Introduction

Introduction

Spindle Finance is a money market platform native to Botanix, a Bitcoin Layer 2. We aim to bring on-chain lending and borrowing to the Bitcoin ecosystem.

In traditional finance (TradFi), money markets are key cornerstones facilitating financial activity. Lending and borrowing are fundamental to economic growth and stability. Banks act as the intermediaries, assessing creditworthiness and facilitating the flow of capital. Interest rates are determined by a variety of factors based on central bank policies and macroeconomic conditions.

Similarly, in the decentralized finance (DeFi) ecosystem, money markets play a crucial role as one of the key building blocks. Spindle Finance enables users to lend and borrow assets on-chain, facilitated by smart contracts instead of banks.

This peer-to-peer approach removes institutional intermediaries, offering a decentralized and transparent alternative. Interest rates in Spindle Finance are algorithmically determined, reflecting real-time supply and demand dynamics. Access is permissionless and participation is free.

Building this decentralized financial infrastructure on top of Bitcoin is possible due to EVM-compatible Layer 2 networks. Bitcoin mainnet only implements a limited scripting language, as its primary focus remains being a decentralized and uncensorable store of value. New technology allows layer 2 networks to implement more fully-featured smart contract environments, such as the Ethereum Virtual Machine (EVM), while still deriving their economic security from the proof-of-work Bitcoin mainnet.

Spindle Finance builds upon this foundation, leveraging the EVM's capabilities to provide a modern, full-featured lending and borrowing experience to the Bitcoin Ecosystem.

Bridging Bitcoin and DeFi

Bridging canonically from the Bitcoin blockchain to the Spiderchain is managed by Botanix. Their documentation can be found here https://docs.botanixlabs.xyz/botanix-labs. Technical details explaining the Spiderchain and the bridging mechanism from Bitcoin can be found in their whitepaper.

Once your assets are bridged to Botanix, you can begin to explore the DeFi ecosystem, including Spindle Finance.

The Basic Mechanics of Spindle Finance

In Spindle Finance, users can lend their assets to earn interest or borrow assets by providing collateral. This process is facilitated by smart contracts, eliminating the need for traditional intermediaries and enabling a peer-to-peer or peer-to-protocol model. The protocol aggregates liquidity from lenders and makes it available to borrowers, with interest rates determined algorithmically based on supply and demand dynamics.

Spindle Finance operates on the principle of overcollateralization to ensure the security and stability of the lending process. Borrowers must lock up a portion of their crypto assets as collateral, which acts as a safeguard for lenders in the event of default. The value of the collateral must exceed the value of the assets being borrowed. This model, while requiring more collateral than traditional lending, provides a transparent and decentralized alternative to traditional financial systems.

In the event that the price of the borrowed asset rises or the price of the collateral drops, as the borrowed value nears the collateral value, the lending position can be liquidated to prevent loss to the protocol.