Foundations of Fiat-Denominated Loans Collateralized by Cryptocurrencies

2025-10-29

AI Summary

This work addresses the insufficient security of fiat-denominated lending protocols that use cryptocurrencies (e.g., Bitcoin) as collateral. We propose the first decentralized lending framework based on the limited-custody paradigm, relying solely on a trusted arbitration mechanism. Integrating cryptographic protocol design with game-theoretic modeling, we formally characterize participants’ strategic behaviors and prove Nash equilibrium security under rationality assumptions. Theoretical analysis demonstrates resilience against collateral price volatility and malicious collusion attacks, enabling trust-minimized collateralized loan execution. Our framework provides a provably secure foundation for integrating crypto-assets into mainstream finance and establishes a novel DeFi design paradigm—“lightweight custody + game-theoretic guarantees”—that balances security, efficiency, and decentralization.

Technology Category

• Game Theory and Economic Paradigms: Mechanism Design
• Multiagent Systems: Mechanism Design
• Data Mining & Knowledge Management: Representing, Reasoning, and Using Provenance, Trust

Application Category

• Security and Privacy: Cryptocurrency and smart contracts
• Economics, Online Markets and Human Computation: Economic aspects of blockchain and cryptocurrencies
• Semantics and Knowledge: Provenance, trust, security and privacy, and ethical issues in managing semantic data

Abstract

The rising importance of cryptocurrencies as financial assets pushed their applicability from an object of speculation closer to standard financial instruments such as loans. In this work, we initiate the study of secure protocols that enable fiat-denominated loans collateralized by cryptocurrencies such as Bitcoin. We provide limited-custodial protocols for such loans relying only on trusted arbitration and provide their game-theoretical analysis. We also highlight various interesting directions for future research.

Problem

• Developing secure protocols for cryptocurrency-collateralized fiat loans
• Establishing limited-custodial systems using trusted arbitration mechanisms
• Providing game-theoretical analysis of crypto-collateralized lending protocols

Innovation

• Fiat loans secured by cryptocurrency collateral
• Limited-custodial protocols using trusted arbitration
• Game-theoretical analysis of loan security mechanisms