Bitcoin is the best collateral in crypto — deep, liquid, and globally recognized. But Bitcoin’s own blockchain cannot run the smart contracts a lending protocol depends on. To use Bitcoin as programmable collateral, you need a representation of it that lives on a smart-contract chain. That representation is a wrapped Bitcoin, and the one Merum uses for its first market is LBTC, Lombard’s wrapped Bitcoin.
This article explains what LBTC is, how it compares to the other major wrapped-Bitcoin assets, how its security model works, why Merum selected it for v1, and — importantly — how Merum’s design handles the scenario every wrapped asset must answer for: a depeg. It is written to be educational. If you are going to deposit Bitcoin-backed collateral into any protocol, you should understand the asset you are depositing.
What LBTC is
LBTC is a token that represents Bitcoin on smart-contract networks at a 1:1 ratio — one LBTC is intended to be redeemable for one BTC. It is issued by Lombard, a project focused on bringing Bitcoin into decentralized finance as productive collateral. When you mint LBTC, real Bitcoin is deposited into Lombard’s custody arrangement, and an equivalent amount of LBTC is minted on the destination chain. When you redeem, the reverse happens: LBTC is burned and the underlying Bitcoin is released.
What distinguishes LBTC from a plain custodial wrapper is its emphasis on decentralized verification and yield. LBTC is designed around a consortium of independent operators rather than a single custodian, and it is built so that the Bitcoin backing it can be put to work (for example through Babylon’s Bitcoin staking) rather than sitting idle. For Merum’s purposes, the relevant property is simpler: LBTC is a 1:1, on-chain, verifiable claim on Bitcoin that can serve as collateral on HyperEVM.
Key takeaway: LBTC is a 1:1 on-chain representation of Bitcoin issued by Lombard, secured by a consortium custody model with on-chain attestation of its backing. Merum uses it because it combines deep Bitcoin backing with the verifiability and ecosystem support a lending protocol needs.
How LBTC differs from WBTC, cbBTC, and tBTC
Every wrapped Bitcoin answers the same question — who or what guarantees that each token is backed by real Bitcoin? — and they answer it differently. The distinctions come down to the custody and attestation model.
WBTC is the original and still one of the largest wrapped Bitcoins. Historically it relied on a merchant-and-custodian model: a custodian holds the Bitcoin, merchants handle minting and burning, and a DAO governs the membership. It is battle-tested and widely integrated, but it is fundamentally a custodial model — you are trusting the custodian to hold the reserves honestly, with proof-of-reserves attestations rather than trust-minimized cryptography.
cbBTC is Coinbase’s wrapped Bitcoin. It is straightforwardly custodial: Coinbase holds the Bitcoin and issues the token. The trust assumption is clean and clearly stated — you are trusting Coinbase, a large regulated public company — but it is concentrated in a single corporate custodian.
tBTC takes the most decentralized approach of the group. It uses a distributed network of independent signers and a threshold-cryptography scheme so that no single party controls the Bitcoin backing the token. This minimizes custodial trust at the cost of greater protocol complexity and a different, more cryptographic risk surface.
LBTC sits deliberately between the fully custodial and fully trust-minimized extremes. It uses a consortium model: a set of independent operators participate in securing the underlying Bitcoin, and the backing is attested on-chain so that the supply of LBTC can be verified against the Bitcoin held. The goal is to reduce reliance on any single custodian while keeping the system practical, liquid, and yield-bearing.
| Asset | Custody / attestation model | Trust assumption |
|---|---|---|
| WBTC | Merchant + custodian + DAO governance | Custodian holds reserves; proof-of-reserves |
| cbBTC | Single regulated custodian (Coinbase) | Trust Coinbase |
| tBTC | Threshold signers, decentralized | Cryptographic / distributed signers |
| LBTC | Consortium operators + on-chain attestation | Distributed custody, verifiable backing |
Models evolve; always check each project’s current documentation for the live trust assumptions.
No wrapped Bitcoin is free of trust assumptions — they simply place that trust in different places. The honest framing is that you trade off custodial concentration against protocol complexity, and LBTC’s consortium-plus-attestation design is a considered point on that spectrum.
The LBTC security model
LBTC’s security rests on a few pillars worth understanding before you rely on it as collateral.
Distributed custody. Rather than a single entity holding the keys to the Bitcoin reserves, LBTC’s design involves a consortium of operators, reducing the single-point-of-failure risk that a lone custodian represents. The intent is that no one party can unilaterally move or misappropriate the backing.
On-chain attestation of backing. The system is built so that the amount of Bitcoin backing LBTC can be verified on-chain, rather than relying solely on periodic off-chain reports. Verifiable backing is what lets a protocol like Merum — and its users — gain confidence that LBTC is fully collateralized.
Redeemability. LBTC is designed to be redeemable 1:1 for Bitcoin through Lombard’s processes. Redeemability is the economic anchor that keeps LBTC trading near the value of Bitcoin: if it traded meaningfully below, arbitrageurs could buy LBTC cheaply and redeem it for full-value BTC.
Ecosystem and audits. As an asset designed for DeFi, LBTC and its surrounding contracts undergo security review, and Lombard publishes documentation on its architecture. As with any smart-contract asset, this reduces but does not eliminate risk.
It is responsible to state the residual risks plainly: any wrapped asset carries the risk that its backing is compromised, that its bridge or minting contracts have a flaw, or that its custody consortium fails to perform. These are not unique to LBTC — they apply to every wrapped Bitcoin — but they are real, and Merum’s risk design assumes they exist rather than wishing them away.
Why Merum chose LBTC for v1
Building a lending protocol means making an explicit choice about which collateral to support first. Merum chose LBTC for its first market for several reasons.
Deep Bitcoin alignment. Merum is a Bitcoin-collateralized credit protocol. LBTC is a Bitcoin-first asset built by a team focused specifically on making Bitcoin productive in DeFi. The alignment of purpose is exact.
Verifiable backing over opaque custody. A lending protocol’s collateral is only as good as the certainty that it is real. LBTC’s emphasis on on-chain attestation of its backing fits Merum’s priority of conservative, verifiable risk over convenience.
Distributed custody. For a protocol whose entire value proposition includes not asking users to trust a single company with their Bitcoin, a consortium-custody collateral asset is a more coherent choice than a single-custodian wrapper.
Liquidity and ecosystem fit on HyperEVM. A collateral asset is only safe to lend against if it can be liquidated efficiently when necessary. LBTC’s liquidity and its presence in the HyperEVM ecosystem make it practical to price and, if required, liquidate.
Choosing a single high-quality collateral asset for v1 is itself a risk decision: fewer assets means fewer attack surfaces and simpler, more conservative parameters while the protocol establishes its track record. You can see the live parameters on the LBTC–USDC market page.
Depeg scenarios and how Merum handles them
Here is the question every serious user should ask: what happens if LBTC loses its peg to Bitcoin? A depeg — LBTC trading meaningfully below the value of the Bitcoin it represents — could occur if the market doubts the backing, if redemption is disrupted, or in a broader stress event. A lending protocol that ignores this possibility is being negligent; Merum’s design treats it as a core risk.
Several elements of Merum’s design address depeg risk:
Oracle pricing. Merum prices LBTC collateral using oracles (the protocol is built on a credible oracle stack including Pyth and Chainlink). The oracle determines the value used for LTV and liquidation calculations. A robust oracle that reflects the actual market value of LBTC — rather than naively assuming LBTC always equals BTC — means that if LBTC’s market price falls, the protocol sees it and reacts, rather than continuing to over-credit the collateral.
Conservative LTV and liquidation parameters. Merum’s LBTC–USDC market caps borrowing at 60% LTV with a 75% liquidation threshold. That gap is a deliberate buffer. Overcollateralization means that a moderate decline in collateral value — whether from Bitcoin’s price falling or from LBTC trading at a modest discount — is absorbed before any loan becomes undercollateralized. Conservative parameters are the first line of defense against both volatility and minor depegs.
Liquidation mechanics. If a position’s LTV reaches the liquidation threshold, liquidators repay debt and claim collateral at a discount, restoring the protocol’s solvency. As long as LBTC remains liquid enough to sell, this mechanism protects suppliers’ USDC even as individual positions deteriorate.
It would be dishonest to claim any design makes a severe depeg harmless. A sudden, deep depeg combined with thin liquidity is a genuine tail risk for any protocol that lends against a wrapped asset, and it can result in losses. What Merum can do — and does — is price collateral at its real market value, keep parameters conservative, and maintain liquidation machinery that acts before positions go badly underwater. Risk is managed and bounded, not eliminated.
Key takeaway: Merum does not assume LBTC always equals BTC. It prices LBTC at market via oracles, keeps a conservative 60% borrow cap against a 75% liquidation threshold, and relies on liquidations to protect suppliers — so moderate depegs are absorbed by design, while severe depegs remain a tail risk worth understanding.
Roadmap: more Bitcoin collateral in Phase 2
Starting with LBTC is a v1 decision, not a permanent one. Merum’s roadmap includes broadening the set of Bitcoin-backed collateral so users can borrow against the wrapped Bitcoin they already hold. Phase 2 is slated to add support for cbBTC, WBTC, and tBTC markets, each with its own risk parameters reflecting its particular custody and liquidity profile. Adding more collateral types expands access while keeping each market’s parameters tuned to that asset’s specific risk — the same conservative philosophy applied per asset.
Supporting multiple wrapped Bitcoins also gives users choice over which trust model they prefer to hold: custodial simplicity (cbBTC), the most decentralized signing model (tBTC), the most established integration (WBTC), or LBTC’s consortium-plus-attestation approach. Different users weigh these trade-offs differently, and a mature protocol should let them choose.
Summary
LBTC is Lombard’s 1:1 wrapped Bitcoin, secured by a consortium custody model with on-chain attestation of its backing — a deliberate middle ground between fully custodial wrappers like cbBTC and WBTC and the fully decentralized tBTC. Merum chose it for v1 because its verifiable backing, distributed custody, and Bitcoin-first design align with a conservative, non-custodial lending protocol. And because no wrapped asset is risk-free, Merum prices LBTC at market through oracles and keeps a wide overcollateralization buffer so that ordinary volatility and minor depegs are absorbed by design.
To see LBTC in action as collateral, read our step-by-step guide to borrowing USDC against Bitcoin, explore the LBTC–USDC market, or — if you hold USDC — supply it to earn yield on the other side of the market.
This article is educational and not financial or investment advice. Wrapped assets carry custody, smart-contract, and depeg risk. Confirm live protocol parameters and asset details in the app and in each project’s official documentation before transacting.