How Non-Custodial Bitcoin Lending Actually Works at Lygos.finance
Lygos.finance uses Discrete Log Contracts to enable Bitcoin-backed loans without giving up custody. Here's how the technology works and why it matters.
In 2022, crypto lenders like Celsius and BlockFi collapsed, taking billions in customer Bitcoin with them. The common thread? Customers handed over their keys, trusting companies that turned out to be running undisclosed risks with deposited assets.
Lygos.finance, launched in August 2025, is built specifically to make that scenario impossible. The platform enables Bitcoin-backed loans for stablecoins (USDC or USDT) without borrowers ever surrendering custody of their BTC to the lender, the platform, or any third party.
The mechanism that makes this work is worth understanding, because it represents a genuinely different approach to crypto lending.
How Discrete Log Contracts Keep Bitcoin Native
Lygos uses Discrete Log Contracts (DLCs), a technology the company acquired from Atomic Finance earlier in 2025. Atomic had already processed $140 million in volume and held $25 million in BTC through these contracts without a single hack—a meaningful track record.
Here's the basic architecture: when you take out a loan, your Bitcoin gets locked in a 2-of-2 multisig script on Bitcoin's Layer 1. This creates a bilateral agreement where only you (the borrower) or the lender can move the funds, and only under pre-defined conditions.
The clever part is how those conditions get triggered. External oracles provide price data (like BTC-USD), but they don't control the assets. Instead, all possible outcomes—repayment, liquidation at various price levels—are pre-signed at contract creation. The oracle simply attests to which outcome occurred, unlocking the corresponding pre-signed transaction.
No wrapped tokens. No bridges. No smart contracts holding your Bitcoin. The BTC stays on Layer 1 the entire time.
What This Looks Like in Practice
Lygos targets institutional borrowers and high-net-worth individuals, supporting loans from $25,000 to $100 million. The use case is straightforward: you hold significant Bitcoin, need liquidity, but don't want to sell (triggering taxes) or hand your keys to a counterparty.
When you repay the loan, your Bitcoin returns to your full control. If BTC's price drops enough to trigger liquidation, the pre-signed transaction executes automatically—but according to terms you agreed to upfront, not at a custodian's discretion.
The platform is currently onboarding select institutional lenders and borrowers, with partners like Magnolia Financial providing liquidity on the lending side.
The Tradeoffs Worth Considering
Non-custodial doesn't mean risk-free. The most obvious concern is oracle reliability—if the price feed is wrong or manipulated, the wrong pre-signed transaction could execute. Lygos addresses this by using reputable external oracles and emphasizing that borrowers retain autonomy over repayment timing, but oracle risk remains inherent to the design.
There's also the question of liquidation mechanics. In traditional lending, a custodian might give you a margin call and time to respond. With DLCs, the process is more deterministic—which provides certainty but less flexibility.
Finally, this model requires trusting the initial contract construction. While the technology has been battle-tested, you're still relying on Lygos to implement DLCs correctly.
A Third Path Between CeFi and DeFi
Lygos positions itself as an alternative to both centralized lending (with its custody risks) and DeFi protocols (with their smart contract vulnerabilities and typically weaker privacy). DLCs look like standard multisig transactions on-chain, providing some privacy benefits, and settle without on-chain computation.
The founding team combines DLC expertise from Atomic Finance (Tony Cai and Matt Black) with traditional finance lending experience from Anchorage and JPMorgan (Jay Patel and Francis Corvino). That mix of crypto-native technology and institutional lending knowledge reflects who they're building for.
For institutions still cautious after 2022's failures, non-custodial lending represents a concrete answer to "how do we access Bitcoin liquidity without counterparty risk?" Whether Lygos specifically earns that business will depend on execution, but the underlying technology addresses a real problem that centralized lenders fundamentally cannot solve.
The key question for potential borrowers: is the tradeoff of oracle dependency and deterministic liquidation worth eliminating custodial risk entirely? For those who watched Celsius customers wait years to recover fractions of their deposits, the answer might be straightforward.