On The Brink with Castle Island - Edan Yago (Sovryn) on Bitcoin-Native DeFi (EP.177)

Episode Date: February 10, 2021

Edan Yago, product lead at Sovryn, talks us through the prospects for DeFi on Bitcoin. In this episode:  Edan Yago's origin story How Edan became disenchanted with the Bitcoin community's ambition Did Bitcoiners compromise on an original vision of adopting successful alternative technologies? Is Bitcoin sufficiently expressive to be a functional base layer for smart contracting? Was the original vision of sidechains abandoned? The state of the art in trustless sidechains Is the perfect the enemy of the good with Bitcoin? Is Lightning "worse is better"? Is Bitcoin hamstrung by the pursuit of perfection? Why compromising on trust assurances has been a boon for Ethereum Why native smart contracting on Bitcoin is superior to using wrapped Bitcoin on Ethereum Do rollups break composability for DeFi? Is DeFi subsidized by token issuance and liquidity mining? What can Bitcoiners learn from Ethereum? Thoughts on other Bitcoin L2s like Blockstack Update on Rootstock/RSK and why Sovryn is building on it What Sovryn is and what you can do with it Does Sovryn require any changes to Bitcoin itself?  

Hello and welcome back to On the Rink with Castle Island. It seems that we're doing a bit of a mini-series on Bitcoin Layer 2 and so our contracts here. We talked to Manib of Blockstack recently, and today we're talking to Edanago of Sovereign, which is effectively a DeFi platform being built on Bitcoin through Rootstock. Now, Rootstock is a merge-mined side chain, which has been operational for over a year now, founded by Sergio Lerner, which has really received very little hype in the Bitcoin community, but it seems like it's finally coming to fruition. We're seeing some of these projects like Sovereign being built on it.

Now, a lot of you might say, well, what's the use of Bitcoin native defy? What about just wrapping Bitcoin using it on Ethereum? We get into that in the episode. It really just comes down to different tradeoffs in terms of trust models and whether it's preferable to use Bitcoin on a near chain basis, as opposed to. to on a third party chain entirely and what the implications are for Bitcoin's security model in the long term. I'm really excited to see richer smart contracting emerge on Bitcoin itself and super optimistic about these projects like Blockstack and Sovereign. So I'll be following their

progress really closely. Let's dive right into the episode with Edan Yago. Brought down by bad mortgage investments, Lehman, which has 25,000 employees will be liquidated. The federal government loans American International Group, AIG, 85,000. billion dollars this is a different kind of market and the fed is asleep the federal government is stepping it to stabilize fanny may and freddie mac the two mortgage giants that have been threatened by the housing crisis the bank of england has pumped 75 billion pounds more into britain's ailing economy with a new round of constituted easy and print a couple trillion dollars and all of a sudden people started to worry so out of this worry we have something called the bitcoin bitcoin edon yago

thanks so much for joining us today my pleasure thanks so much for having me it's one of my favorite What costs? I love to hear it. So we've talked about Bitcoin L2 recently. We had a need from Blockstack on the show not too long ago. I don't know if you described that as an L2, but basically there's an underappreciated domain here with Bitcoin in terms of powering smart contracts potentially. And Sovereign is one of the most interesting new platforms have come across doing this.

So I'd love to hear about the sovereign system and learn more about how it works. I guess before we start, maybe tell us a little bit about how you came to be involved with sovereign and sort of your background in the industry. Sure. So I have been in Bitcoin one way or another for a little over 10 years now. My family background and professional background, I thought, I think, are what. made it so that it was almost inevitable for me. The family I grew up in is a family that has been on the wrong side or conflicting with so many of the tyrants of the 20th century. The communists, the Nazis, the apartheid government of South Africa, they've gone through hyperinflations

and rebellions and had to hide. And there have been a few themes. that have always come through. One is that everything is always fine until it isn't. And the other is that the first thing that they go for is your access to money. And so that was the tradition that I grew up on, a tradition of recognizing that the monopoly of violence, which is what government is, is an extremely dangerous thing that we all need to be extremely wary of. And then academically I studied neuroscience, specifically I focused on neural networks, which is kind of like machine learning.

And so I was very involved in network science. And one day I came across this paper, the Satoshi White Paper. And at the time I was running a biotech company and we were using neural networks to create better diagnostic tools. and the Satoshi white paper completely screwed up everything for me. All of my plans went out the window. And pretty much from that point on, I have been all Bitcoin all the time. And then over the last 10 years, I've tried to be involved in ways in which we can make sure that as many people have access to sovereignty as possible. And getting Bitcoin into the hands of people before they even know.

they need it. And so I won't recount for you, maybe all of the different companies that I've been and we can talk about it. But that's been the theme. It's always been about trying to improve people's sovereignty. And one of the frustrations that I've experienced throughout this period, and a lot of people, I think, a lot of Bitcoiners who were my friends early on, have experienced the same, is we always expected that we would expand on this idea of sovereignty beyond. just huddling. There's this irony about Bitcoin, which is we have this most amazing sovereign monetary asset which you can control and which no one can take away from you. And yet the minute you want to use it, you need to give up control. And so most Bitcoiners are using centralized

services for exchange, for lending, for investing their Bitcoin. And so they're all giving up their sovereignty just to use the sovereign asset, which robs it of its initial purpose and power. And I always expected that people's, you know, that the Bitcoin community would create decentralized financial services to replace and to provide an alternative to these centralized services. And it never really happened. And so I was lucky enough to reconnect with, some people during the pandemic who I'd known from the Bitcoin space over the years, and we'd started to, we reconnected to try and raise funds to get masks to people. And as a result, we started talking again, and this was a theme that kept on coming up,

until eventually we said, screw it. We're just going to have to do it ourselves. And so mid-2020, we started working on Sovereign, which is a smart contract-based, decentralized financial operating system for Bitcoin. And now it's been live for a few months and he's growing like some kind of mutant weed. And it's an extremely gratifying thing to watch. And I don't think it's sort of reinvigorated my excitement in Bitcoin to levels that I haven't experienced in a long time. So I want to talk about sovereign and how it works and so on.

But maybe we can just return to something you just said, which is the Bitcoin community almost compromising its vision for decentralized financial services. beyond just treating it as a store of value or large-scale settlement mechanism. What would you identify as the major reasons for this shift? Is it a technological impairment? Or is it just that it was easier to institutionalize Bitcoin and go after the holder market as opposed to try and build more expressive services on top of it? I think the greatest trick Vitalik ever pulled was coining this term Bitcoin Maxis or Bitcoin maximalists.

And he created it as a slur, right, as this idea that, you know, there was a class of Bitcoiner who thought that only Bitcoin could be, you know, Bitcoin should be the only crypto asset. And as a reaction, the Bitcoin. Bitcoin community adopted the term as its own. And it's massively shrunk our thinking. Now, that's, you know, that's sort of like a superficial story. I think deeper than that, there have been two traumas that have occurred to the Bitcoin

community. And they occurred at the same time and really changed the way the Bitcoin community thinks. The first was the scaling wars. around Segwit and 2x, and it created an extremely defensive reaction. Now, that was the appropriate reaction, and I was a supporter of what people would today call the small block camp. But that sort of defensiveness metastasized into a rejection of any type of change. And then the second thing that was happening at the same time was the growth of Ethereum,

which even to this day is the only credible sort of threat, so to speak, from within the crypto space to Bitcoin's dominance, with maybe the exception of stablecoins. But even stable coins run on Ethereum. So that too created a strong sense of defensiveness within the Bitcoin community. And as a result, I think there's a minority, but an extremely vocal minority of Bitcoiners who have come to have a not-built-here attitude to any technology that isn't created initially from the Bitcoin community and has placed blinkers on many, many members of the Bitcoin community.

And to me, that has robbed Bitcoiners of one of the fundamental things that I've always thought was most impressive about the Bitcoin community, which is this sense of optimism, this sense of innovation and adventure. And there used to be, you know, we have a few terms like toddle or not your keys, not your coin, which are canonical to our attitudes towards the world. They sort of express what the Bitcoin or view is. there used to be a meme in the bitcoins world which was as important as any of those which was if any technology improves upon bitcoin bitcoin will simply adopt it and you just don't hear that anymore and i think that that is a strong indicator of how our attitude has towards innovation has changed yeah that is that's a very that's very well said you're right we do not hear that anymore i'm just reflecting on something, I believe Vitalik wrote, I'm trying to remember the exact phrasing he used. It was something

like minimum viable expressivity. He thinks that, you know, Ethereum, or Bitcoin is sort of too limited in sort of its core features of the base layer to serve as a base layer for a more expressive, decentralized finance system. And so that would be an argument for wanting to use a more complete and more expressive base layer. I take it that you disagree with that, that you think Bitcoin can be the functional base layer for these things. I think one of the interesting and often overlooked things about Bitcoin is that Bitcoin is by far the most scalable blockchain out there. And the reason Bitcoin is so scalable is because it tries to do so little. It's extremely specific to the purpose that it was created for, right?

The Bitcoin blockchain wasn't even an idea from Satoshi's perspective. He never mentions a blockchain. He talks about Bitcoin. The entire creation is designed to create this programmable money, Bitcoin. Now, it's true that that doesn't have a high degree in and of itself of expressivity. But that doesn't mean that you can't build additional. layers around it of expressivity. One of the other things that we used to talk about a lot within the Bitcoin community were sidechains. This idea that we can expand upon the functionality of Bitcoin

without having to change its canonical core. This is an extremely powerful idea because it shifts the burden of scalability and functionality out of the core to additional layers of technology, which is exactly how every digital technology that has ever scaled has scale. If you look at the internet, it's built layers upon layers of protocols. It's not one protocol that does everything. And we've also sort of there thrown the baby out with the bathwater and have stopped focusing on the opportunity that sidechains provide us. So that doesn't mean that the work has completely stopped.

In different pockets in the world and in the Bitcoin community, there've been many different teams working on side chains and other types of layer two technologies. And indeed, sovereign takes advantage of the work that has been done over the last six years around side chains, which has matured a great deal. I think the technology is available. It's really our conception of the world and our understanding of just how powerful Bitcoin can be, which is lagging behind. I'm definitely not an expert on sidechains, but I had this kind of understanding that there was a disillusionment with the original view of side chains once it was sort of acknowledged that maybe the SPV model and the fraud proofs were not considered secure.

Am I characterizing that correctly? like if you go back and look at the original block stream paper on side chains from maybe, I don't know, 2015, 2016. And when those trust assurances didn't pan out, people sort of abandoned the idea. Is that sort of the correct chronology there? Definitely part of the story, yes. It's true that even to this day, the biggest challenge with a Bitcoin side chain is having a fully trustless pig. and what that means is the ability to transfer Bitcoin from the main chain to the side chain

and ideally back with the type of trustless security assurances that you have when using Bitcoin main chain that remains out of our reach at this point. That said, the ability to build trustless pegs has improved a great deal and will continue to improve. So the type of cryptography that is becoming available in Bitcoin is advancing rapidly with things like Taproot. The types of cryptography that are available to us just generally, like Zero Knowledge Proofs, are improving rapidly. And if you concentrate minds on this type of problem, solutions, emerge much more rapidly. One of the issues we have right now is that minds aren't really concentrated on this problem. And that's one thing that I'm hoping to help change with sovereign and that the

community that's behind sovereign is working on. But it remains the case that the two-way pegs for Bitcoin are not entirely trustless. That doesn't mean we don't need them or that they're not useful, right? So the alternative is that you put your Bitcoin on Binance or Krakken or, you know, that you don't do anything with it. And neither of those are, you know, just huddling is fine, but if you actually want to build an economy around Bitcoin and you're completely reliant on centralized services, that is a substantially worse solution than trust as pegs, which, which while they have perhaps reduced security assurances right now are still far better. One thing that strikes me to listen to this conversation is simply the phrase,

the perfect is the enemy of the good here. And it seems to me that once it became clear a few years ago that truly trustless, proof of work, side chains were going to be difficult, that the Bitcoin community abandoned the idea. to a certain extent because they wanted true trustlessness or nothing. So there's a similar, there's a phrase which a lot of people have used

to describe Bitcoin, which I think a lot of Bitcoiners embrace, which is this idea that worse is better, right? So worse is better is an essay that was written a while ago by a computer scientist. And he basically... Corn, right?

Yeah, one of my favorites. That's right. And in that essay, he expresses the, idea that if you have something which is functional and which can scale and upon which you can build additional functionalities, you don't need the perfect solution. And indeed, the perfect solution will usually be too late or too complicated. Bitcoin is one of the best examples of worse is better. Bitcoin doesn't do everything. Bitcoin can't and won't do everything.

And Bitcoin, you know, as a result, is so scalable, so powerful and will continue in all likelihood to be the leading sort of digital monetary asset. I think we need to extend that thinking to the layers beyond Bitcoin. So if you look at what's been happening with another layer two solution, for example, Lightning, Lightning Network. Lightning Network has not managed to adopt the worse is better solution. It becomes increasingly complicated as people try to iron out the kinks. And we still don't have the kinks ironed out. Many Bitcoin services that want to be trustless or want to use lightning have implemented it and abandoned it. The pursuit of perfection is, as you say, very often,

it gets in the way of the pursuit of pragmatic incremental improvement. Yeah. I mean, I do contrast, not to speak highly of Ethereum or anything, but I do notice that the Ethereum community is willing to compromise significantly on trust assurances. If you look at some of the L2 systems, see if the optimistic roll-ups that rely on fraud proofs, for instance, which in my view are not truly trust minimized. but you still see the Ethereum community embracing these things in the spirit of experimentation and just throwing stuff at the wall and see what sticks.

And in some sense, that is maybe more conducive to innovation than having these extremely rigid requirements for trust minimization. So I wish that the Bitcoin community maybe took more of a middle ground approach to the problem. Right. I think the reason that Ethereum has done so well is because of its incrementalism. It's willingness to make incremental improvements on an ongoing basis. The way it's gone about it in some ways has always been, I've taken issue with it, right?

This idea that we're incrementally building towards this perfect future, right, of this world computer. And we don't quite know what the roadmap is. Where that becomes problematic is when you don't have a set of core beliefs that you are unwilling to compromise on. And so I think it's important that we have a very clear idea of what those core beliefs are. And we be willing to experiment with the rest, rather than having core beliefs that are too broad or non-existent. For me, the core beliefs are one, we don't need, and indeed we should all be as the crypto community galvanizing around one monetary asset, because this is the big battle. The battle to create sovereign currency, basically the entire world is arrayed against us,

and it's going to take all of our effort to win that battle. The second thing is we don't introduce any type of even moderately controversial change into Bitcoin core. Bitcoin should be almost like a law of nature in that the main chain keeps plotting on and on block after block unchanged forever so that if you held Bitcoin today, you know what that Bitcoin is going to look like in 10, 20 and 100 years. beyond those two things, I don't think we, we, we, we, I think incrementalism becomes not just permissible, but absolutely necessary. Yeah, I'm fully with you on that. I certainly believe that there are some qualities of a system, especially a monetary system that should be absolute. And, and you can't really compromise on, I would say the verifiability. So the ability to run a node

and verify the entire transactional history at a commodity level, and then the integrity of the property rights that are being proposed by that system. So not interfering with the supply or the issuance, for instance. And for me, those are non-negotiable. So if your innovation compromises either one of those things, then you have a problem. So that's the way I see it at least. in terms of there's been this interesting phenomenon in the last year we've seen a lot of Bitcoin move its way over to Ethereum a couple billion dollars worth of wrapped Bitcoin on

Ethereum I believe yeah what do you make of this and why would you propose building native smart contracting on top of Bitcoin as opposed to biting the bullet and using Bitcoin on Ethereum. So I think if you're using Ethereum, there is a number of disadvantages, some of which are inherent just to any use of Ethereum and some of which are specific to Bitcoin. So Ethereum, one of the amazing things that they've done is create a culture of hyper-inclusivity. And I think that, you know, there's nothing to do but admire that culture. Because if we are trying to build, you know, a world of hyper-bitcoinization. If we are trying to build the next reserve currency, right, the reserve currency of the future,

this needs to be a vision which includes everyone. And so hyper-inclusivity, I think, is something that right now Ethereum is doing better than Bitcoin from a cultural perspective. The irony is that the chain itself is actually becoming increasingly hyper-exclusive. The cost per transaction is sometimes $30, $400, $100. This is not something that a regular people can use with any chance of profitability or practicality. And so it's become a domain primarily for so-called whales. I don't think that that's something that we want for Bitcoin.

Beyond that, the goal in building smart contracting tools for Bitcoin, I think, is to expand the assurances of sovereignty that Bitcoin provides into the. the financial and economic sphere. There is defy on Ethereum, but I don't think it includes Bitcoin. The vast majority of Bitcoin on Ethereum is in the form of wrapped Bitcoin from Bitco or from Renvium. Both of those systems are in practice centralized and non-transparent right now. So while you might be using a defy system, you are not using defy.

you have given up the sovereignty and the decentralization of the asset that you're using. So in practice for Bitcoin, there is no defy, with, I think, the exception right now of very few systems. And the one which is gaining the most traction is sovereign. So just a further comment on defy before we get to sovereign itself. So when we were talking prior to this conversation, we were talking about defy sustainability. So maybe just touch on how sustainable you think DFI is on its own and what the effect of the stimulus from liquidity mining is and whether that means that defy is going to struggle when and if that sort of runs out.

I think the idea of DFI is extremely simple, which is that we have various things that we want to do. We want to trade. We want to lend. We want to create stable coins. so we have access to liquidity without having to sell, let's say, our Bitcoin. There is clearly a desire for these services. And even among, you know, even the fact that we have so much wrapped Bitcoin shows that there's latent demand for it in the Bitcoin sphere.

But, and so from that perspective, those services, we know they're sustainable. Look how well exchanges are doing. Look how well blockfire are doing, right? So if we can just decentralize that. I mean, that's obviously sustainable. There's another side to Defi, which is that right now, it's kind of like the ICO World 2.0, right? Everyone's creating a token. They give away this token to create so-called yield, and then when that's over, you move on to the next project,

which is giving you more tokens and more yield. That is, at best, animal spirits at worst, sort of a little bit of Ponzi. Or, you know, even in Ethereum circles, they call it Ponzonomics, right? That isn't sustainable. But it is very powerful for adoption. And so on balance, you know, these types of irrational, episodes of irrational exuberance, they actually build a huge amount of extremely useful infrastructure. I mean, in 1999, 2000, there was this massive run up and crash in Internet stocks.

Right. So there was this internet bubble, which basically was Ponzionomics. But as a result, we got the internet. I think if the price we have to pay for massively accelerated innovation and rollout of infrastructure is that people get to participate in a giant casino, to me, that's not the worst possible price we could be paying. That's well put. I also reflect back on the railroad bubble, which funded a lot of infrastructure, but investors lost a lot of money. So I see the logic there. And I think moreover, Defi also introduces primitives, which makes sense in other contexts, maybe on Bitcoin, too. So there's certainly positive externalities there. Just briefly on the effect of L2's. on composability, what do you make of the fact that we're seeing all these competing L2s on Ethereum, which are sort of siloing various protocols up and potentially interfering with composability? I think it's an extremely interesting thing to watch. And it's not really, I think, in a way, in the Ethereum world, and, you know, I just don't

want my, what I'm saying, to be misinterpreted. I am a Bitcoiner, but I have a huge amount of respect for the Ethereum community. and for what they are building and for the way that they've shown us the path forward on many things. And I think, you know, you can be a bit coiner without having to dislike everything that is Ethereum. Indeed, if you want to maintain a degree of adversarial and honest thinking, you should, no one should be more curious about defy than Bitcoiners. So with that qualification aside, one of the elephants in the room in the Ethereum space that I don't think is getting that much attention, but should be, is that I think Ethereum Layer 1 is coming up against a pretty hard wall. Up until now, the great big hope has been Ethereum 2.0, which is sharding.

We know that that is years away. It's definitely not going to be able to come in time to deal with the hyper-exclusivity problem which Ethereum is currently suffering through. And as a result, Ethereum Layer 1 is becoming, to a great degree, obsolete for new entrants and for many of the existing users. So many of the powerful things that Ethereum Layer 1 provided, as a lot of the, a standard was interoperability between all of the wallets, the ability to move funds between different systems, composability between the smart contracts of different DFI projects.

And now it's unclear how to deal with that. So there are multiple different competing layer twos, which different projects are moving to. There's arbitram, optimism, Matic, X-Dye, et cetera, et cetera. The list is extremely long. And as Ethereum defy-projects begin to move into these new layer two chains, they're going to basically have to recreate all of that interoperability. This is a really interesting time for Ethereum and a very interesting opportunity

for everyone who isn't Ethereum to enter into the smart contract DFI. space and take advantage of what is quite a lot of disruption, which nobody knows how it's going to play out. So moving on to the Bitcoin, I don't know if you want to call them L2s or the Bitcoin adjacent smart contracting platforms. There's a handful, not as many, I would say, as there are on Ethereum and which may well be due to the fact that Bitcoiners are more reverse to building complex systems on top of Bitcoin. I would identify the main ones, and these are heterogeneous in their qualities, as block stack, liquid to a certain extent, rootstock, which you use, and then drive chain, which is maybe still more theoretical. I don't know if there's any others you would

add to that list at all, but maybe we can talk about some of those in terms of. So there are a few other efforts. There's lightning network. There's RGB. There's DLCs. There's a lot of interesting innovations. Most of these have just a handful of people behind them and are extremely immature. Some of them have made what are to me extremely weird design choices.

So, for example, Blockstack is... It doesn't have a very clear peg with Bitcoin. It has its own smart contracting language, which means they need to build out an entire framework and all of the attendant ecosystem of a smart contracting language, which, by the way, is a lot. So what Ethereum have built with their EVM, which is their smart contracting system over the last five years,

has taken the efforts of many, many thousands of developers, many, many thousands of projects and many, many tens of billions of dollars. And it still isn't as mature as most of the languages and frameworks that people usually program in. So going and creating all of that from scratch is a very, very tall order. And that's what, for example, liquid or block stack are trying to do. one of the reasons we chose to work on RSC is that is EVM compatible, which means that all of this fantastic work which has been done is available to us. Best practices, audited code, systems that have had hundreds of millions of dollars of user funds in them and are battle tested are all available to us. So, you know, if anything improves upon Bitcoin or could be useful to Bitcoin, we should be adopting it.

Beyond that, RSK is the only one of those which is merge mined with Bitcoin. That means that every single time you're paying a transaction, not only are you paying in Bitcoin, but you're paying the Bitcoin miners. So all of your transactions are improved, are secured by Bitcoin, which is the most secure chain, but are also adding to the, the security budget of Bitcoin. So those are two really important things, which only RSC have in the wild. So RSC is so interesting to me because most Bitcoiners know Sergio Lerner.

I mean, actually, a lot of Bitcoiners know him for his analysis of Satoshi's coins. And yet, you never hear anything about RSK for some reason, even though it has been live, It's merged mined with a good fraction of hash rate, I believe. Yeah, about 60%. Sometimes 70. So, and merge mining was one of the oldest ideas in Bitcoin.

I mean, name coin was merge mine with Bitcoin. I think it's still maybe. So what do you make of this? Maybe tell us a little bit about the progress of RSK and how far it's come the last couple of years. And then also why it continues to sort of be overlooked by Bitcoiners. So first, I think Sergio is one of the most underlooked people in Bitcoin. It's possible that he's found and helped correct more bugs in Bitcoin code than any other person. He's been around from the very early days, and he's just brilliant.

What he has managed to architect with Rootstock is phenomenal. So why isn't RSK or Rootstock? more popular. Part of it is sort of the conception issues, you know, that Bitcoiners have, which we described earlier. But I actually think that that's much less of an issue. The much bigger issue is that while Rootstock provides extremely, two extremely powerful tools, EVM compatibility and merge mining, there is a huge amount which is necessary,

that which is missing and that the sovereign community are effectively building. This includes easy on ramps and off ramps, a better peg and and bridging with Bitcoin, bridging with other chains to allow Bitcoin to be traded against something, better wallets and easier accessibility, the ability to more easily move liquidity. There's building an ecosystem, you're like a pioneer, you've arrived on a new land. you have to build everything. Now, a lot of that work has only really been done over the last few months at amazing speed by the sovereign community, but up until then, it wasn't available.

The other big thing is that RSK has been reliant on a peg called the RBTC peg, which up until quite recently was limited to only 50 Bitcoin. you can't build an economy on 50 Bitcoin. And even now it is limited to 700 Bitcoin. So one of the big things that the sovereign community are building in collaboration with others is a better, more practical and more trustless Bitcoin peg. And that should be rolling out over the course of the, next month or six weeks. But I think it's a combination of sort of a lack of marketing.

Sergio isn't really a very good advocate for himself or his project. His brilliance lies elsewhere and also practical limitations, in particular the economic limitations of the pig. Okay, so it was kind of being artificially held back while I was still in its early stages, I suppose. For those that aren't familiar, what would RSC allow a developer to do with Bitcoin? Well, really anything. So the big idea of Ethereum is that it's touring complete.

And what that means is that you can program any type of program on Ethereum. Now, in some ways, it's actually not entirely touring complete, but that's really getting into the weeds. the functionality that a user can have is basically all of the key functionality that you would want to have through the services that you're currently using do you want to lend your bitcoin in a trustless manner you can do that do you want to trade your bitcoin you can do that do you want to lever up your bitcoin because you're bullish on bitcoin and like me you're you don't have any more fiats that you can spend on more bitcoin you can do that um uh so

So, you know, I think that's actually really only the beginning. We have people now who are talking to us about allowing trustless mortgages to be provided through Bitcoin loans. We have a team who are working on, and there's already a team that have launched a Bitcoin collateralized stable coin called Money Unchain. And there are other teams who are working on similar things. This allows you to hold your Bitcoin forever and continue to buy pizzas and coffee by effectively lending yourself dollars that are not created by the Fed. It's a phenomenal opportunity. And you basically pay down that just from the increase over time of your Bitcoin. And then some of the more far out ideas are people who are talking about creating a pension system, which could work globally.

by having people, you know, place funds into the system, earn out a high-yielding pension and basically using those funds to purchase more Bitcoin, most of the upside of which would go to Bitcoin believers. So, you know, you could really build an entire new financial system, entirely revolving around Bitcoin using this. And I think that's what's happening as we speak. So I guess we've preambleed long enough. Why don't you tell us about that? the contours of the sovereign system with as much level of abstraction as you like and as little or as much details you think is necessary, but just how the system works mechanically and what users can do on it today and maybe in the coming months.

Right. So So sovereign started out in many ways as a less ambitious project than it is now, and that's despite the fact that it only started a few months ago. The original idea was there are basically two things that people want to do with their Bitcoin that currently they force to do through centralized services. One, trading, and the most popular form of trading is leveraged trading, and two, lending in order to earn yield on their Bitcoin. And so those two functions were built out. And that provided two core primitives, which is lending and trading. And then

through the money and chain team Bitcoin back stable coins were added and since then the community has begun to grow quite rapidly and is building out more and more so right now the key things that you can do is you can take your Bitcoin

you can transfer it to the sovereign system and you can lend it out, start earning yield. You can trade it with up to 5x leverage right now against stable coins, but more assets are expected to be added soon as a bridge to Ethereum is constructed. So if you wanted to go along Bitcoin short Ethereum, you could do that. And you have the ability to introduce your Bitcoin and lever up your Bitcoin basically using your Bitcoin as collateral. So if you're extremely bullish, you can do that. Now more sophisticated tools are also starting to be introduced.

So perpetual swaps are being worked on. Different ways of hedging your Bitcoin exposure are being developed. And it's starting to dawn upon the community of developers and other interested parties that what we're actually building is a full-stack financial operating system. which is trustless, transparent, and permissionless. And so more and more people are sort of starting to get excitable ideas about the different things that people can be building on sovereign. So I think maybe from a practical perspective,

the way a user could think about it is if you want to borrow, lend, trade, or leverage, you can do it now with sovereign in a trustless manner. And that from a bigger perspective, the assurances that we have of sovereignty that Bitcoin provides us in the monetary sphere are now being expanded. So it kind of expands or adds new superpowers to Bitcoin, moving it from a monetary instrument

to a financial operating system, as well. And in terms of users calibrating the risk of using the system, what are the trust requirements of using a system like Sovereign? Where are the potential centralization points if they exist? Yes. So this is actually evolving quite rapidly. I'll try and describe where it is now, where it will be, I think, in two or three months and where we expect it could potentially go. So there are two primary components I think you need to think about. One is how are the transactions being confirmed? And the second is how is the Bitcoin PIG being provided?

So the transactions are currently confirmed by Bitcoin miners. They're merged mine with Bitcoin, but not all Bitcoin miners are mining root stock or sovereign transactions. about 60 and sometimes 70% are. So that means that a 51% attack on sovereign would only require about 35% of Bitcoin miners right now. This has been increasing. So just over the last few months, that number has doubled. It's gone from about 30% to 60%.

And it's likely that it will continue to grow. But that's one sort of security difference between main chain Bitcoin and Pegged or RSK Bitcoin. The other things to take into account is that any time you're adding a new system, you're introducing a new level of risk, right? Because you are using Bitcoin Mainchain, but you're now also using a different system. So if anything goes wrong with the other system or with Bitcoin, you're exposed to both of those risks. it's very hard to quantify what that is but of course it introduces additional layers of risk then there's the question of the pig right now the bitcoin in sovereign are coming through

the rootstock peg which i described which is a secure hsm driven federated system so it's probably the most secure one way you can think about it is it's the most secure multi-sex system in existence which is a high level of security but it isn't quite where we would want to be yet we are currently working on a collateralized and a peg which is currently already on test net and has also been is very similar to the to the model you by TBTC, which has been extremely successful and is considered the most secure Bitcoin pig. And so we've been working with TheSys and the Keep team on that. There are potentially some improvements that we'll be able to introduce,

not to mention the fact that it will be secured by Bitcoin miners. But there too, there are questions around threshold signatures, or questions around the collateralization, which provides the trustlessness where your Bitcoin isn't as secure. as cold storage or main chain or even, you know, transactions that you were performing on main chain. So I think we're getting to a point right now where the security is at least comparable to Lightning Network. And over time, I believe that that is going to continue to improve and increase.

And one of the great things about the system is, as the system is becoming, seeing more traction and more use, the number of minds that are concentrated on these problems and the speed of progress is accelerating. So I think this could really be a renaissance in terms of the type of technology being built for Bitcoin. Renaissance is the right word because I really have been waiting for the technical Bitcoin developer community to, you know, wake from their slumber a little bit. it comes to Bitcoin native smart contracts. And I guess partly Taproot will help here to a certain extent. But to be clear, your system doesn't require any changes to Bitcoin Core. No. But certainly things like Schnorr and Taproot will provide us with many additional

avenues to continue to improve the degree of trustlessness and censorship resistance and reliability that users can have in Peg Bitcoin. So I guess as we wrap up, maybe give, I know it's hard to predict, especially I wouldn't have been able to predict what Bitcoin would have looked like today five years ago. But let's say things go well. What do you expect in terms of Bitcoin native defy and what do you expect from sovereign and smart contracting on Bitcoin? Well, I don't know if I can make a prediction, but I tell you what I hope, right? I think there is a path forward to hyper-bitcoinization. It's not assured.

It probably requires all of us to continue working, and I think the biggest challenges are actually ahead of us. But even if we achieve it, there are two paths of hyper-Bitcoinization. One is Bitcoin becomes digital gold and digital code only, at which point it is going to effectively be, mostly in the hands of central banks and large financial institutions, and probably constrained in many ways. I think there's a different and much more exciting path forward.

And that path is that we expand upon the promise of Bitcoin from the monetary system, right? We've already revolutionized the monetary system. Now it is up to us to revolutionize the financial system, And then ultimately, and I think this is the boss level, I think this is the end game, to create an economic system which revolves around Bitcoin and provides everyone with the same degree of sovereignty and self-determination that Bitcoin holders have. But it provides that for their salaries, for their everyday payments, for all of their economic activity. And I don't think that they will be trading or transacting in Bitcoin itself. I think that they will probably be using something like stable coins or layer 2 Bitcoin.

And so we need to build those tools to make sure that what they're using are not provided to them by centralized services, but are provided to them by us, for us, and by the people, for the people, and with the people in mind. I think that has always been what has excited me about, being exciting to me about Bitcoin. And I think we now have a renewed path forwards to that end goal. Fully agreed. Well, this is very exciting to see. I certainly hope that you succeed. I'll be watching the sovereign platform very closely as you evolve and grow here and get more assets on the platform.

In terms of how people can track your progress and follow the Sovereign project, where would you direct them? Well, the easiest interface for Sovereign, although certainly by no means the only one, is Sovereign. App. So you just go to Sovereign. That's S-O-V-R-N dot app. You can also follow Sovereign BTC on Twitter. and I am Idan Yago on Twitter, so that's at Idan Yago. Well, Edan, this has been fascinating. Thanks so much for joining us today. Thank you so much for having me.

It's been an absolute honor.