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.

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:

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.

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.