Seedless Keys And DLCs: How Lava Is Making Bitcoin Custody Easy

Company Name: Lava

Founders: Shehzan Maredia

Date Founded: January 2022

Location of Headquarters: New York, USA (with some remote employees)

Amount of Bitcoin Held in Treasury: N/A

Number of Employees: 7

Website: https://www.lava.xyz/

Public or Private? Private

Shehzan Maredia wants to make custodying Bitcoin easy.

This is why he founded Lava, an app that he and his team have created that allows users to purchase bitcoin, transact with both bitcoin and stablecoins globally and now hold their bitcoin in self-custody without having to write down a seed phrase.

Maredia is one of a growing list of entrepreneurs in the Bitcoin space who believes that seed phrases — lists of 12 to 24 words used to recover funds from lost or stolen cryptocurrency wallets — are hindering mainstream adoption of bitcoin. He thinks that seedless alternatives to self-custody will help onboard the masses.

“I realized that seed phrases were a big barrier to adoption,” Maredia told Bitcoin Magazine, “and I went down the rabbit hole [to make] something better.”

After months of R&D, Maredia developed a solution that’s now at the heart of the design of the Lava app: Lava Vault.

Lava Vault

After testing a number of different self-custody setups, Maredia and his team arrived at a unique multisignature solution that became the backbone of the Lava Vault.

“We built this two-of-two recovery solution for self-custody where you can attach one part of the two-of-two to your cloud account and the other is a four digit PIN,” he explained.

Introducing the Lava Vault, the best self-custody app for people who want to save in bitcoin and spend in dollars without compromising on security.

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secure your assets with seedless, 2-of-2 recovery pic.twitter.com/nEIYIHD6Dg

— lava (@lava_xyz) July 16, 2024

“If I have your four digit PIN, I can’t steal your money because I don’t have access to your cloud account. If I have access to your cloud account, I don’t have your four digit PIN, and I can’t brute force it,” he added.

Maredia and the team at Lava call this design the Lava Smart Key, and they believe that it’s helping to provide simpler self-custody for those who otherwise might not want to take on the responsibility.

“We’ve actually seen a bunch of people using it that previously would have just bought bitcoin and kept it on Coinbase,” he said.

What is more, Lava Vault works seamlessly with Lava Exchange, another product Lava recently rolled out.

Lava Vault + Lava Exchange = Auto-Onboarding To Self-Custody

It’s often challenging for new Bitcoin users to tell the difference between a custodial wallet that an exchange provides and a self-custody wallet. It can be overwhelming for someone new to Bitcoin to go through the process of moving their bitcoins from an exchange wallet into self-custodial wallet, especially if the exchange offers both (e.g., Coinbase).

Lava removes this difficulty, though, as it allows users to purchase bitcoin within the app — at the best rate available — before automatically sending that bitcoin into self-custody.

“We have this exchange aggregator we’ve built,” said Maredia.

“If you want to buy bitcoin today, you have to figure out which exchange — Kraken, Coinbase. So, we work with a lot of them. We know what price they offer you based on your order, and we just route you to the best exchange through Lava,” he added.

Once users make their purchase, the bitcoin shows up in their Lava Vault.

“This is super useful if I’m trying to onboard users to self-custody,” said Maredia. “Now, I can tell them to download directly to self-custody, which largely increases the likelihood that they will continue to use self-custody.”

Once users have their bitcoin or stablecoins in self-custody via Lava, they can use either asset to make transactions permissionlessly with anyone in the world. And soon they will also be able to borrow dollars against their bitcoin without having to turn their bitcoin over to a third party.

Lava Loans

Maredia and the Lava team recently released a beta version of a new product called Lava Loans, which Maredia describes as a “self-custodial version of BlockFi.”

BlockFi, now defunct, was a platform that allowed users to use bitcoin as collateral for a loan. The main difference between a platform like BlockFi and Lava is that users had to give up custody of their bitcoin to BlockFi to use the service.

“Lava Loans is the first way to borrow against your bitcoin without giving it to a custodian or bridge,” said Maredia.

Maredia created this product because he both saw the demand for it and wanted something like this for himself.

“There’s a lot of Bitcoiners who don’t want to sell their bitcoin,” shared Maredia.

“I don’t want to sell my bitcoin either, because it’s appreciating. I’d rather borrow against it at a lower interest rate than it’s appreciating,” he added.

He also noticed that the other methods of borrowing against one’s bitcoin are both highly inefficient and expensive.

“There are billions of dollars of bitcoin-secured loans happening with custodians or with Wrapped Bitcoin (WBTC),” he explained.

“To get Wrapped Bitocin, you have to take your Bitcoin, KYC yourself, put it on an exchange, pay fees to mint it, pay a bunch of network fees to move it onto Ethereum and then once you’re done using Wrapped Bitcoin, move it back to your exchange, pay extra fees to unwrap your Bitcoin and move it back to self-custody. And you probably have tax obligations for wrapping your Bitcoin, too,” he added.

“I want to get these people using native bitcoin. We can increase the market size of people who are using actual bitcoin as collateral.”

Discreet Log Contracts (DLCs)

Lava Loans employs a specific type of smart contract on Bitcoin called Discreet Log Contracts (DLCs).

Maredia explained that DLCs are safer than the types of smart contracts often deployed on other major crypto networks.

“DLCs are interesting because you’re basically just using the Bitcoin layer one to lock your Bitcoin and release it under some predefined set of conditions,” he explained.

“[As opposed to] smart contracts on Ethereum or Solana that constantly keep getting hacked, DLCs are basically a bunch of pre-signed transactions that you encrypt. You almost get formal verification of your system by default, because you know that the money that’s locked in the smart contract between you and your counterparty can only be moved under this predefined set of conditions that you have verified,” he added.

“So, there’s a lot less technical risk versus writing arbitrary code deployed on the EVM that anyone can poke around with and exploit.”

Maredia also shared that the Lava team is composed of a number of engineers who contributed to early DLC standards.

“There’s probably like 10 people, a lot of which work at and contribute to Lava right now, who know about this tech,” explained Maredia, who also shared that the potential of DLCs has yet to be fully realized largely because of how new the technology is. “Not too many people know about [DLCs, but] that’s because the tech is early and we’re building it.”

Move Slowly And Safeguard Things

Unlike many in the crypto and broader tech space who take the “Move fast and break things” approach, Maredia and his team are analytical and thorough. They prefer to conduct research and test products rigorously before bringing them to market.

“We’ve been doing a lot of R&D over the last two years,” said Maredia.

“We were experimenting with lots of things. Even before we built Lava Smart Key, Lava Exchange and Lava Loans, we had been experimenting with a lot of different ways to do loans, to do self-custody security and to do on-ramp and off-ramp,” he added.

“This new self-custody security solution is a product of the last eight to ten months of experimentation.”

Maredia added that while Lava Loans is likely months away from going live, the beta version of the product has been functioning well and providing he and his team with important feedback.

“Everything’s coming together,” he concluded.

Lava is a portfolio company of UTXO Management, a regulated capital allocator focused on the digital assets industry. Bitcoin Magazine is owned by BTC Inc., which operates UTXO Management. UTXO invests in a variety of Bitcoin businesses, and maintains significant holdings in digital assets.