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Bitcoin Collateral Verification for Lenders
Why cryptographic proof is replacing screenshots.
The problem with current methods
Bitcoin-backed lending has grown substantially. Borrowers use Bitcoin as collateral for loans without selling. The lender needs to verify the borrower actually controls the claimed Bitcoin.
The common approach is screenshots. Borrowers send wallet screenshots, exchange account balances, or blockchain explorer links. This is problematic.
Why screenshots fail
Screenshots can be edited with basic tools
Exchange balances prove custody, not ownership
Blockchain explorer links show anyone's address
Funds can be moved seconds after screenshot
Same Bitcoin can be pledged to multiple lenders
The fundamental issue is that screenshots prove nothing. They show what someone claims to own, not what they actually control. A borrower could show you a whale's wallet and claim it as their own.
What cryptographic proof provides
Bitcoin's design already solves this problem. To spend Bitcoin from an address, you need the private key. Message signing uses this same mechanism to prove control without spending.
What cryptographic verification proves
The signer controls the private key for the address
The signature was created for this specific message
The current balance can be verified on-chain
Results are independently verifiable by anyone
The verification is mathematical. Given a message, signature, and address, anyone can verify the signature is valid. No trust in any third party required.
If someone produces a valid signature for an address, they control that address. This is not an assumption. It follows from the mathematics of elliptic curve cryptography.
What auditors need
For audits and compliance, verification needs to be documented. A lender should be able to produce evidence that verification occurred at a specific time.
A proper verification report includes:
- The Bitcoin address verified
- The message that was signed
- The cryptographic signature (base64)
- Balance at time of verification
- Timestamp of verification
- Method to independently verify all claims
The report itself should be tamper-evident. Including a hash of the document contents allows anyone to detect if the report has been modified after generation.
Auditors can verify the signature independently using any Bitcoin library or online tool. The verification process is standardized and deterministic. Given the same inputs, any correct implementation will produce the same result.
Implementation considerations
When implementing collateral verification, several practical considerations apply.
Message content
The message should be unique per verification. Include a timestamp, nonce, or reference ID. This prevents signature reuse across different verifications.
Multiple addresses
Large holders often use multiple addresses. Each address requires a separate signature. Summing verified balances gives total verified holdings.
Point-in-time nature
Verification proves control at a specific moment. Bitcoin can be moved at any time. For ongoing collateral arrangements, periodic re-verification may be appropriate.
Address formats
BIP-137 supports Legacy (1...), SegWit (3..., bc1q...), and with extensions, Taproot (bc1p...). Ensure your verification system handles all formats.
Exchange custody is different from self-custody. Verification of exchange holdings requires cooperation from the exchange. This guide focuses on self-custody verification where the borrower controls private keys directly.
Ready to implement cryptographic collateral verification?