Two Prime Says Bitcoin L2 Yields Rely on VC Subsidies

The question behind Bitcoin yield

Bitcoin yields on layer 2 networks may be harder to sustain than their headline rates suggest. Alexander Blume, co-founder and CEO of Two Prime, argues that offers from projects such as Babylon and Stacks depend on venture capital subsidies rather than lending economics that can stand on their own. The distinction is central: a high stated return can attract deposits, but it doesn’t by itself show that borrowers are generating enough income to pay that return over time.

Blume made the case in an Unchained Premium discussion with Matteo Pandolfi, co-founder and CEO of Pareto, about a Bitcoin lending vault the firms built together. Two Prime began lending in 2022, as Celsius and FTX were collapsing. It has since made about $4 billion in Bitcoin-backed loans, according to the episode description. That history gives Two Prime experience in a difficult market, though the scale of past lending alone doesn’t establish how the new vault will perform or what risks its depositors face.

Here’s the thing: “Bitcoin yield” can describe products with quite different sources of return. Some may rely on incentives intended to draw users; others depend on borrowers, collateral and lending operations. For anyone evaluating a product, those differences matter more than the label. This is more significant than it looks.

Putting credit operations onchain

The vault’s design keeps the lending itself offchain. Two Prime gathers wrapped bitcoin onchain, then lends it to vetted borrowers through its established lending operation. Pareto brings more of the loan lifecycle onto blockchain infrastructure, including capital allocation, interest accrual, repayment, reporting and redemption. The arrangement separates where capital is tracked from where credit decisions and lending occur.

That division is a practical response to a familiar challenge in bringing private credit to blockchain systems. A transaction can be represented and monitored onchain, while the borrower relationship and lending activity still rely on processes outside the chain. The design may give users clearer access to information and a more direct way to handle their position, but it doesn’t make the underlying loan automatically transparent or liquid.

Pandolfi’s view is that institutional credit doesn’t need new legal and financial principles; it needs infrastructure that can make those principles work onchain. The distinction matters because private credit is difficult to exit quickly. Onchain secondary markets and repo arrangements could make redemptions easier, though the discussion presents them as potential ways to reduce friction, not a fix already in place. In other words, putting a claim on a blockchain doesn’t guarantee that a buyer will be available when someone wants to sell.

That gap between recording a position and finding liquidity is easy to underestimate. Similar systems typically depend on counterparties, market demand and the terms of the underlying credit. If you’re working in this space, the useful question is what happens when a holder wants out before a loan is repaid. The discussion points to possible tools, but leaves that operational test open.

A receipt token extends the vault’s reach

The vault issues a receipt token that can be deposited into Morpho vaults and used for looping. Two Prime has also become a Morpho curator, linking its Bitcoin lending product to decentralized finance strategies built around that token. The receipt gives the vault’s position a role in other onchain activity, so the product’s reach can extend beyond the original lending arrangement.

That added utility comes with added dependencies. A user considering a looped strategy has to understand not only the vault’s credit exposure, but also how the receipt token is used in the connected strategy and what conditions could affect access to it. The discussion describes the token’s possible uses; it doesn’t establish how those uses would behave in every market condition.

Blume also sees a challenge in who turns to crypto for distribution. He argues that private credit firms struggling to raise capital in traditional markets may seek onchain channels, creating a risk of adverse selection for crypto platforms. The concern is straightforward: demand for capital can bring in borrowers or products that have fewer options elsewhere, so a new distribution channel still needs careful screening.

That’s the part most people overlook: easier access can increase the importance of underwriting, rather than make it less relevant. A blockchain interface may help move or display a position, but it can’t tell users on its own whether the credit behind that position is sound. Better rails. The hard credit questions remain.

Access and economics remain open questions

Blume says an SEC innovation exemption leaves much of the value from vaults offshore for now. He pointed to potential tokenized equities from ICE as a development that could change how traditional assets reach onchain markets. The episode doesn’t establish how or when that shift might happen. For now, the reference signals a possible direction for tokenized assets, rather than a concrete change to the vault’s current access or operations.

Access is only one unresolved issue. The broader question is whether the yield comes from activity that can continue without promotional support, and whether the product gives users a clear view of the credit and liquidity arrangements involved. Those questions apply across the category; they aren’t answered by a token’s presence onchain or by the size of a headline rate.

For Bitcoin yield products, the practical test is whether returns can come from lending and other durable activity once subsidies fade. Two Prime’s approach offers a different model: use blockchain rails to track and distribute capital while keeping underwriting and lending with an established credit operation. That may make the product easier to integrate with onchain strategies, while preserving a division of labor between blockchain infrastructure and credit management.

What this means for you depends on what you expect the product to do. If the goal is exposure to lending returns, the important details are the borrowers, the way loans are managed and the conditions for redemption. If the goal is to use the receipt token in other strategies, those dependencies matter too. The design offers a route for connecting Bitcoin-backed credit to decentralized finance, but its promise rests on the performance and availability of the pieces behind it.

What the model still needs to prove

Two Prime and Pareto are making a case for infrastructure that can carry parts of institutional credit onto blockchain systems without relocating the lending operation itself. That’s a meaningful design choice, especially for products whose underlying assets can’t be sold on demand. Yet the division also means users must assess both the onchain mechanics and the offchain credit operation.

The model’s wider significance will depend on whether its claims about tracking, access and distribution hold up alongside the less visible work of underwriting and managing loans. The conversation lays out a structure and several possible paths to easier liquidity; it doesn’t show that those paths are already delivering it. For now, the enduring question is whether a Bitcoin yield product can explain where its returns come from—and keep generating them when subsidies no longer do the work.

Unchained is seeking reader feedback on future shows, stream times and Premium offerings. Its anonymous survey takes about five minutes and is open through Sunday, November 8; participants can choose a free month of Premium or Bits + Bips. The survey gives readers a way to share what they want from the publication’s programming, including how it schedules shows and shapes its paid offerings.

— Laura