Say you’re a lender with 100,000 USDC. You’re comfortable financing ETH-backed loans up to 65% LTV, and BTC-backed loans up to 60% LTV, on terms you’ve already worked out: acceptable oracles, acceptable liquidation rules, a minimum return you won’t go below. What you don’t know yet is whether tomorrow’s borrower will want to post ETH or BTC. Nobody does, until the borrower shows up.
Most isolated lending markets ask you to guess anyway. Before any borrower exists, you have to park your USDC in one market or the other, say 70,000 in the ETH pool and 30,000 in the BTC pool. If a BTC-backed borrower later asks for 30,000 and only 20,000 sits in that pool, the remaining 10,000 is stuck on the wrong side of a wall you built for reasons that have nothing to do with your actual appetite for risk. You were willing to make the loan. The capital was sitting uncommitted. It just wasn’t in the right room.
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