How Side Lending works
Side Lending is a two-sided money market purpose-built for native Bitcoin. It connects:
BTC holders (borrowers) seeking liquidity without giving up custody
Liquidity providers (lenders) who want to earn yield by providing capital
Unlike traditional DeFi lending protocols, which require BTC to be wrapped and bridged to external chains, Side Lending is built directly on Bitcoin’s native UTXO model. It leverages Bitcoin’s scripting capabilities to enable the creation of multiple UTXOs, each with distinct, predefined, and enforceable spending conditions.
Loans are issued on Side Chain, while BTC collateral remains securely locked on Bitcoin L1. This architecture is enabled via Discreet Log Contracts (DLCs), where the counterparty to the borrower is a covenant committee called the Distributed Collateral Manager (DCM).
The DCM cannot arbitrarily access or move user funds. Instead, it can only trigger liquidation by executing pre-signed Contract Execution Transactions (CETs), which are cryptographically bound to oracle input. These CETs rely on threshold adaptor signatures — a mechanism where the unlocking secret is embedded in the oracle’s signature and only revealed if a quorum of oracle committee members jointly attest to a specific price outcome. Once revealed, the secret completes the CET, enabling the contract to execute and collateral to be partially or fully forfeited. This design ensures trust-minimized enforcement without rehypothecation or custodial risk.
Spending Conditions
In Side Lending, BTC collateral can only be unlocked under four predefined conditions:
Repayment: Borrower repays the loan + interest → BTC is returned to the borrower
Price-triggered liquidation: Side’s oracle (Oracle++) reports BTC has hit the liquidation price → DCM executes CET → BTC is transferred to the DCM
Maturity default: Loan term ends without repayment → DCM executes CET → BTC is transferred to the DCM
Failsafe timeout: If Side Chain becomes non-operational → The borrower may unilaterally reclaim BTC after a predefined time-lock
Once the DCM receives liquidated collateral, it initiates an open liquidation process. Anyone can act as a liquidator by purchasing the collateral at a discount (e.g., 5%). Proceeds from the sale are returned to the lender pool to compensate liquidity providers. If any portion of the collateral remains unsold, it is returned to the borrower.
A Bitcoin Borrower’s Journey
Let’s walk through how Alice borrows 50,000 USDC on the Side Chain using 1 BTC as collateral.
Step 1: Loan Request
Alice submits a loan request on Side Chain. If the liquidity pool has enough capital, she proceeds; otherwise, the request is rejected.
Step 2: Lock BTC
Alice locks 1 BTC into a non-custodial vault (multisig 2-of-2) on the Bitcoin mainnet. She can either sign a deposit transaction directly from her connected Bitcoin wallet or deposit from other sources (e.g., centralized exchanges).
Step 3: Pre-authorize Liquidation
Alice pre-signs two CETs, each corresponding to an unlocking condition under which the DCM may move her collateral: price-triggered liquidation and maturity default.
Once this step is completed, Alice receives 50,000 USDC directly to her Bitcoin address on Side Chain — no additional claim action is required.
Settlement Outcomes
Happy Path:
Alice repays the loan and interest before maturity → Her 1 BTC is fully returned.
Unhappy Path:
Side’s oracle reports that BTC/USDC has fallen to the liquidation threshold and provides a valid signature → DCM executes the CET and transfers the collateral.
The oracle attests that the loan has passed its due date → DCM executes the CET and claims the collateral.
In either case under the Unhappy Path, Alice is not required to repay the loan or interest. If any portion of her BTC remains after liquidation (e.g., unsold collateral), it is returned to her.
A Lender’s Journey
The lender’s journey is relatively straightforward. Anyone can become a lender (or liquidity provider) by depositing capital — such as USDC or USDT — into the lending pool on Side Chain.
In return, lenders receive a yield-bearing token called an sToken (e.g., sUSDC), which represents their share of the pool. sTokens automatically accrue yield generated from interest paid by borrowers.
sTokens are native assets on Side Chain, minted upon deposit and burned upon withdrawal. They can also be integrated into other DeFi protocols.
This design makes Side Lending fundamentally different from other DLC-based lending solutions, which rely on peer-to-peer models where each borrower is matched with a single lender. In contrast, Side Lending uses a liquidity pool model with a signer committee (DCM) acting as the counterparty to all borrowers, enabling greater scalability and capital efficiency.
Note: Research is underway to support replacing the DCM or enabling multiple DCM sets in parallel.
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