Bitcoin-Collateralised Lending and Risk-Disciplined Leverage in Decentralised Finance

Abstract

This study examines whether Bitcoin-collateralised lending can operate as a form of risk-disciplined leverage within decentralised finance (DeFi). A stylised framework is developed to characterise how over-collateralisation, automated liquidation rules, and interest-rate formation determine balance-sheet risk and portfolio efficiency. Particular attention is given to loan-to-value (LTV) constraints, custody structures, and liquidity buffers in identifying the conditions under which collateralised Bitcoin borrowing improves capital allocation without generating destabilising leverage cycles. The findings indicate that conservative collateralisation combined with active liquidity management mitigates insolvency risk even under high asset volatility. The analysis provides a formal characterisation of leverage constraints in decentralised lending and extends the literature on risk allocation and capital structure in digital asset markets.