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

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. Et...

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.

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.


Cami Russo: 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!

Eden Yago: Exciting to be here, looking forward to it!

CR: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 super interested about that.

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.

EY: Sure. 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.

So 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.

CR: 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?

EY: 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.

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

EY: 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.

CR:Awesome! Edan, what makes you defiant?

EY: 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.

CR: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?

NFTs on Bitcoin

EY: 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.

CR: 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.

EY: I agree with you. 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…

CR: 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?

EY: 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.

CR: 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.

Ethereum versus Bitcoin

EY: 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.

CR: 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?

EY: Yeah, I think you've summarized it very well, thank you.

CR: 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?

Bitcoin’s L2 ecosystem

EY: It's hard to say. 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.

CR: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?

EY: 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.

CR: Rootstock is EVM-compatible? Oh, wow.

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

CR: 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?

EY: 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.

CR: Do you know how many nodes are securing that chain?

EY: 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.

CR: 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?

EY: Which smart contracts? The bridge smart contracts?

CR: Yeah.

EY: 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.

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

EY: 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.

CR: 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?

EY: Yes.

CR: 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?

EY: 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.

CR: 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?

EY: 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.

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

EY: 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.

I think that… a lot of people have Bitcoin as well as various other tokens and assets. But I think people have a slightly different mindset when they’re thinking about their Bitcoin versus when they're thinking about some other tokens that they're holding.

The other tokens are typically more of a speculative, or high risk, or sometimes ‘get rich quick’ thing, that's the mental mode that people are in when they're using it. And the mental mode that people have when they're using their Bitcoin is different. It's usually more [for] savings, it's like the conservative part of crypto. And so the types of DeFi products that people are interested in when they're using their Bitcoin are slightly different. They're not looking for super high yields, they're looking for transparency [and] security. They first want to preserve their wealth, and then they want to grow it, so the approach of the Sovryn community in terms of the types of products that it's working to build out and the devs are building, are geared towards that sort of longer-term, highly transparent risk, very clear and easy to use products that I think are based on the same mindset of ‘I want to hold my Bitcoin and grow my Bitcoin, or I don't want to ever sell my Bitcoin’, and those are the things that are important to me.

CR: Got it. A place where you can earn interest on Bitcoin would be like very interesting for this group of people, right?

EY: Yes. So today you can earn interest on your Bitcoin right now. It's about 3% annualized, no KYC, no gateways, you can maintain your pseudonymity and you always maintain control of your keys. There's a number of developments being built now which I think might see the yields grow higher than that, and people are starting to work out ways [they] could… take on higher degrees of risk in order to earn more. So there's a lot of work around creating more choices which will allow people to choose their own adventure when it comes to their financial future.

And here are teams who are in El Salvador working to integrate with Sovryn, a lot of the teams in Nigeria — there's a lot of effort around integrating this with the day-to-day lives of people, and that's important in every ecosystem. But I think in Bitcoin, in particular, it's been very important for this to become a fundamental money — a reserve currency — that is available to all people and provides financial security to everyone. And that is very much the approach that Sovryn is taking.

CR: Very cool. Besides Sovryn, what are the main DeFi applications on Bitcoin right now? What does the ecosystem look like? So Sovryn’s Total Value Locked (TVL) is $300M, what's the total TVL on Bitcoin right now?

EY: Again, I'm not sure about the TVL, partly because it's not really possible to say exactly what the TVL is. For example, Lightning Network can be difficult to say, partly because it's not, particularly a metric that I'm really interested in. I think, in some ways, [TVL is] the wrong metric.

I'm much more interested in how much people are transacting because TVL is about people locking up their funds and a lot of it is rehypothecated. Rehypothecated means that you'll lock up your funds in one place, and then you'll basically lock them up in another place. And the way this works in DeFi as opposed to the finance sector, is [for example] you put your money into Curve, and then you get CRV tokens. You put the CRV token somewhere else, and then on the basis of that, you get a different token you put that into a different thing.

CR: Yeah, there's different measures of TVL that discount rehypothecation. Some would value pure TVL without rehypothecation at around $200B, with [rehypothecation] its $250B. So yeah, I think the sites tracking TVL are aware of that happening, but I think it's a good metric to understand how many people are trusting a system to put their money in.

I wanted to have a comparison of TVL on all of Bitcoin… and I just couldn't find one for Bitcoin. I was wondering if maybe you knew? Or if TVL isn't a metric that's looked at on Bitcoin, what metric is… a good way to track this ecosystem?

EY: It's interesting. So the whole sort of smart contract [and] DeFi ecosystem in Bitcoin is quite young, but Fantom is just as young… I think a lot of the sites that track these things aren't tracking the Bitcoin world so much, and I'm not entirely sure why that is.

Besides Sovryn, there’s a project called BabelFish, which has several tens of millions [worth] of different stablecoins — it aggregates various stablecoins. There's a system called Money on Chain, which creates Bitcoin-backed stablecoins. There's Atomic Finance, which allows for betting and trading and is built using a different technology called [Discrete Log Contracts (DLCS)]. There's obviously Lightning Network. There's Liquid, which are now issuing a billion dollars worth of bonds with the government of El Salvador. There's a project called Stacks, which has a totally different approach and it's sort of a hybrid between Bitcoin Layer 2 and its own Layer 1, and it's got things like MiamiCoin and CityCoin. So there's quite a lot of things being built in the Bitcoin ecosystem, especially over the last six months.

But so far, I haven't found very good places to track it. Sergio Lerner, who is a really great Bitcoin dev, I know he's working on a website to track all of these things. But I don't think anyone has built one yet.

CR: Okay, well maybe that'll be a job for The Defiant Terminal, we'll definitely want to have DeFi Bitcoin metrics.

EY: That would be super interesting!

CR: So there is a lot of development being DeFi on Bitcoin. I wanted to ask you about governance. You mentioned a lot of activity on Sovryn has been around governance — is there like a Sovryn token that people are using to vote on different aspects of development? How is it used exactly?

EY: Yes, so there's a token called the SOV token. The SOV token is the coordination token of the ecosystem and is used to govern.

The way it works is, it's designed to encourage and incentivize people to be long-term thinkers. So you can stake SOV, but the longer you stake SOV the more voting rights you get, so it's a forward-looking thing. The longer you're staked for, on a quadratic basis, the more voting power or voting weight you have. And also the more voting weight that you have, the more of the protocol’s revenue that you earn.

So the idea is the people who are staking for the longest periods of time actually have… more influence. So that aligns the incentives of the stakers with the long-term benefits of everyone using the protocol, as well as protecting the protocol from short-term or “flash governance” attacks.

Bitcoin’s cultural evolution

CR: That's interesting, like that mechanism. From a certain point of view, it seemed like in Bitcoin it was a bit frowned upon for applications to have their own governance tokens. Is that changing with DeFi on Bitcoin?

EY: I think it is changing, yes. So Bitcoin culture took a weird turn for a while there, and I think almost became weirdly communist, it became very suspicious of the profit motive.

And it's true that there have been a lot of scammy or poor quality projects created with tokens, but there have also been a very large number of extremely innovative projects that would never have existed without tokens. And more importantly, you can't build systems that are borderless, and that have no company registered in this country or that country, unless you're building it in a more decentralized way with tokenized governance. So I think the culture is starting to change.

Anyone been watching what's been happening in Bitcoin recently, there's been a huge pushback against toxic maximalism. And there's been an ongoing change and an ongoing debate where people are starting to recognize that if we want to get to a hyper-Bitcoinized world, and if we want to build a world of secure property rights around Bitcoin — if we want to build an economy around Bitcoin — that means having more than just Bitcoin.

It means having projects, and companies, and stablecoins, and assets, and a way of representing many different types of property — and that introduces tokenization, as well as representing many different ways that people can collaborate, like DAOs, which also introduces tokens. So it's still very much a debate within the Bitcoin community, but I'm surprised by how much the conversation has changed, especially over the last six months

CR: It's so interesting because… there's already been many months of develop[ing] governance, and token experiments, and yield farming, and DAOs, and NFTs, and all these things happening on Ethereum. And Bitcoin has been kind of on the sidelines looking [in], and it seems like now it's appearing to be more open to accepting that ‘oh, maybe there is innovation happening outside of Bitcoin that we could use’. Is that kind of what's happening at the moment?

EY: Well you know Auroro — she's one of the first devs who started working on Sovryn — she wrote a manifesto for SovrynI think in August of 2020. And in it, she said [that] one of the most powerful memes in Bitcoin up until about 2015, was: ‘anything that is valuable to Bitcoin, Bitcoin will adopt’, and we don't hear that as often as we used to but it's making a comeback.

And I think the Ethereum and smart contract world has proven immensely valuable in terms of inspiring and creating a whole wave of innovation, and doing a lot of the things that people wanted to build on Bitcoin… before any of these projects existed… And I think it's great to see that innovative spirit plus the seriousness with which people treat security and reliability in the Bitcoin space being merged to build layers of innovation on top of this extremely unique, permaware system, which is Bitcoin.

Different people talk about different things, like ‘will we be in a multi-chain world’? Or ‘will everything be built on Ethereum’? Or ‘will everything be built on Bitcoin’? And I don't know the answer to that question. But what I think I can say with a great deal of certainty, is that over the coming years, we will see Sovryn and other projects like it effectively bring the functionality to build anything you want on Bitcoin and secure it with Bitcoin. And I think for a certain set of use cases, especially those financial use-cases where people have long-term horizons, it's going to make a lot of sense to build those on Bitcoin.

CR: So if Bitcoin is better for this specific kind of financial use-case, which is for serving value and more conservative investing… then wouldn't it make sense that users will want to have different alternatives of financial applications? So maybe in that framework, a multi-chain future would make more sense? Or do you think that the more conservative use-cases are available on Bitcoin now, but every use-case will be available on Bitcoin in the future?

EY: I suspect that you will be able to build any use-case on Bitcoin.

If you [ask] ‘ultimately, what is the big limitation’? The big limitation is ‘can we add scalability’ and ‘can we add certain features’? So if you think about what zero-knowledge proofs can do. For example, with rollups, they effectively allow you to add any type of computational activity with extreme scale to any system to which you can roll up — you can roll up to Solana, you can roll up to Ethereum, you can roll up to BSC, you can roll up to Bitcoin. So I think the technological differences between these different systems is going to be extremely minimal. They are not going to have unique properties from a technological perspective, because ultimately most of the computational work is going to be done off-chain in these rollup environments. And then the real differentiator becomes accessibility, the network effect of the assets that are associated with them, and the ruleset and reliability of that ruleset.

So I think when you look at the space, you can… rollup to a chain, and in that respect, we're definitely going to live in a multi-chain universe. You'll be able to do anything anywhere, but where you choose to do it, I think, will depend more on the secondary aspects of network effects and the security assurances you receive.

CR: Got it. So what's missing for defining Bitcoin to really take off, is to have these scaling platforms like zero-knowledge proofs, rollups that… DeFi applications will be able to use. And then, when those applications are finally deployed or confirmed, you believe most will do it on the Bitcoin chain?

Security trade-offs between Proof-of-Stake and Proof-of-Work

EY: I don't know if I believe that specifically, what I would say is that if I had to guess, I think it's more likely to be on the Bitcoin network than any other network. And I also think that it's more likely to be one dominant network and several smaller networks, rather than a very large number of networks. So I do think that there's a very high likelihood that… we see a consolidation, and that when that consolidation happens, it will happen around Bitcoin. Part of the reason for this is actually because of Bitcoin's use of Proof-of-Work, and the fact that the Bitcoin asset is not an asset which is tied to use as sort of like a utility token right.

So if you think about ETH, or SOL, or AVAX, these are very important utility tokens. They're essential to be able to use the chain on which you're operating for the purpose of processing smart contracts. But there's a bit of a problem because all of these different systems right now are in a competitive race to reduce fees, and I think they will succeed.

So what will happen is that the cost of using these systems is going to drop a great deal. And that's going to impact the potential security of these systems because Proof-of-Stake systems effectively make money on the basis of collecting the fees of these transactions — so when you drop the fees, you're dropping the amount of fees that can be collected, and ultimately you drop the security of the system. Whereas Bitcoin, because of its Proof-of-Work system based around having this sort of digital gold asset, is actually less impacted, it could continue to exist even if it didn't have these smart contracts.

So um I think you know looking five years out, we may find that Proof-of-Stake systems, especially for smart contract platforms, actually start to see diminishing security assurances, especially as they compete amongst themselves — and that may prove to be a real problem. But I can't tell the future, it's just one potential risk that I see.

CR: Interesting. I understand that Proof-of-Stake systems secure the network with the amount of value at stake — not necessarily how high fees are, but with how much value the different validators are staking to the network. So if that's the case, maybe having lower fees doesn't compromise security. But I don't know, that's my understanding of it.

EY: You're totally right, the thing is that the incentive for staking is how much fees are captured, and you can basically capture fees in one of two ways. You can either capture fees in the form of transaction fees, and if you're constantly reducing those then you're reducing the amount of value that can be captured, and then you're reducing the incentive to stake, because when you stake you give up liquidity.

But there's another option — and this actually might prove to be more useful, but in some ways is more dangerous — the other place that you can capture fees as a staker and as a validator is through MEV, Miner Extractable Value. And I could see a future where Ethereum, or Solana, or you know any of these systems have a lot of activity on them, and that activity drives a lot of MEV, and then it becomes very profitable to be validator and effectively capture that MEV. But we know that MEV has certain risks.

CR: But then it's not fair for users.

EY: Yeah. So basically there are three routes. It could be [that] the situation that we currently have of this race to the bottom of fees doesn't continue for whatever reason, and then the Proof-of-Stake system will work. There's this situation where the transaction fees are in a race to the bottom, and then the security is diminished. Or there's a situation where the security isn't diminished, but it's primarily because it's being subsidized by MEV. So I think those are the three potential outcomes.

CR: Since we're on the subject, there's this criticism that I see… about Bitcoin that I'd love to get your take on, which is that Bitcoin has this famous 21 million hard cap on the amount of Bitcoin that will ever be in circulation. And so where does the security come from? Does it come from very high fees that will go to miners? And if that's the case, does the network become less attractive for users? And it seems that for all its emphasis on sound money, the fact that this incentive for nodes to secure the network ends at 21 million doesn't seem very reassuring. So what's the plan there?

EY: I think that's a very good question, and unfortunately I don't think it's a question which receives enough debate in the Bitcoin community.

So my answer to this is… I think that there's two possible outcomes. One outcome is that the fees that are collected actually do go down over time, and so the system becomes less secure, or at least has a less significant security budget. The other outcome is that the fees on Bitcoin Layer 1 become quite expensive, in fact, very expensive — significantly more expensive than they are today. That would secure the network and I think that that's a good outcome. I think that's the outcome that we want right because users will not be paying those fees. Those will be high-value settlement payments, and they will effectively be an aggregation of all of the other activity that is occurring on Layer 2. And so I suspect that we will get to a point where the fees are quite high.

Coming back to the first scenario where the fees aren't high enough, it's not clear to me how much of a danger that is, because if the fees aren't high enough… the only reason that would be happening is because there isn't actually that much use of the Bitcoin network. If there isn't that much use of the Bitcoin Network, then we've actually failed before the security issue became a problem — we failed because there wasn't enough adoption to drive the security demand.

So um I think the real question is ‘do we see Bitcoin usage — not so much on Layer 1, but really on Layer 2 — scale to the point that when you aggregate and settle those Layer 2 transactions into Layer 1, it's a huge amount of activity which is able to support the high fees. That's basically the question when it comes to Bitcoin.

Getting started with DeFi on Bitcoin

CR: Got it? Okay, so it's basically… if there's usage on Bitcoin, the way to continue securing the network will be with much much higher fees than what we're seeing today.

And then to wrap up, very practical for those listening who want to start experimenting in Bitcoin DeFi, what steps do you recommend? What non-custodial wallets should people download? How to start gaining interest on Bitcoin [using] Sovryn? What other applications do you think a newbie should look at?

EY: So with Sovryn, you can connect your Trezor or your Ledger directly to the system, and that is the most secure way to deal with the system. So we strongly encourage people to use hardware wallets. But you can also use things that maybe you're more familiar with like Metamask, or web3 mobile wallets — basically any web3 wallet will work with Sovryn as well. And if you're interested in learning about it, a good place to start is the website, Sovryn.app.

But the best place to get into conversations, especially technical conversations, is either the forum or the Sovryn Discord. So if you go to the website and you click through to the Sovryn Discord, it's a very active community and quite transparent, so you can see you know the conversations that are occurring between the developers and what they're working on, and ask questions and get involved.

CR: Very cool. Edan, this has been such an interesting conversation. Like I said, you're probably the first Bitcoin developer on The Defiant podcast, so it's great to start learning more about this ecosystem, I think it's a really interesting approach!

My take on Bitcoin and Defi has been that Bitcoin is great as digital gold, and Ethereum is very well suited to be a platform for more sophisticated financial applications. But if there can be smart contracts on Bitcoin, and the Layer 2 ecosystem continues developing, I think it’s interesting to track and experiment. I think a lot of people come to crypto through Bitcoin, and I think there should be a lot of interest to start putting that Bitcoin to work directly on Bitcoin, and not kind of having to wrap it and add extra layers of risk to those transactions.

So anyways, Edan, pleasure chatting with you. Thanks so much for taking the time!

EY: Thank you, [this was] a super interesting conversation, I really enjoyed it! I hope maybe we can do it again sometime.