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, a Bitcoin-based lending protocol. He’s maybe the first Bitcoin builder we have had on our show and that’s because DeFi on the first blockchain network has been slow to pick up — but Edan says that’s about to change.

Ethereum and other smart contracts platforms have evolved over time with use cases like tokens, DAO’s and NFTs flourishing. Meanwhile, Bitcoin has mainly looked from the sidelines. Edan says there has been a gradual mentality shift, as Bitcoiners accept the first cryptocurrency should be able to support a wider array of use cases to become the backbone of a more decentralized financial system.

Edan believes Bitcoin is the most reliable, secure and decentralized base layer upon which to build DeFi, and that Bitcoin Layer 2s, like Rootstock and Lightning Network are providing all the programmability and scalability needed for decentralized applications.

The podcast was led by Camila Russo, and edited by Alp Gasimov and Daniel Flynn. Transcript was edited by Samuel Haig.

🎙Listen to the interview in this week’s podcast episode here:

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👀 Only paid subscribers have access to the full interview transcript below.

Here we are at The Defiant podcast with Edan Yago, an early contributor of Sovryn — a Bitcoin-based lending protocol. Edan, welcome to The Defiant podcast, it’s great to have you here!

 Exciting to be here, looking forward to it!

Awesome! So at The Defiant podcast, we usually haven’t had many Bitcoin builders, so I’m super interested to hear from you, your experience, and a lot more about what DeFi on Bitcoin is looking like 

In November, there was a big upgrade on Bitcoin called Taproot, which was heralded as a way to unlock smart contracts on Bitcoin 

 which of course, this is key to further developing DeFi there. We’ll get into all of that, but before that, I’d love to just get a brief overview of what Sovryn is, and then we’ll go right into learning more about your background and what led you to start contributing to Sovryn. So yeah, if you can just give us a brief overview of Sovryn itself.

A lot of people think that you can’t build smart contracts, or greater throughput, or privacy on Bitcoin. And the truth is that you can, and you can do it today, but you need to put together different pieces of the Bitcoin Layer 2 technology stack.

 A lot of really cool technology has been built out, and what Sovryn is doing is it’s bundling that together into kind of like an operating system for extending the capabilities of Bitcoin and giving Bitcoin even more superpowers.

Sovryn is a system built on a technology called Rootstock, as well as Lightning Network. Rootstock is a Bitcoin sidechain which has EVM-compatible smart contracts,

 so you can think of it like all the capabilities of Ethereum, secured by Bitcoin miners, using Bitcoin as the native asset.

And with Sovryn, what we’re looking to do is build a world around Bitcoin, a world that looks more like Bitcoin — secure, reliable, permissionless, borderless, censorship-resistant. And the first things that the community and the developers have been building out, are primarily those things which are tied to economic and financial sovereignty. Decentralized trading, decentralized lending, Bitcoin-backed stablecoins, governance that is secured by Bitcoin miners, and now also introducing things like perpetual swaps and futures markets.

Awesome! Okay, definitely will dig into all of that coming up. But first, I’d love to get to know Edan. If you can tell me more about your background: Where are you from? What was your pre-Bitcoin life? What got you interested in Bitcoin? What got you interested in starting to build Sovryn?

 I grew up in Apartheid South Africa. That was the South Africa that discriminated against pretty much everyone who wasn’t white, and my family was Jewish.

One part of my family had been discriminated against by the British because they were German Jews, the other part of the family had been discriminated against by the Germans because they were Polish and Lithuanian Jews and they went through the holocaust. In South Africa, the South African part of my family became very active in working against the apartheid government. So much so that some of them had to flee South Africa in the middle of the night because the government had defined them as terrorists.

So when I was very young I grew up on this tradition of part of my family only having survived the holocaust because they had managed to smuggle jewels, and then when I was 9 I started smuggling gold out of South Africa because my mother would sew Krugerrands — gold coins — into my clothes and then send me flying overseas so that I could get money to my family. So 

I grew up in a very politically aware environment, and in particular, the lessons that I learned were that the basis for freedom — what gives people the ability to be free and to be sovereign — is having sovereignty over their economic and financial destiny, and that’s the first thing that oppressive regimes try to limit.

 You lived in Argentina for a while, so I’m sure you are very aware of this as well.

Later on, my family left South Africa. I started studying neuroscience and then started focusing on machine learning. Many years later, I had moved to the United States and was involved in starting a few startups. One of the startups that I was involved in was working on diagnostic tools using machine learning, and I was reading a lot about neural networks and network science in general.

In 2011, on a very cold day, I read this paper which blew my mind. I came across it by mistake because I was reading papers in network science, and it was the Bitcoin whitepaper. By the time I had finished reading that, I had become convinced that this was the biggest, most important thing that I’d ever come across. I messaged everyone I knew telling them that they need to pay attention to this because it was going to be something which would impact the rest of our lives, most of them ignored me initially but now have gotten excited about it as well.

Ever since then, I’ve been pretty much all-in on Bitcoin as the best way for us to build privacy, and in particular property rights and sovereignty for people in a digital age. So that’s how I got into Bitcoin.

Awesome. This was 2011, so pretty early on in crypto history, relatively speaking. From there to starting work on Sovryn, how was that process?

Well that happened many, many years later. First of all, the early days of Bitcoin were very similar, in some ways, to today.

Everyone thought that they were late. Everyone thought ‘why didn’t I get in earlier’? But more fundamentally, there was a huge sense of adventure and innovation around the entire space, and around what Bitcoin could be. One of the key things that was exciting to people was this idea of not just having sound money and decentralized money, but of having a sound financial system around it — decentralized exchanges, decentralized lending.

Because it was very difficult to build this around Bitcoin, there was this strong desire to do it but it never quite happened. And many years later, Ethereum came out, and Ethereum started demonstrating the various ways that people could become excited about smart contracts. And when the pandemic hit, I [and] a number of other Bitcoiners… were involved in trying to donate mosques to various places and we were taking donations in Bitcoin — we wanted to give people NFTs whenever they would donate, so we started looking to see how we could build this on Bitcoin.

And several months later, a few developers who had been working on this showed me that they had continued this work and taken some of those ideas and used it to build a decentralized exchange. And I got very excited and got involved — this was late-2020.

So if Bitcoin was a reaction to the crisis of 2008, in many ways Sovryn is a reaction to the crisis of 2020, and this idea that we really need to find ways, not just of having control over our money, but also being able to interact with that money

 — being able to put that money to use in a decentralized way, and finally the technologies had matured to a point that we could start doing that.

Well, I think my personality. On the one hand, I grew up in a family [where] several generations of my ancestors have all been defiant people, and have all in one way or another gotten involved, and had very strong opinions, and have been willing to be activists.

My great grandfather was expelled from Soviet Russia for being too communist. He was like a communist anarchist, and he was handing out anarchist pamphlets in The Red Square and they expelled him from Russia. Other parts of my family have been involved in the Warsaw ghetto uprising, and other parts of my family were involved in working against the apartheid regime in South Africa.

So I think it’s a sense of history really for me… In the western world — like in Europe or in the United States — there’s one or two generations of people who have grown up in a world which seems very safe. 

Things are starting to change now, I think the world… is starting to feel less safe, but I grew up on stories and personal experiences of how quickly things can change, and how quickly things can deteriorate, and how important it is that we never give up the keys to our freedom. Because once you give them up, you never get them back.

It’s not just money, it’s also giving up your personal information to Facebook, it’s also giving up your right to travel to the TSA, or to the health authorities around Covid — they’re very dangerous paths that we can easily go down if we start giving up freedoms because you never get them back without huge effort and pain. So it’s that lesson, of how asymmetrical the problem is — everything can be fine until it isn’t, but by the time it isn’t it’s too late.

So it’s always been important to me to maintain my own sovereignty, but also to try and build a world more sovereign, where individuals don’t have to give up their freedoms.

I love that answer, you’ve had such a fascinating history — your family’s history is incredible, certainly defiant. I want to go back to some of the things you mentioned [regarding] the spark that started Sovryn, which was this idea of creating Bitcoin-based NFTs. So why try to create NFTs on Bitcoin if they’re already booming and working well, or at least working, on Ethereum. What’s the idea behind that?

I think it’s a good question, why are NFTs important at all? I think the reason NFTs are important is because the big innovation that Satoshi brought to the world is the fact that we now have digital, borderless, non-violent property rights. 

So Bitcoin is a very specific [and] special kind of property, but it is protected by this massive institution which is the Bitcoin network. It’s not just the computers, it’s not just the ASICs, not just the nodes, it’s not just the Bitcoin holders — it’s [that] all of this together represents a totally new kind of human institution that is completely voluntary to participate in, but that creates a new kind of property right that has never existed before. It doesn’t rely on violence, it doesn’t rely on geography.

 This is a phenomenal idea, and I think this idea can be expanded beyond just sound money into sound, borderless property of all kinds.

But because it’s such a fundamentally important thing, it needs to be built in the most fundamentally secure, reliable, and permanent system. And it needs to be built with true principled intention — it needs to actually work.

A moment ago you were asking me the question, you said ‘well if NFTs really work well on Ethereum’, and then you kind of backed away and said ‘well, at least, [they] are popular and work’. But that’s the problem, 

if we make sacrifices, if we take shortcuts when we’re building this very fundamental thing — which is people’s property rights — and we build not only by taking shortcuts but also in [building] systems which maybe we don’t know what they’re going to look like in six months or two years or ten years, so we don’t know if they’re permanent, we don’t know if they’re secure. Then we’re building something which is extremely temporary.

Property rights cannot be temporary. They have to have longevity. They’re the basis of how we build our economies, how we manage our lives. And I think that’s the big thing that has been missed. 

Everyone from VCs to people who are building on smart contract platforms like Solana, the big thing is not how decentralized things are, the big question is not how many nodes there are. The question is, why is it decentralized? And the reason Bitcoin is decentralized is because that makes it impossible to manipulate, or in another word, impossible to change — and that is what makes it reliable.

So this really isn’t a technology at all. Technology is something which is always changing, and 

when you look at the space through the lens of someone who is investing in technology, then you’re making a category error. We’re not building technology, we’re building fundamental social institutions.

And frankly, I don’t think that any of these other systems have approached the problem the way that Bitcoin has — building a fundamentally secure social institution. 

They’ve all treated themselves as technologies, and in that respect, I think they’ve missed the point, and also have not built out the kind of permanent reliable systems that we would want to build a new kind of economy [and] a new kind of world upon.

Interesting. The reason I backtracked was because I didn’t want to include my judgment in the question. Also, some people might say NFTs on Ethereum don’t work very well because of the high fees you have to pay… And you could say the same thing about transactions on Bitcoin. Just clarifying why I backtracked — it’s not because I think NFT on Ethereum are bad at all, I actually have my own NFT project on Ethereum.

I think Ethereum has done phenomenal things and there are extremely important innovations which we must learn from and can learn from in the Ethereum ecosystem. And the Ethereum ecosystem has brought in a huge amount of excited, super-intelligent developers who are building amazing stuff

, including things like zero-knowledge proof rollups — which I don’t think would have happened without Ethereum, even though they’re not directly an Ethereum thing.

The problem is, when [people] say ‘NFTs maybe don’t work on ethereum or don’t completely work right’, there’s a whole bunch of different reasons that maybe people would be upset with NFTs or criticize NFTs on Ethereum. One is high fees, another is they maybe aren’t decentralized enough…

The main reasons I see people criticize NFTs on Ethereum, I wonder how Bitcoin would do them better? And not just like for NFTs, so maybe we could broaden the question — I’d love to hear your thoughts on what ways could DeFi on Bitcoin be better than DeFi on other smart contract platforms, including Ethereum? For the NFT-case specifically, the criticism I hear the most about NFTs are high transaction fees and high energy consumption [due to] Proof-of-Work, and I don’t think Bitcoin could do a better [with regards to] either of those criticisms.

I’d love to hear your thoughts, not just on NFTs but in general. In what ways does Bitcoin improve the DeFi experience?

Sure. So first of all, let me separate between the energy consumption aspect and the high fees aspect.

So the energy consumption aspect, I think, is a poor criticism. I think we want to spend energy on a lot of things, on everything from dishwashers to electric cars. So the question is ‘where do we spend the electricity where it provides us with benefit’? And I think if we’re building a system which provides for borderless, non-violent property rights — that’s a massive benefit. And if the price that we need to pay for that is the consumption of electricity, most of which is green, I think that’s a price well worth paying. 

So that’s true for Ethereum, and that’s true for Bitcoin. or any system.

The other point is the high transaction fees. 

Now the high transaction fees, I actually think that there is something fundamentally different there between Bitcoin and Ethereum. And the fundamentally different thing is… the approach that Ethereum took to providing smart contracts and as a result, also its ultimate scalability, was by building everything on to Layer 1. Whereas Bitcoin has taken a much more conservative approach of building very little on Layer 1, and then everything else is built on additional layers built on top of Bitcoin.

 Now, this actually means that you never get to the same kind of fees and cost, certainly not on Layer 2, that you have today with Ethereum on Layer 1. And now Ethereum is, through rollups, attempting to utilize the strategy of scaling via layer 2, but I think it was fundamentally something which a lot of people recognized was not going to scale — I don’t think any Layer 1 system can properly scale.

So both of those things are sort of like features. Some people will say ‘oh, the feature that I want is less energy consumption’, or ‘the feature that I want is greater scalability’. And I actually don’t think that that’s where the interesting difference lies, I think the interesting difference… lies in the fact that Bitcoin has been around now for around 13 years and is very similar, almost identical, in the fundamental way it works to the way it was 13 years ago. Whereas every other system changes far more frequently, is far less reliable — and that’s the big difference.

The big difference is that when we’re building finance, the majority of finance is not what we see today with DeFi — like yield farming and things like that. The majority of finance is more like what we see in specific corners of DeFi, things like Aave, or Compound, or Uniswap, those are the basic functions of trading, lending, [and] derivatives. 

Those are things where the people who are engaged in that, not in the crypto world but in the rest of the world, the primary thing that they’re focused on is wealth preservation. And then, only as a secondary consideration, is it growing their wealth.

And when it comes to wealth preservation, the number one thing that you want is reliability and really only Bitcoin has provided this base layer of reliability — where you know [that] it’s not just going to be the same next year as it is today, but it will be the same in 10 years, and it will be the same for your children, and for your grandchildren.

 So it is something that you can have a pension on, it is something that you can build, a trust fund for your children on, it’s something that you can pass down from generation to generation. And so as a result, when you want to build property rights and a financial system that the entire world can use to replace the one that we have now, you want something which is going to be on that level of reliability.

I understand Ethereum has changed more than Bitcoin, but why do you view it as unreliable? Ethereum has never been down, all the transactions have always been approved. It has changed to upgrade and reflect the changing priorities of developers and users, but it’s still been reliable I think.

I think that’s a great question because it illuminates in another way the distinction that I’m making between the technology, and the features, and the rules. So when I’m talking about reliability I’m not primarily talking about the uptime or the features, because this is not [Amazon Web Services]. It’s not a technology service that I’m interested in, it’s an institutional service that I’m interested in, so what really matters is the ruleset.

Ethereum has taken the approach of quite frequently changing the rule set in fairly dramatic ways. For example, when you change the entire consensus mechanism, you’re changing maybe the most fundamental aspect of the ruleset. Whereas the ruleset with Bitcoin is more minimalist and hasn’t changed.

The reason this is an important distinction is because when we’re using a blockchain, we’re not using technology —it’s terrible technology, it’s much slower, much less efficient than any database, or server system, or cloud system we could use.

We’re using it because what it actually is, is a set of rules which we come to consensus around, and then can’t really change, and certainly can’t manipulate. And so the focus should be on the institution — the social institution, the set of rules. Sometimes I call Bitcoin ‘permaware’ instead of software because it’s like a set of rules. It’s written in code, but it’s like it’s been etched in stone, and that is a very important property.

Got it. So the reason why you would rather build a DeFi protocol, Sovryn, on Bitcoin, is because it has these characteristics that it’s more permanent — it’s not going to change, it’s more trustworthy and reliable [from] the perspective [that] these rules have been set from 2009 when Bitcoin started running, and they have almost remained unchanged. So it’s something that you can depend on, and that’s the sound base for which to build a financial system on, even if it takes longer, and so on — [it’s] just like a better base. That’s kind of the argument, right?

Yeah, I think you’ve summarized it very well, thank you.

Okay! Since it’s hard to build on Bitcoin’s mainnet, what DeFi protocols on Bitcoin are doing is building on Layer 2. So that’s another fundamentally different approach from Ethereum — Ethereum developers [first] build on Ethereum mainnet directly, now many are going to Layer 2. But most Bitcoin developers are starting directly on Layer 2, and I think the most popular Layer 2 would be Rootstock, is that right?

There’s quite a lot of different Layer 2 technologies. But certainly, the two most popular ones in terms of the number of users and the amount of value that is managed by them is Rootstock, and Lightning Network.

And with rootstock, when you’re building there, the main reason to build DeFi on Bitcoin is to have the most sound blockchain, and the most decentralization, and so on. Does Rootstock maintain all of those properties?

So Rootstock doesn’t maintain the same set of rules that Bitcoin does, it adds additional rules, but it adds those rules in a way where they are enforced and secured by the Bitcoin miners, and where the base asset Bitcoin continues to maintain those rules.

Earlier you mentioned it’s been hard to build on Bitcoin Layer 1, and so that’s why developers have chosen to build on Bitcoin Layer 2. But I think it’s actually different from that — it’s impossible to build and on Bitcoin Layer 1 in many ways, and that’s a feature. The idea was that you don’t expand the ruleset of Bitcoin Layer 1 because that’s the broadest set of consensus. And the more people that need to use something, the fewer rules that you want to have. And then you basically have a hierarchy of rules right — this is the most basic rule, and then people can opt into additional layers’ rules. And so 

what you’re doing when you’re using Rootstock is you’re using Bitcoin and then opting into an additional set of rules which give you access to the smart contracts, the EVM-compatibility, and the various DeFi tools that are available.

Yeah, so you can basically port any contract that exists on another EVM chain to Rootstock.

I didn’t know that Rootstock uses Ethereum Virtual Machine. What kind of Layer 2 tech is it like? Is it like an optimistic rollup? Or is it like a sidechain? Does it have nodes?

It’s a merged-mine sidechain, which means that the Bitcoin miners who are mining Bitcoin, are also mining Rootstock, and hashes that wouldn’t find a Bitcoin block might find a Rootstock block. So you basically get this very cool property where, on the one hand, you can piggyback on the security of Bitcoin Proof-of-Work. And on the other hand, the transactions that are occurring on Rootstock are paying fees in Bitcoin to the Bitcoin miners and increasing the security budget of Bitcoin.

Do you know how many nodes are securing that chain?

I actually don’t know, I haven’t checked recently, but there are quite a few. I mean, just the Sovryn community alone is running tens of nodes.

Lastly on Rootstock… what is the level of control that there might be on Rootstock smart contracts, like upgradeability. In the case of Ethereum, there is controversy around how centralized Polygon is because the bridge is controlled by a multisig wallet which a handful of people have control over, and that obviously poses security concerns. In the case of Rootstock, do you know how those smart contracts are managed?

Which smart contracts? The bridge smart contracts?

So the way you transfer Bitcoin into the Rootstock sidechain is through a Bitcoin peg. It’s a bidirectional Bitcoin peg, and it uses a combination of effectively a multisig system with hardware secure devices, and [Simplified Payment Verification (SPV)] proofs.

So SPV proofs are shared between the two chains to the peg signatories — or what are called “peg-natories,” who, in addition to signing themselves, also need to have an [Hardware Security Module] which signs as well. So this is what I think you would call a “federated peg,” and it’s probably the most secure way of transferring Bitcoin on and off the main chain that exists anywhere. But it is one of the core things that we’re constantly working to improve, with the goal of eventually getting to a cryptographic or purely trustless peg. So the purely trustless two-way peg is something which doesn’t yet exist for Bitcoin, and I think it’s effectively like the final boss. Once we’ve done that, then it truly becomes possible to build anything in a trustless manner on Bitcoin.

Got it. So right now, every DeFi protocol building on Rootstock has to depend on this kind of federated bridge between Rootstock and Bitcoin?

Well, no, only the users of Bitcoin need to do that. The smart contracts themselves have nothing to do with the peg-natories; they are purely dependent on the Proof-of-Work security.

So it’s not like Polygon, which has its own security system [and] its own consensus mechanism. Rootstock is sharing and piggybacking off of Bitcoin Proof-of-Work. So there’s a direct link there, and that’s what moves the chain forward. That’s what discovers and creates the blocks, and that’s what secures the smart contracts.

Got it. So I understand that Lightning Network is a Layer 2 that is mostly used to send Bitcoin from one place to another, it’s like a payments network. And then Rootstock would be the smart contracts layer, right?

So, is the view that the future of DeFi on Bitcoin will have to be built on Rootstock? Or is the idea that there will be multiple Layer 2s coexisting?

No, I think that there is probably going to be more than one Layer 2. Already, like we mentioned, there’s Lightning Network and Rootstock, and Sovryn combines both of them. So one of the very exciting things that Sovryn is doing is providing you the ability, through Lightning Network, to interact directly with smart contracts, to use smart contracts to improve Lightning Network, and also to use smart contracts to bring other tokens, like Bitcoin-backed stablecoins, to Lightning Network.

So you can begin not just transacting with Bitcoin, but also transacting with dollars that are backed by Bitcoin. I think when you start to combine these different Layer 2s, you can get very cool properties that each one in isolation wouldn’t be able to provide.

Very cool. Can you dive a bit deeper into what Sovryn does? Is it kind of like… a MakerDAO that allows you to lend and borrow crypto in a permissionless way. Could you go deeper on that?

Sure. So Sovryn exists on three layers, [there are] three parts of the Sovryn stack.

The base layer is the infrastructure stack, and that’s sort of like an operating system for developers who want to use the different parts of Bitcoin Layer 2. So it combines Rootstock with bridges to other chains, with Lightning Network, and tooling around the EVM system — which makes it truly EVM-compatible and allows you to port contracts. So developers can build on that part of Sovryn.

One step up on the stack is the Sovryn core system, which has the governance, as well as the core primitives for trading, lending, [and] creating Bitcoin-backed stablecoins. One of the very cool things that is being developed now is kind of similar to Liquid [which] enabl[es] the ability to zero-interest loans against your Bitcoin and hold them into perpetuity. So you never need to sell your Bitcoin ever again, you can just get the dollars [that are] backed by Bitcoin. So those core primitives are part of the core primitive sets that come with Sovryn.

And then the final layer is the ecosystem layer, where other applications or other teams can build and plug into Sovryn. So there’s a launchpad being built, and there’s NFT projects, and there’s FX trading projects that are building, and they all integrate into Sovryn.

So Sovryn has got some aspects which [are] like a Layer 1, and some aspects where it’s like a Dapp, and it combines those aspects.

Very cool. I saw on the Sovryn website that you have a bit over $300M of value locked, is that right?

 I’m not sure, I’d need to check right now. But it’s been fluctuating between $100M and $300M. 

The system launched in late April so it’s been up for around eight months and has seen over 13,000 users participate in governance, it’s had over $2B in trades that have been performed over the system. So it’s really growing much faster… than anyone expected a Layer 2 system in Bitcoin to grow

. And it’s been very encouraging to see [that] when you can start providing people with the ability to use their Bitcoin in a way which is secured by Bitcoin and without middlemen, there’s very significant interest in doing that.

Edan Yago is a co-founder of Sovryn, a Bitcoin-based lending protocol. He’s maybe the first Bitcoin builder we have had on our show and that’s because DeFi on the first blockchain network has been slow to pick up — but Edan says that’s about to change.

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🎙 Sovryn's Edan Yago on Building Bitcoin DeFi; Slower Growth But Strongest Foundation