network, there is currently no efficient way to access this idle liquidity.
Bitcoin holders face challenges in utilizing their assets for generating returns or accessing liquidity when needed.
This limitation is due to the traditional Bitcoin network's design, which primarily focuses on secure and decentralized transactions rather than providing lending or borrowing capabilities.
- Absence of smart contracts on the Bitcoin network:
The Bitcoin network's scripting language is intentionally limited in functionality compared to more advanced smart contract platforms like Ethereum.
This restricts the ability to create complex decentralized applications (dApps) and execute programmable agreements on the Bitcoin network.
Without smart contract functionality, developers and users are unable to automate various financial transactions, decentralized exchanges, decentralized finance (DeFi) protocols, and other innovative applications that require programmable logic.
- Omni-chain lending with Bitcoin and other networks is still underdeveloped:
The interoperability between different blockchain networks, including Bitcoin, is a significant challenge when it comes to lending and borrowing activities.
While Bitcoin is the largest and most recognized blockchain, it lacks native support for cross-chain transactions and collateralization.
This means that lending platforms and protocols struggle to provide seamless and secure lending services involving Bitcoin and other blockchain networks.
The absence of a robust and efficient Omni chain lending infrastructure hampers the growth of decentralized finance and limits the potential for leveraging Bitcoin assets in various financial activities.
- Lack of interoperability with other blockchain networks:
The Bitcoin network operates on its own blockchain, which is separate from other blockchain networks like Ethereum, Binance Smart Chain, or Polkadot.
This lack of interoperability poses challenges when it comes to integrating Bitcoin with other blockchain ecosystems and leveraging the benefits of different platforms.
Interoperability allows for seamless communication and value transfer between different blockchains, enabling cross-chain transactions, asset swaps, and decentralized applications that span multiple networks.
The absence of interoperability limits the potential for creating innovative and interconnected financial systems, hindering the growth and adoption of decentralized finance and other blockchain-based applications.
- Limited scalability and high transaction fees on the Bitcoin network:
Bitcoin's original design was not optimized for high scalability, resulting in limited transaction processing capacity and longer confirmation times during peak demand.
As the popularity and usage of Bitcoin have grown, the network has faced challenges in handling a large number of transactions efficiently.
This limitation leads to increased transaction fees as users compete for limited block space, making it costly to perform even simple transactions on the Bitcoin network.
High transaction fees and slower confirmation times pose obstacles to the seamless and affordable use of Bitcoin in various applications, such as microtransactions, remittances, and everyday payments.
- Liquidity Access:
X2 provides a solution to the problem of billions worth of liquidity sitting idle on the Bitcoin network. By leveraging Bitcoin's value, X2 allows users to unlock this liquidity and access it for various DeFi activities. This opens up opportunities for borrowing, lending, trading, and other financial activities, creating a vibrant ecosystem around Bitcoin liquidity.
- Smart Contract Functionality:
X2 aims to enable smart contract functionality on the Bitcoin network, addressing the limitation of smart contracts not being possible natively. This is being done through innovation done by the Odsy Foundation which is building a third generation of blockchain to solve the Silo problem in Web3.
X2 recognizes the importance of interoperability between different blockchain networks. To overcome the lack of compatibility between Bitcoin and other blockchains, X2 develops interoperability solutions that enable seamless interaction and value transfer between Bitcoin and other networks. This allows users to leverage the strengths and features of multiple blockchains, creating a more connected and versatile DeFi ecosystem.
- Cross-Chain Lending:
X2 aims to facilitate lending and borrowing activities across different blockchain networks. By integrating with various chains and leveraging Bitcoin's liquidity, X2 enables users to participate in cross-chain lending, where Bitcoin holders can lend their assets and earn interest, while borrowers can access Bitcoin liquidity by using their assets on other networks as collateral. This opens up new opportunities for capital efficiency and yield generation.
- Developer Tools and Infrastructure:
X2 will provide developer tools and infrastructure to empower developers to build decentralized applications and financial products on the Odsy network. This includes software development kits (SDKs), APIs, and documentation to simplify the process of integrating with X2's solutions and leveraging the full capabilities of the Odsy Network.
How does it work?
X2 is utilizing the programmable MPC solution Odsy to enable lending and borrowing positions using Bitcoin and other cryptocurrencies in a trustless manner. To understand how X2 is utilizing the lending protocol, it is essential to delve into the technical background and key components of the Odsy Network. The Odsy Network is a turing-complete MPC solution that addresses access control in Web3 in a programmable and decentralized manner.
One of the key components of the Odsy Network is the Wallet, which is an MPC network holding private key shares of a user's wallet across different supported blockchains. By utilizing MPC technology, the Wallet ensures secure key management while allowing dynamic and stateful access control on various chains, including non-smart contract chains.
X2 leverages the Odsy Network's Wallet to enable users to claim ownership over their assets without removing them from their individual wallets. This is achieved by locking the assets within the user's Wallet, granting the lending protocol access to the assets while maintaining the user's control and ownership.
Flow of the user
Examples of state transitions of the lending protocol. For simplicity, interest rates and underlying gas fees are neglected. V denotes the virtual liquidity pool and L the lending protocol. User 2 has 10 BTC in the Wallet.
Then, before being able to interact with the protocol, the user first has to give the virtual accounting standard an aNowance to lock funds. The virtual accounting standard locks the funds within the user's dWallet and credits the user's virtual liquidity. Lastly, the user has to give the lending protocol an allowance to withdraw virtual liquidity.
When calling the deposit function, the protocol first calls transfer FromVirtual to move the funds to the protocol and subsequently mints tokens A that represents the user's deposit into the pool.
Users can then borrow funds provided as virtual liquidity by calling the borrow function. This leads to virtual liquidity being transferred from the protocol to the user and debt tokens D being minted accordingly. The function checks that the borrower's position health is sufficient.
Borrowers can repay their position by calling the repay function, which transfers virtual liquidity from the user back to the protocol and accordingly burns the debt tokens.
Withdrawing liquidity from the protocol is inverse to depositing it, namely transferring back the virtual liquidity from the protocol to the user and burning the tokens representing pool deposits accordingly.
The health of a position is given by the ratio of the sum of liabilities (given by the debt tokens D), over the sum of provided collateral (given by the asset tokens A). For both, a borrowing and collateral factor, namely bf and cf, are introduced respectively to account for the volatility of the borrowed asset collateral.
Borrowers have to keep their position health always above 1, as they will get liquidated otherwise. In case a borrower's position falls under the liquidation threshold of 1, the user's collateral is up for liquidation. By calling the liquidate function, the liquidator transfers virtual liquidity for the borrower's liabilities to the protocol, whereas in return, the protocol transfers the borrower's virtual collateral to the liquidator. The liquidator can take a flashloan to perform the liquidation.
Soft liquidations are used to ensure that not too much of the borrower's collateral gets liqui-dated. Therefore, after the liquidation, the health factor has to be between H minimum and H maximum.
Similarly to Euler, a type of Dutch auction is used to increase the liquidation discount dipamically over time. Rather than a fixed discount percentage, the discount is incremented based on a function of how under-water the position is. This setup decreases the occurrence of priority gas auctions, as liquidators will liquidate at different discounts. This is also beneficial to the borrowers as it reduces the costs that come along with liquidations. On top of that, liquidation boosts could be used that give liquidators a higher discount which could be granted for liquidators depositing capital in the protocol.
The protocol has its own reserve, which is responsible to accumulate funds and acting as a buffer against bad debt. The reserve receives funds by interest accrual and liquidations:
- The reserve factor, specified by governance, defines how much of the interest accrual for a particular asset goes to the user vs. the reserve. Riskier assets will have a higher reserve factor leading to more interest paid into the reserves.
- As part of the liquidation process, the liquidator must give back a slightly larger amount of the borrowed asset. This additional amount is added to the reserves for the borrowed asset. This ensures that volatile assets accumulate faster in the reserve.
The accrual of interest is calculated on a per-second basis and a reactive interest rate is used in order to not set parameters for every lending market manually, improving robustness. Funds within the reserve are available for others to borrow and accrue interest. The reserve funds are accounted for virtually.
Risks of supported chains and assets need to be managed in order to ensure the safety of the protocol. Therefore, measures for onboarding new chains and assets are introduced in the following.
X2 taps into the idle liquidity on the Bitcoin network, offering the first-mover advantage in accessing billions of dollars worth of liquidity. With its visionary approach, market potential, unique value proposition, timeliness, and strong team, X2 is well-positioned to capitalize on the growing demand for decentralized financial solutions.
By addressing the limitations of the current lending market landscape and leveraging innovative technologies such as virtual liquidity and smart contracts, X2 aims to enhance the functionality and accessibility of lending and borrowing activities. The protocol aims to bridge the gap between different blockchain networks, enable cross-chain lending, and provide users with the ability to leverage Bitcoin's liquidity in combination with other assets and networks.
X2's success would not only benefit individual users looking for liquidity solutions but also contribute to the growth and adoption of decentralized finance (DeFi) as a whole. By unlocking the value of Bitcoin and enabling seamless integration with other blockchain ecosystems, X2 has the potential to create a more interconnected and versatile DeFi ecosystem, fostering innovation and financial inclusion.