Bitcoin wallet and lending platform Lava has come under scrutiny in the past few weeks due to a lack of clarity around a recent update. According to numerous users of the app, the rug was pulled out from under them in a way, as the update in question completely altered the wallet’s trust and security model by switching from a non-custodial setup to a fully trusted and custodial model where Lava has full control over users’ digital assets.
According to a report in Blockspace, the controversy started in September when Lava users were shown a screen that indicated an update was necessary to gain access to all of the latest features. Notably, the update screen did not indicate there would be a complete alteration of how custody of user funds was handled behind the scenes in the Lava app. Additionally, there was no way to access loans that had already been taken out via the app without the update.
Eventually, Lava CEO Shehzan Maredia made an X post on some changes that had been made in terms of how the financial app functions behind the scenes. The details of the changes outlined in the post are somewhat murky, but the takeaway for many was that Lava would be moving to a completely custodial model. In response, Foundation Head of Physical Design Owen Kemeys publicly asked on X for more specifics about what exactly had changed and whether those alterations had already been implemented via an update of the app.
The move to a custodial model for Lava would be particularly odd, as Maredia has a long list of posts on X regarding the problems with custodial setups. Additionally, while all this was happening, Lava had also announced a new $200 million fundraising round. Maredia allegedly told Blockspace that a post-mortem regarding this event would be provided on Wednesday, but such an update providing more clarity had not been published as of the time of this writing on Thursday.
Hold on. Lava was founded as DLC based and “non custodial”; ie local keys (for what that’s worth – not 100% accurate whilst lender is also the oracle, but, baby steps).
1. I have an active loan.
2. I used to have “contracts updating, please wait” type loading screens.
3. There…— Owen Kemeys (CTV+CSFS enjoyer) (@OwenKemeys) November 4, 2025
One of the biggest criticisms of the crypto space, more generally, is the large amount of decentralization theater that takes place. This issue was on full display a few weeks ago when a large amount of crypto infrastructure went down amid an Amazon Web Services (AWS) outage. A large part of the decentralization theater that has occurred in crypto over the years has also been centered around stablecoins, and there is an increasing sense that much of the technology used in crypto is now mainly focused on regulatory arbitrage for centralized entities rather than any sort of cypherpunk philosophy.
In the aforementioned X post by Maredia, the Lava CEO said they are taking a different approach than those who use “trustless theater” in the crypto industry. However, the level of decentralization involved in Lava’s app was questioned in the past, as it was originally built on the concept of Discreet Log Contracts (DLCs) with Lava itself eventually acting as the relevant oracle. Additionally, the Lava app has also operated on a closed-source basis this whole time, so what exactly has been happening behind the scenes hasn’t really been known.
Stablecoins are just traditional fintech that have to use the word “blockchain” for regulatory arbitrage purposes. Doesn’t really make sense to build on Bitcoin. Solana is so centralized it’s basically just traditional fintech. Maybe “stablechains” eventually used.
— Kyle Torpey (@kyletorpey) November 13, 2025
Users of closed-source crypto wallets are effectively using a custodial system, as they have no way of knowing whether the developers behind the app have access to users’ private keys. Open source software is generally viewed as a requirement for any Bitcoin-related software, as the whole point is to operate as a decentralized financial system without trusted third parties. This is also why the Bitcoin Core node client goes the extra mile with practices such as reproducible builds and forcing users to manually opt in to software updates.
Due to the embrace of crypto by the Trump administration, there could be a continuation of this bifurcation of the space between Bitcoin’s focus on decentralization and fintech-esque use cases that heavily involve centralized stablecoins.