OrdFi Strategies

Decentralized Finance on Bitcoin Ordinals (“OrdFi”) provides a rich set of strategies. I use Liquidium‘s collection offers as an example.

Lending

How it works:

1. You provide liquidity (BTC) to another participant
2. The borrower provides an Ordinal as collateral
3. If the borrower doesn’t repay the loan plus interest (“default”), you receive the Ordinal

Benefits:

1. You earn passive income
2. Even in case of default, you benefit if the Ordinal is worth more than the current floor

Risks:

1. You are worse off if the borrower defaults and the floor price drops below the loan amount plus interest

The infographic below shows the profit and loss (P/L) from a lender’s perspective. (And yes, it looks very familiar to a short put.) One has to distinguish two cases:

1. The floor price at loan maturity is below the floor price and the borrower decides to default. In this case, the lender can claim the pledged Ordinal. In the worst case, the total loan amount is lost if the Ordinal cannot be sold.
2. The floor price at loan maturity is above the loan amount. In this case, the borrower repays the loan amount plus interest.

P/L from a lender’s perspective

Takeaways :

1. Only offer loans for Ordinal collections that you would consider holding
2. More liquid collections are safer (in case you want to get rid of an Ordinal)
3. Look out for collections with low loan-to-value (LTV) ratios (lower default risk)

Borrowing

How it works:

1. You own an Ordinal (that is covered by Liquidium) and need short-term liquidity
2. You take a loan offer and pledge your Ordinal as collateral

Benefits:

1. You can use the liquidity for fresh mints or other short-term financial needs
2. Consider it as a collateralized payday loan

Risks/drawbacks

1. If you cannot repay the loan, your Ordinal goes to the lender
2. You pay a substantial interest rate, transaction fees, and Liquidium’s fees

Takeaways

1. It makes sense if you hold a floor Ordinal (not your forever PFP) and you don’t have enough liquidity to use your WL spot in a hot mint
2. It could be cheaper than other available financing options such as loan sharks and payday loans

Hedging

How it works:

1. You borrow to hedge your Ordinal against short-term price drops
2. If the floor price drops below the loan value until the loan matures, you keep the BTC and don’t repay the loan

Benefits

1. You don’t need to sell your Ordinal even if you think that the floor price may drop

Drawbacks

1. It’s relatively expensive for longer time-horizons
2. You would need to roll over to a new loan after your current loan matures

Takeaways

1. Reasonable hedging strategy for short horizons
2. The higher the LTV, the less risky

“Covered” lending (Degens only!)

How it works:

1. You have an extra Ordinal and want to gain these juicy yields
2. You assume that your Ordinal may not outperform these yields
3. Example:

Assume an OMB floor of 0.7 BTC, current loan offers of 0.5, and an APY of 90% (to simplify the math)

Sell your OMB at the floor and make an OMB collection loan offer for 0.5 (assume it’s accepted)

Roll over these OMB loans every 16 days

Benefits

1. You earn the yield: you own 1.15 BTC at the end of the year if there are no loan defaults and the yield remains constant
2. In case the borrower does not repay, you receive the OMB, plus you have some extra BTC (the difference between the loan and the floor price), so you are better off than your starting point (owning the OMB only)
3. You may be lucky and the received OMB is above the floor or the floor price is above the loan amount

Risks

1. The OMB floor increases more than the APY path
2. In that case you are worse off than just holding the OMB

takeaway — suitable strategy if you expect Ordinals prices to go sideways

Point farming

How it works:

1. You combine borrowing and lending to double farm points
2. Example:

You own a NodeMonke and borrow BTC (paying an APY of 90%)

You lend BTC to riskier collections such as Puppets (receiving an APY of 120%)

Benefits

1. You farm more points than just plain vanilla lending/borrowing

Risks/drawbacks

1. You have to lend into riskier collections to cover your interest costs and transaction fees
2. If one or more borrowers default, you cannot repay the NodeMonke loan (without fresh capital)
3. You need to find liquid collections with matching loan durations