It's an interesting post but I'm not seeing the ways that BTC, as collateral, can be 'debased', as you put it. (I would have used the word 'degraded' instead, as 'debased' has a particular meaning with respect to currency.)

You give examples of cars and houses being misused while in the possession of one party as collateral but we are often told that Bitcoin is the 'perfect collateral', and one way that Bitcoin is perfect as collateral is that it is entirely virtual in nature, and thus can't undergo any physical abuse or sustain physical damage.

The only way that I can think of that a certain quantity of Bitcoin can become damaged is if it is split up across a greater number of UTXOs, perhaps to the point where some of the Bitcoin becomes 'dust' at a later point in time. We have seen quantities of Bitcoin become dust over the last ~15 years but I don't see why this dustmaking would be done by either party, or even a third party, when Bitcoin is used as collateral.

Certainly we should be very careful as to how possession is treated of any Bitcoin we use as collateral. And be very wary of rehypothecation but, again, Bitcoin has properties that can prevent that (a transparent blockchain). But I'm still not seeing how the actual Bitcoin gets degraded while being used as collateral, versus something like a valuable painting that may be incorrectly stored or damaged or vandalised while held as collateral. You may lose it, as is the risk of all collateral, but if you get it back it should be just as good bitcoin as when you loaned it out (except, perhaps, no longer as privately held).