DeFi on Bitcoin? An Introduction to SOVRYN

Andrew Throuvalas

@andrew

BitcoinDeFiSOVRYN

Here’s a look at SOVYRN – the project quietly revolutionizing the Bitcoin network with once-incompatible functionality: decentralized finance. With time, it may fully correct Bitcoin’s limitation on programmability, rendering various altcoins obsolete.

The Present Crypto Divide

As things stand, Bitcoin is still the most valuable cryptocurrency on the market. The digital asset has a $440B+ market cap. Next to the total crypto market cap of $1 trillion, Bitcoin’s market dominance is unquestionable.

The outside world also adopts the currency at breakneck speed by businesses and hedge funds alike. From Twitter enabling Bitcoin payments to Tesla adding BTC to its portfolio, Bitcoin’s legitimacy as an asset is also unavoidable. Multiple businesses have even recognized it as an inflation hedge superior to gold.

Yet despite Bitcoin’s popularity and network, it is no longer the only mainstream cryptocurrency. Instead, several other cryptos, tokens, platforms, and protocols have risen next to it. Moreover, while some have been short-term and speculative fads, others have proven viable long-term.

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Fervent Bitcoin maximalists may claim this is due to ignorance or pure market speculation. However, a more charitable interpretation would have it that such altcoins fill gaps in the decentralized economy, which Bitcoin cannot. For example, Tether serves as a convenient yet value-stable form of liquidity for crypto traders. Meanwhile, Monero provides enhanced transaction privacy, which Bitcoin fails due to its public blockchain.

However, the most noteworthy alternative blockchain network is currently Ethereum. Founded by Vitalik Buterin and others, Ethereum’s market cap rests presently above $500 billion. Most people believe it is the only cryptocurrency network that could grow larger than Bitcoin.

Driving this belief is the following observation:

As Bitcoin uses a Turing incomplete programming language, it is unsuitable for smart contracts. Therefore, it is inferior to Ethereum for conducting decentralized finance.

Why Does Defi Matter?

Decentralized finance (DeFi) is the most popular developing use case for blockchain technology and decentralized networks. It is a simple set of peer-to-peer financial services that require no central authority to facilitate them. These could include savings, lending/ borrowing, trading, and insurance.

The appeal of such technology is that it is permissionless, efficient, and almost constantly active compared to centralized financial alternatives.

For such a parallel financial system to function, it requires three main pillars:

• Stable currency
• Chequing/Savings Accounts
• Various Exchanges

In the developed world of centralized finance, each function is served by multiple parties. One example would be the US dollar, Chase Savings, and the NASDAQ stock exchange, respectively.

Meanwhile, Defi developers are already creating less centralized and more efficient blockchain-based equivalents of these systems. For example, the Ethereum platform hosts multiple dollar-pegged stablecoins (Tether, USDC, DAI, etc.) to serve as stable currencies. Meanwhile, Compound is a borrowing/ lending protocol that lets people earn from their crypto savings in smart-contract-controlled lending pools. Finally, Uniswap functions as a decentralized exchange for ERC-20 tokens, which could be utilized for trading tokenized assets like stocks.

These days, Ethereum’s facilitation of smart contracts and Defi protocols has given it a massive niche within the cryptocurrency market. It is the backbone and standard of decentralized applications that enhance finance beyond value storage and transactions. Furthermore, as all tokens traded on the platform require spending ETH for gas, the cryptocurrency accrues additional layers of demand.

These factors have led Ethereum to be recognized as a second “primary” cryptocurrency alongside Bitcoin. Because it serves different functions, many refer to Ether as “digital oil,” whereas Bitcoin is “digital gold.”

SOVRYN: Combining Defi with Hard Money

What if the advantages of Bitcoin’s trust, security, and decentralization could be combined with Ethereum’s smart contract compatibility? What if the benefits of “digital gold” and “digital oil” could be brought under one tent?

An emerging protocol is developing on Bitcoin’s application layer, striving to do just that. Its name is SOVRYN.

SOVRYN is a “non-custodial, permissionless, smart contract-based system for bitcoin lending, borrowing, and margin trading,” according to its website. Edan Yago co-founded SOVRYN and launched it in April 2021. Today, it is Bitcoin’s most feature-rich Defi platform.

Features of SOVRYN

SOVRYN’s current features include the following, among others:

• A lending pool with which HODLers can earn interest on their tokens from borrowers and margin traders – including bitcoin. This is like a Compound on Ethereum.
• Over-collateralized borrowing from the lending pool.
• A decentralized spot exchange allows users to instantly trade tokens using the lending pool, similar to UNISWAP.
• A token bridge between RSK, Ethereum, and BNB Chain.
• Up to 5X leverage trading, also borrowed from the lending pool.
• Bitcoin-backed, US dollar-pegged stablecoins, all backed by over-collateralized bitcoin. This is the Bitcoin equivalent of DAI.

Features currently developing for SOVRYN include a fiat off-ramp and trading limit orders.

As we can already see, SOVRYN is now offering the three core services needed for a parallel financial system. However, on this system, bitcoin is the base asset.

How it Works

Rootstock

This DAO is built on Rootstock (RSK), a Bitcoin sidechain that enables smart contracts. RSK connects to the main Bitcoin blockchain through merge-mining, whereby the same miners and energy secure both networks. Furthermore, users can use a two-way peg to convert their BTC from the Bitcoin network into a “smart bitcoin” tock (RBTC) on Roots. Hence, users can take advantage of various dApps as they would on Ethereum, alongside Bitcoin’s peerless security and asset value. SOVRYN is one such DApp.

SOV Token

In the spirit of decentralization, SOVRYN works under a “Bitocracy” using the platform’s native governance token, “SOV.” SOV tokens allow holders to manage the SOVRYN protocol through staking and voting. Holders will also receive rewards from the funds that the protocol generates.

SOV token supply has a maximum cap of 100,000,000 and is distributed over seven years. Their allocation varies to founders, early funders, early users, developers, and contributors. In addition, some SOV will be distributed through programmatic sales, allowing users to trade in bitcoin for SOV.

According to Edan Yago, SOV token holders are incentivized to participate in and contribute to the network’s development. This makes it different from holding an ordinary company share.

“If you passively hold a Wal-Mart share, you get money. If you passively hold SOV, you don’t. So you need to participate in the system actively. It’s like an access pass into participating and influencing the system.

Due to the various incentives, over 4000 people locked up SOV on the platform in early June. Furthermore, improvement proposals for the network regularly received over 60% participation from those holders.

Generally speaking, users that manage to accrue more SOVRYN through its various distribution methods have more influential voting power. Also, a user may delegate his voting power to another network address by staking his SOV.

Furthermore, SOVRYN admits that its protocol cannot achieve decentralization like Bitcoin’s base layer. Still, it allows it to go a long way. Moreover, this form of decentralization does not come at the expense of features or scalability.

Benefits of SOVRYN

SOVRYN provides several unique benefits to dedicated Bitcoiners, as well as the strength and security of Bitcoin itself. Some of these benefits include the following:

Privacy

As a uniquely decentralized bitcoin lending service, users can remain protected by Bitcoin’s pseudonymity while putting their bitcoin to work. This contrasts with centralized lending services, which typically adhere to KYC and user tracking restrictions.

Self Custody

One’s private keys no longer need to be concentrated with one centralized party. With peer-to-peer lending available, SOVRYN users conduct finance with total “sovereignty” over their funds.

Bitcoin Native

With Bitcoin as the Rootstock chain’s native asset, users can pay transaction fees in BTC. However, since SOVRYN is a platform for Bitcoin lovers, transacting is far more convenient for the average user, who is likely trading bitcoin anyways.

This differs from the Ethereum blockchain, which requires Ether for transactions despite most network users transacting in USDT. Therefore, purchasing Ether can be quite a hassle for those interested in only its platform rather than the base asset.

Bitcoin nativity also entails piggybacking off of Bitcoin’s unmatched network security, bolstered by miners worldwide.

Keeping Bitcoin Decentralized

Decentralization is not only a feature but a necessity for network integrity. Should Bitcoin’s use cases fail to increase, its more complex financial applications would risk concentrating in the hands of centralized services. This would defeat the purpose of Bitcoin, as money once again passes through financial giants for added utility. Meanwhile, the pathway to censorship would be available again.

Through SOVRYN, users have an uncensorable access pass to sophisticated Bitcoin finance. In addition, the protocol itself should achieve reasonable decentralization, massively reducing the risk of targeted censorship.

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Conclusion

SOVRYN’s features continue to multiply over time. It appears to be emerging as the go-to decentralized finance protocol native to Bitcoin. Furthermore, as ideas and DeFi applications develop on other blockchains, SOVRYN will be free to adapt them as the community sees fit.

This raises an essential question regarding the future of other cryptocurrencies, blockchains, and Defi protocols. If SOVRYN brings Defi to Bitcoin, do other chains have any reason to exist long-term?

As mentioned, most crypto lovers – even Ethereans – recognize bitcoin as the highest-tier asset. It has the best chance of all cryptocurrencies to garner global trust at the scale of a world currency. Its decentralization and inception are characteristics no other blockchain or crypto can mimic. Hence, Bitcoin faces little competition as “digital gold.”

Meanwhile, Ethereum, Cardano, Solana, and other networks face steep competition for providing the best DeFi services. While Ethereum is presently winning that contest, bitcoin may take over with time, thanks to SOVRYN. Furthermore, if Bitcoin gains enough traction over time, SOVRYN may become its protocol. This is due to its use of BTC as the base asset.

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This future is still a long way out if it exists. However, innovations like SOVRYN may render Ethereum – and all other blockchains – useless next to Bitcoin.