The Wolf Of All Streets - Building DeFi on Bitcoin with Edan Yago, Creator of Sovryn

Episode Date: January 14, 2021

Edan Yago grew up during apartheid in South Africa and at one point had to smuggle gold as a child to help his family. Yago discovered Bitcoin and, after years of prepping for a revolution, immediately knew that his life would change forever. Stepping into the crypto space, Edan set out to design a new way of approaching DeFi and built Sovryn, a sidechain off of Bitcoin instead of Ethereum. Edan is excited for the monetary revolution that DeFi will bring to the 99% of the world that does not have full access to the world’s financial garden - and all based on Bitcoin.   Scott Melker and Edan Yago further discuss sewing gold into coat pockets, growing up in South Africa’s apartheid, a family of political activists, the only important choice is buying Bitcoin, bringing Bitcoin’s liquidity to DeFi, designing Sovryn, defeating crypto tribalism, fighting the no-coiners, loaning against DeFi, pseudo-Bitcoin, hyper dumps, hyper pumps and more. ---- If you enjoyed this conversation, share it with your colleagues & friends, rate, review, and subscribe. This podcast is presented by Blockworks. For exclusive content and events that provide insights into the crypto and blockchain space, visit them at: https://www.blockworks.co

What is up, everybody? I'm Scott Melker, and this is the Wolf of All Streets podcast. Today's guest is a true OG in the crypto community and a self-proclaimed cheerleader for one of the most hyped projects in the space, Sovereign. I'm also pleased to announce Sovereign is the newest sponsor of the podcast. Now, Adanyago has created an extremely unique decentralized infrastructure powered by Bitcoin, which I can't wait to dig into. But beyond Sovereign, I'm eager to discuss how an OG Bitcoiner looks at what's fueling Bitcoin's price, Bitcoin's role in DeFi, current technological developments on Bitcoin, and how his intense background has led him to where he is today. So, Iago, man,

it's a pleasure to have you on the show today. It's a pleasure to be here, man. Thanks. So before we get into the questions, once again, you're listening to the Wolf of Wall Street's podcast, where twice a week I talk to your favorite personalities from the worlds of Bitcoin, finance, trading, art, music, sports, and politics. The show is powered by Blockworks Group, a media company with over 20 podcasts in their network. You can check them out at blockworksgroup.io. And if you like the podcast, follow me on Twitter, check out my website, join my newsletter. You can do both those things at thewolfofallstreets.io. So, Yago, we constantly hear about the narrative calling Bitcoin digital gold, but you have a crazy history with regards to actual gold. You were a gold smuggler as a child. I need to hear that story first just to get this started. Yeah. So my family have always been very ideological and very disagreeable for authorities.

And I grew up in South Africa during the apartheid, which was the segregation between whites and everyone else. And my family were involved in fighting the apartheid government. And they were affiliated with the anc which is uh you know nelson mandela and so there were always issues you know i remember my mother being nervous about us being followed and um you know hearing stories and it was mostly kept hush-hush like they they pretty much tried to shield me from it uh you know because hearing stories and it was mostly kept hush hush. Like they, they pretty much tried to shield me from it. Yeah. Cause I was a kid, but one night I was woken up cause it was like commotion and my uncle was in our house

and there was like running around and my grandfather was talking to him and gave him keys to my grandfather's car so that he could basically drive through the nights to get out of South Africa because he had discovered that the authorities were after him. So after that, we were trying to get out and there were other members of the family who were getting out. And so there needed to be some way to get the family funds out of the country like many countries today with oppressive governments like Venezuela or or China and even some countries with less oppressive governments like Korea or Brazil there were significant capital controls in South Africa so what my mother did is she converted funds into Krugerrands, which were these South African gold coins, and sewed them into my clothes. And I started having trips overseas,

like alone, which were basically smuggling trips because they wouldn't search kids. So that's how we got the funds out of the country. And, you know, between that and several other stories that I'd grown up on about my family, you know, smuggling or surviving in different places, like in Eastern Europe as refugees or dealing with capital controls and in the communist bloc, by the time I came across Bitcoin, I think I was primed to realize this potential. And I basically, it screwed up my life. Like after I encountered the white paper, you know, I basically dropped everything else

I was doing. And for the last, wow, almost 10 years, I've been engaged 100% in the space. So can you talk about that first introduction to Bitcoin and why it was so powerful for you? Obviously, as you said, you were primed for it, but it's a big step to drop everything and go full time into something at the time that was especially so nascent and small yeah so i think i've inherited the um the whatever gene it is that is in my family that makes us difficult people when it comes to dealing with authorities i've always been um sort of politically engaged and active but but also from an academic perspective, I was studying

neuroscience and specifically I'd been focusing on neural networks. And so the way I actually came across the white paper was because I was reading papers in networking science. This, you know, was totally different and took me by surprise. But given my background from the perspective of thinking about what happens when governments go wrong, thinking about how important monetary sovereignty was for personal freedom, I don't think that the person can be free if they don't have freedom over their assets. And that's also why governance, that's the first thing they always squeeze. And also because I was just, you know, intellectually fascinated and curious with my optimistic view of a future where

we would use less resources, we would be less wasteful because we would mostly be using digital resources we would live in more and more digital worlds as we spent more and more time in the internet as we as the internet became more and more immersive um i just felt it was the future in every it like it touched every single nerve and it was clear to me that as big as the internet was, the biggest thing it was missing was a homegrown economy, a way of having a proper economy. And a proper economy means scarcity. So if you think about all of the industries that managed to grow up with the internet up until this point, they've all been based around things which don't require scarcity. It's mostly been advertising, right?

Because advertising is the only thing that you want to sell where you want people to replicate it. Like you're happy for there to be no scarcity. You know, if people sort of like share your ad with with their friends that's a good thing right everything else you kind of want to maintain scarcity and so google facebook snapchat tiktok all the big internet companies are driven by advertising which is just such a weird thing it's such a big part of our economy but all it does is is advertise and it was clear to me that the the shoe that hadn't dropped

was having digital native scarcity and bitcoin invented that and so that i think of all of the other stuff it was clear to me that not only was this the right thing to do but that it would be successful because it was the thing that we needed to do. I didn't realize this at the time, but I had an intuition. I think what has become clear to me over the years is that Bitcoin is a reformation. Bitcoin is a revolution of freedom, but it's dressed up as a get-rich-quick scheme, and that's what makes it so successful. Yeah, that's true. You need the speculation for those who believe in it to actually profit and see it come to fruition in the end. And I think that's something that we're seeing very clearly now, certainly through the back half of 2020 and coming into 2021.

One of the big hot topic issues of the last year in crypto obviously has been DeFi, right? We've seen all these platforms built largely on Ethereum, insane gains and losses by people speculating on food coins and yield farming and all of this stuff. I know that it's your contention that the real base of DeFi should and can be Bitcoin. So I'd like to dig into that because I think most people's view at the moment is that it's an Ethereum-based concept. Right. So first of all, it absolutely is right now mostly on Ethereum. And the fact that Ethereum has created defi is is huge it's such a it's such an important thing that ethereum has contributed and the way i think about it is you have like the first invention which is bitcoin which is

the base invention and that's monetary sovereignty. It's a new monetary system. And money makes the world go round. So the monetary system is the gravity well, is the foundation of it all. But now there's the second thing that we need to do. Phase two is the financial system, so we need to build the finance the decentralized permissionless borderless financial system and and and up until we had defy we didn't really have that the ecosystem around the decentralized monetary system was completely centralized right centralized exchanges centralized lending services etc et cetera, in financial institutions. But now with DeFi, we're starting to bring the decentralization into phase two, which is the

finance world. And once we get the finance world, which is where the liquidity is, which is where the ability to generate the capital to start new businesses is, then you get to the end game which is a decentralized permissionless borderless economic system which means that every single person will be living their lives you know all of their economic activity basically in the crypto space and i think that's where we're going and i think that's the end game and each of these phases i think could take about 10 years so the first 10 years is the monetary layer. Now, the problem with DeFi right now, as I see it, is that the biggest, most important pool of liquidity, 90% of the liquidity in the crypto space is in Bitcoin.

And it's mostly unconnected to the DeFi space. So we need to marry those two pieces if we really want them to blossom and be as powerful, as effective as they should be. And that's a perfect segue into Sovereign, right? I mean, that's what you guys are doing. So I'd love for you to talk about the platform and how you're making that happen. So what Sovereign is, I think maybe one way to think about Sovereign is Sovereign is a side chain to Bitcoin, which means that it is Bitcoin native. It has Bitcoin as its native currency.

It is secured by Bitcoin proof of work through merge mining. And at the same time, it's deeply connected to, and we'll get more and more deeply connected to Ethereum. So it's, on the one hand, a sidechain to Bitcoin. On the other hand, it's like the Bitcoin shard for Ethereum. And the goal exactly is that, is to provide the glue between those two worlds.

And this is because on the one hand, on the ideological side, right, I believe that if people are going to be free, then we need to have a financial world, which is as decentralized as our monetary base in Bitcoin. And then sort of on the greed side, and the reason I think this will work is, you know, when I was a student, I had a finance professor. And in the very first class, the finance professor said, the way you build a successful financial system or a successful financial business is you basically need to just do one thing. You find a giant stream of money and you go stand in the middle of it. And I think the giant, the giant stream, right, which we as an industry need is the deep liquidity of Bitcoin with the decentralized financial tools of the DeFi space. And so that, and so, so, so we're building that connected tissue, but it's more than just

connected tissue. It's a full stack financial operating system. In other words, Sovereign already has Bitcoin and other tokens, sort of like Ethereum tokens that you can trade in a decentralized way. You can margin trade, leverage trade, borrow, lend. And so all of the key financial primitives are being built and the community is building more and more all the time. And there's always the adage in the Bitcoin community, certainly in the Maxi community, you know, not your keys, not your Bitcoin. Right. And so I think that that in many people's view is what keeps a lot of those people, big holders from participating in DeFi because they don't want to put their Bitcoin on a platform where they don't own the keys and they're not their own bank. But I know that that's also something that Sovereign is solving for, correct? That's right. That's right. So we have a decentralized peg, and we're currently working on having a fully trustless peg with Bitcoin. So it's different from WBTC, which

is the most popular way of getting Bitcoin onto Ethereum right now, but it's completely centralized. And so in essence, it's not really part of DeFi. It sort of serves things that people who are using Bitcoin care about is making sure that their security is the best, the highest level of security that exists, which is, you know, like many of the big holders, our OGs, our whales who have been in this from the beginning and believe in the system, and they want to continue to support the continued growth of Bitcoin. And so when you pay fees like gas fees in Sovereign, you're actually paying the Bitcoin miners, helping to provide even additional security to Bitcoin. And as a result, Sovereign has an interesting property that when you're using Bitcoin, you're secured by Bitcoin. And when you're using like Ethereum or an ERC-20 in this decentralized exchange, you're secured by Ethereum. And so you always have the security assurances of sort of like the parent chain. And maybe we should talk a little bit about how I think parent chain, the of pair and change is changing, right? So right now, I think we're going through a very exciting and somewhat scary time for Ethereum. Ethereum has probably reached, it's kind of outgrown itself, right?

Transaction fees alone can sometimes be, in the gas 350 dollars right a couple of days ago even something as simple as a uni swap swap was 40 dollars per transaction unless you are a whale there's no ways that you can use that uh profitably and probably even most whales can't profitably trade at 40 dollars per transaction before transaction fees, right? Before trade fees. And so one of the things that I think is most beautiful about Ethereum is that it is a hyper inclusive culture. But at the same time, it's kind of become the most hyper exclusive chain, right?

A chain that, you know, only whales should use because everyone else gets crushed. And I think everyone realizes this. And so it's clear that over the coming few months, more and more activity is going to move off-chain into layer two, primarily through bridges with projects like Sovereign and roll-ups, which Sovereign is actually going to be transitioning to a roll-up as well. And this will help provide much needed scaling capacity to Ethereum. But at the same time, it's actually going to break with a high level of probability. So I can't say this for sure,

but based on if you actually consider it, there's going to be all of these different bridges, all of these different layer two roll-ups. And right now, every single DEP in the Ethereum ecosystem is very, very tightly connected to all of the others. The liquidity moves between them. They all kind of rely on each other. There's a high degree of what they call in the DeFi space, composability, right? Lego pieces. What happens when you break that composability because every project or multiple

different projects go to different spaces right so um we're going to go through a period where we're going to suffer with the problem that wallets won't be as interoperable as they are now projects won't be as interoperable as they are liquidity won't flow as easily as it does now and eventually this will get solved, but there's going to definitely be a dislocation. And so one of the things that we're doing with Sovereign is we are building it as a full stack system where it can interoperate with everything else, but it isn't reliant. It has its own trading mechanism, its own AMM, its own lending, its own market making and liquidity. And it's kind of amazing what the community have built in such a short space of time.

They've really reconstructed all of the basic aspects, the basic, you know, the primitives, we call it, of finance that is required for DeFi. So it sounds like for you, the end all be all is Bitcoin. And so you can take the example of what's being built in other places and improve upon it and put it on Bitcoin and make it better. Well, I don't think it's the end-all. I really love what's being built on Ethereum. I think that Ethereum in isolation of Bitcoin loses a lot of its power and Bitcoin in isolation to Ethereum loses a lot of its power. For the reason that Bitcoin is the monetary pool, it is where the liquidity is. There's a second piece of liquidity, which is

stablecoins, which also is struggling right now on Ethereum. You know, I mean, we pay, all the vendors I work with, we pay with stable coins and it's become so expensive. It's really crazy the last few weeks. And there's been phases this summer and later that it was crazy. But like you said, I mean, sometimes if you want to send a small transaction

and pay 20 or $30 for it, it doesn't make much sense. Exactly. So I think there is a bit of a misalignment in terms of where we think the network effects are in the blockchain world. I don't think they've ever really been in the blockchain. And we know that because there was the Bitcoin blockchain, but now there's a lot of other blockchains, right? We also know that because there is the Ethereum blockchain, but everyone's going a lot of other blockchains, right? We also know that because there is the Ethereum blockchain, but everyone's going to have to move to layer two. The real locus of gravity, the real network effects are in the assets. And the two big assets that have

network effects right now in terms of liquidity pooling is on the one hand, Bitcoin as the reserve asset. And on the other hand, stablecoins as the bridging asset to the rest of the fiat world. It's interesting that you bring up stablecoins because obviously, you were inspired by the white paper, which is a peer-to-peer cash. And to some degree, I mean, I've made the argument before and heard many others make it. We've seen Bitcoin sort of, you know, polarized towards the store of value narrative because stable coins have come in and are actually, to some, you know, the superior cash. Do you think that stable coins to some degree are far

more transactable and have replaced that part of what Bitcoin was intended for? In the short term, certainly. I always thought that it would be very difficult for people to transition their economic lives directly to Bitcoin. And going back to what I was saying a little bit earlier, I think the decentralized borderless economic phase is the endgame. It's the last thing that we will do. And so we need something to bridge us there, right? Because everyone today thinks in dollars or euros or whatever their local currency is. And that's the role that stable coins play. I don't think stable coins are the long-term vision of anyone. But the short term, when you're thinking short term in crypto, 10 years is still quite shorter. This is a generational project. Yeah, that makes sense. I just think that most people in crypto feel like 10 years is 100 years

anywhere else. It definitely is. I mean, I think, you know, one year in crypto, you know, you've got human years, which is one year, dog years, which is seven years and crypto years, 21 years. I think it's accurate. Yeah. But at the same time, I think a lot of people seem to be focused on trading or, you know, what altcoin they can buy or when is it out season i tend to think of it certainly in terms of bitcoin as more like real estate right nobody day trades real estate but but if you if you were growing up in the 60s or the 70s or even the 80s you only really had to make one right decision and that was to buy a house right and then everything appreciated you didn't need to trade you only really had to make one right decision. And that was to buy a house, right? And then everything appreciated. You didn't need to trade.

You didn't need to have a retirement account. You just needed to buy a house anywhere in the world, pretty much. Our generation doesn't have that. We can't even afford to buy houses. But our generation, the one right decision you need to do is to buy Bitcoin and hold. You do that. That's the equivalent of buying a house in the 70s or the 80s. You only really need to get one thing right. And so I think the

way people should be thinking about this is, yeah, sure, you can try and figure out when out season is, or you can trade, you know, with 100x leverage. And that's cool and maybe it's fun and maybe it's the way you make your 100x. But the way you're going to guarantee for yourself a better future and financial sovereignty for yourself and your children is making the one right decision of holding Bitcoin. Do you think that that decision is still available to most regardless

of the price? There's obviously some who would argue that that was true at $1,000 or $100 or $3,000, but $30,000, $40,000. Do you think that people need to be concerned about tops? Or do you think that if you have a long enough time horizon, this is merely a step on the way? Nobody who bought a house in 1973 remembers whether it was a good year for real estate or a bad year for real estate. They know that they bought the house for $30,000. Today, that house is worth a million dollars. With Bitcoin, the same thing is going to happen, except much, much faster. So Bitcoin in 10 years or five years, I don't know, but it's going to be a million dollars or $10 million a coin. And the reason is there's hundreds of millions of houses,

but they're 21 million Bitcoin. The level of scarcity here and the speed of digital progress just means that this is going to massively outperform and really has massively outperformed anything real estate has ever done. We have an opportunity. Our generation has been given an opportunity. We got lucky that we get to be part of the greatest opportunity for wealth creation that humankind has ever experienced. And anyone can do whatever they want, but I'm going to take full advantage of it.

I agree with you. I just completely playing devil's advocate. But I think that we're just seeing the tip of the iceberg here, obviously. And 2020, to some degree, is what opened the floodgates to that, right? And the problems that the world is becoming aware of that maybe some of us were aware of before 2020 are just coming into focus for your average person, right? I mean, monetary policy, fiscal policy, central banks, endless printing, all of these things you knew about them before, but your average person is still just having that awakening, don't you think? Yeah, definitely. I mean, look, I'm

extremely optimistic about the future because we are going through such a transitional phase. I think it's clear to everyone that our institutions are no longer performing the function that they were meant to perform. We no longer trust them. They are no longer fit for purpose. National institutions can no longer deal with a globalized world. Slow institutions can no longer deal with a fast world. Paper-based institutions can no longer deal with a digital world. In every single way, they are no longer fit for purpose. And as a result, most people have become very, very angry or depressed because they see the world they know crumbling around them. I think we are at the precipice of change, but what's going to happen is once we're pushed over that precipice, it's not that we're going to fall, it's that we're going to fly. Everything that we've, all of this stuff has been holding us back. The academia and how old and inefficient has become has been holding back science. Politics has been

holding back social change. The mega corporations of yesterday have been holding back economic change. And we're about to change all of that and unleash human potential again. Man, when you say it, it sounds so inspiring. I'm ready. You got me pumped up. So it leads to an interesting question, because obviously we talk about DeFi and we talk about the purpose of Bitcoin as, you know, being a hedge thing or is that a bad thing? Knowing that banks will be able to use stable coins, that they'll be able to custody your Bitcoin, you know, obviously the increased attention by tax authorities, things like that. Yeah. Well, you know, there's that old line. First, they ignore you, then they laugh at you, then they fight you. Well, we're definitely entering the then they fight you phase. Because for the first time, Bitcoin and the cryptocurrency world represents an actual threat to the status

quo. A threat so obvious that even the most unimaginative bureaucrats can get their heads around it. And so we are, I think, going to go through, you know, for the last 10 years, we've had a really great time. You could buy pretty much any shit coin and make money. There was no one really against us. There was no substantial regulatory movement against us. In fact, quite the opposite.

And you look like a genius. And so we did what people who have too much time and too little challenge on their hands always do. We turned on each other. We started fighting amongst ourselves. We would go onto Twitter and tell each other why each other's coins were shit. And most of them were. But the point is that was not nearly as important as it felt. But hard times make strong people and strong people make good times. And I think that the secret sauce there is unity. And I think that we're about to be attacked. And I think that the assault we're about to be under as an industry, as a community, as a movement is going to mean that exchanges and the financial institutions that are maintaining our financial sovereignty and the continued value of this reformation that we're creating.

So regulators will attack and DeFi will be the only way to opt into a new banking system and out of the legacy financial system effect 100 100 and that's why it's so important that everyone bitcoiners included bitcoiners especially come together under this banner of all right we're in phase two now they're attacking us now monetary tool is not enough if you can't use it in a decentralized right right the irony of bitcoin is you have this amazing decentralized coin but every time you want to use it you a decentralized way. The irony of Bitcoin is you have this amazing decentralized coin, but every time you want to use it, you have to go into a centralized service. That's not good enough anymore. Maybe it was fine for the first 10 years when we were in the

honeymoon phase, but now the real game has started. And so now we need to be more careful. Will Barron To that point, I mean, Bitcoin can't be banned. I mean, Bitcoin can't be banned, right? I mean, nobody can ban Bitcoin. They can't stop the network, but they can certainly make it really difficult to get your dollars in and out. Exactly.

Or whatever currency. Or even your Bitcoin in and out. And that's the real threat, right? The travel rule is basically going to squeeze exchanges or lending platforms, right? That where you have like been lending your bitcoin or staking your ether it's going to basically say listen binance listen kraken listen coinbase phase one right we're going to warn you phase two we're going to tell you you know you're not allowed to send to let withdrawals happen unless you can say with

certainty that the person withdrawing it is withdrawing it to their wallet. And there's no way you can say that with certainty. And if you can't say with certainty, then you, Mr. CEO, and you, Mr. Compliance Officer, well, at any time, you may be liable for criminal charges. And so what are the exchanges going to do? What are the exchanges going to do when they want to IPO like Coinbase? What are the exchanges going to do when they want to IPO like Coinbase? What are the exchanges going to do when they want to be bought up by Fidelity? They're going to have to play by the rules and the rules are going to be no more sovereignty, no more sovereign wallets. So it's going to become very, people can find themselves suddenly trapped outside of the permissionless

crypto space if they are using centralized services. That's scary. I think so. I think it is. Yes. And I think it's especially scary if you're sitting where I am in the United States. Yes. You know, and because most of these things that we're discussing are not

theory anymore here, you know, the idea that you're talking about with KYC and AML for private wallets is on the docket already in the United States. And they gave a very short time for people to comment and they did it over a winter break when nobody was in session or at work. I mean, the writing's on the wall. So if you're an American, what are you supposed to do? You're going to have to play by the rules just like those exchanges. That's right.

I mean, look, America, the beacon of democracy for the world, right? The land of the home, the free and the brave, right? It is also the country that confiscated everyone's gold in 1936, right? Now, 1936, the United States was not less democratic than it is today. If anything, it was more democratic, more liberal, right? In the classical sense, more constitutional. And yet it is the country that confiscated everyone's gold. So if it could happen once in the United States, it can happen twice.

Sure. Okay, so let's dig into what DeFi and Bitcoin together look like. We obviously hear a lot now about people saying, don't sell your Bitcoin, just take a loan against it. What does that look like for the average person? So right now you can go, you have basically two options. First of all, before we talk about how you can do that, maybe we should talk about why you'd want to do that. Sure. That's better. So let's say you have a bunch of Bitcoin right now and you have expenses, right? So you want to spend money. You can sell, but that kind of sucks because this is the one good decision that you have

to make in life is not selling your Bitcoin, right? The other reason it sucks is because if you sell your Bitcoin, you have to pay tax to the IRS. So there's an alternative. The alternative is you can take out a loan. If you go through a centralized service like a BlockFi, then all of the Bitcoin that you've given them to custody is at risk. But at least you've managed to take out a loan and you're paying maybe 6%, 7% interest per year on an asset that appreciates 100% a year. So you're easily paying back that loan just from the fraction of increased value that you have.

But there's a better alternative now with DeFi, with platforms like Sovereign. Deposit your Bitcoin in a trustless way where you maintain control of your keys, where it can never be confiscated by anyone, where the platform is as uncensorable as the asset. Now you're taking a loan out. You're basically borrowing from yourself. You're borrowing a stable coin or you're borrowing a Bitcoin-backed stable coin,

even better. And basically, you're now able to live like a rich person. So how do rich people live, right? They've got yachts or they've got big houses in Monaco. They try not to have an income, right? Because an income is something you have to pay tax on. So instead, they'll go to a bank and they'll say to the bank, listen, I have a 50-foot yacht.

Give me a $5 million loan with the yacht as collateral. And then they spend down that loan, never having to pay tax. And in the meantime, the value of the yacht or the art or the house goes up so much in value that it pays back the loan itself. Now that opportunity, and this is the coolest thing about DeFi, the coolest thing about Bitcoin, all of the opportunities that used to be available only to the 1% of the 1% are now available to everyone.

And how so? Because Bitcoin is the greatest, I mean, I always argue Bitcoin is the greatest collateral that's ever existed. Exactly, exactly. You don't need to have a 100 foot yacht. You need to have 100,000 Satoshi. You need to have 0.1 of a Bitcoin and you're good. What if the price drops? I mean, devil's advocate. It does generally go up 100% most years. But if

you did that in 2014 or 2018, or what was it, 2011? Not as pretty. A hundred percent. That's completely true. Which is why you, you know, there's, but there's suddenly a quantifiable way to quantify that sentence, never invest more than you can afford to lose. How much can you afford to lose? The amount you can afford to lose is now quantifiable because it's the amount of interest you can continue to pay without having to start selling down your collateral, right? No margin at all. Yeah, exactly. So now you know exactly how much you can afford to lose. So let's say you have a Bitcoin and you are borrowing $20,000 off the basis of that Bitcoin and you're paying, let's make it expensive, 10% a year, right? So you need to pay back $2,000 per year to make

sure you never have to sell that Bitcoin. So just make sure you've got $2,000 worth of income. Yeah. I mean, it really is that simple. And I think the days of it could go to zero are pretty much out the door, I hope. Certainly. So and how does your platform or any of these other platforms, how do they actually pay that yield? I'm not talking on the other side, if you're allowing them to lend your Bitcoin, not if you're taking a loan, of course. Right. What all of these platforms do, sorry, what all of the decentralized platforms do is they allow people to borrow your Bitcoin, but only in a way in which they are over collateralized. So, for example, to borrow your Bitcoin, they would have to collateralize with, you know, a Bitcoin and a half worth of value. Right.

And then if that asset that they have starts dropping in value relative to Bitcoin, they get margin called, not you. And so you are secured. This is what's known as a secured loan. The decentralized space doesn't work that way. Sorry, the centralized space, so like the BlockFi, Celsius, Nexus of the world, they operate more like a bank, which is fractional or unsecured lending. So a hedge fund that want to do market making will come to them and say, listen, we're an important hedge fund. We want to do market making in Bitcoin. We don't have Bitcoin. We don't want to go out and buy Bitcoin. So we're going to borrow Bitcoin from you. And because we are such a respectable hedge fund, you'll let us borrow from you on the basis of our credit rating. And so BlockFi or Celsius will let them do that.

The DeFi space doesn't work that way. And many people, I think, believe that it's just too risky to lend out Bitcoin in that way. And in fact, one of the biggest centralized US-based VC-backed lending platforms just recently declared bankruptcy, taking a lot of people's assets with them. So the centralized world is not just problematic because of the regulations, it's also problematic because of the culture. It's also problematic because of the lack of transparency. And most of all, and basically this is the core issue for all of the other issues, it's problematic because of your lack of control as a user. Instead of you having the control, they do. So what happens when the actual banks start custodying Bitcoin and lending it?

Because that seems, I mean, you're talking about fractional reserve and the problems with the banking system, I think that's what's coming. Right. If they're saying, if the OCC is saying, hey, you guys can custody Bitcoin, the only reason they want to custody Bitcoin

is to be able to lend against it, right? Right. So there's a potential for rehypothecation there, right? So what is rehypothecation? Rehypothecation is a bank will say it's got a thousand Bitcoin in its vault or whatever, but will lend out 3,000 Bitcoin, right? So a bunch of hedge funds and you and some other dude come and you all want to borrow Bitcoin and so it lends to all of your Bitcoin. But how is that possible with Bitcoin? The only way it's possible with Bitcoin is on a centralized platform, right? So if you went to Kraken today and open up an account with them and they decided to offer lending and they lent you a bunch of Bitcoin, you would have no idea if they lent you actual Bitcoin or they just lent you and 10 other people

the same Bitcoin, right? But with actual Bitcoin, like on a DeFi platform, that can't happen because the Bitcoin that is lent to you is on chain. You can see it and there's no sort of pseudo Bitcoin rehypothecation. That is kind of where something like WBTC on Ethereum becomes a little bit problematic because it is, on the one hand, being used in DeFi, but on the other hand, is through a centralized service. And so it's not real Bitcoin. But it's a step in the right direction. And I think we're starting to see things like Sovereign and TBTC

take us even further in the direction of true, unchained, trustless Bitcoin being able to be used in DeFi. And what reasons are you seeing people giving for wanting to actually borrow that Bitcoin? I mean, we obviously hear that people just want leverage and they want to be able to short. I mean, that's one that people just want leverage and they want to be able to short. Right. I mean, that's one of the huge purposes, obviously.

What other reasons are people looking to actually borrow? So in retail, there's basically two reasons you would want to borrow Bitcoin. Reason number one, you're extremely bullish. So, for example, in So example in sovereign there's the ability to take bitcoin and basically using your bitcoin as collateral borrow another bitcoin right so now you you if if bitcoin goes up you see twice as many gains but if it goes down you see twice as much loss right so that's just basically do i I believe in Bitcoin? The second reason that retail, you know, basically regular users would borrow is they want to go short, right?

So they borrow the Bitcoin and immediately sell it because they think they can buy it back after the price drops. Then there are the institutions. The institutions have those reasons for borrowing as well, but they have additional reasons. So a big one is the institutions want to make markets or arb between price differences and exchanges. So that means that they need to have tens of thousands of Bitcoin sometimes. David Steinberg Yeah, got to create that sell wall.

Peter Goundrill Exactly. To create the sell, but it's extremely expensive to buy Bitcoin. Much, much cheaper to borrow it at 6%, 7%, 8% per year, right? And so that's a big reason why they're using it. So it's basically the same thing, but with maybe a little bit more obfuscation or sophistication. Sure, that makes perfect sense. So I'm curious, you've been here since literally the beginning. I mean, you know, within a year or two of the white paper being written, you've seen all the cycles.

You saw the 2017 bubble, you know, by any definition, I think now we can accept it as such. What do you think is so different this time? Well, what is different this time is, you know, people have been shouting from the rooftops every single bubble up until now, the institutions are coming, the institutions are coming. This time, it's actually happening. And that will, with a high degree of likelihood, change something. I don't think we have any idea what it's going to change. Does it mean that volatility gets dampened? Does it mean that this bubble is much bigger? Does it mean that this bubble is longer, but with less ups and

downs? Does it mean that there's not a big drop of this? We don't know. It's going to be a wild ride. My intuition is that it will change something, but it's actually not going to change all that much. So we're still going to have a hype much so we're still going to have a hype cycle we're still going to have a a a huge up and then a hangover afterwards um i think uh it will you know change the the accent that we're using in this particular bubble but it won't change the words um so um but that i you know that that's the big difference the other big difference and to me this is the much more fundamental and interesting one is that this time we have the an explosion and a growth of decentralized platforms which are starting to drive this and that includes decentralized leverage which means that we can sort of hyper pump and then hyper dump,

which is definitely going to happen. But for me, the really fundamental thing here, if we're looking at the long-term adoption cycle is I think this is the big cycle where decentralized services get adopted. We talk about hyper pumps and hyper dumps. This will come out soon, but people don't know that as we're sitting here, we've seen Bitcoin drop effectively from 42,000 to just around 30,000 in a matter of days. I'm sure that you are unaffected by these things emotionally after having been through it so many times. But you're talking about it, but it's actually happening to some degree right now. I mean, you're right. 30 percent in a day or two.

Right. So we talked about an institutional floor, but it's still getting passed through. We can still see these huge moves. Right. Yeah. Yeah, definitely. have to put myself in the shoes of an institutional buyer who has various mandates around diversification and risk management you know if i bought into an asset mid-december and it's now up 4x i'm have to i have to i'm mandated to think i need to take some money off the table yeah and so it

might be that you know we saw that we see this sort of like jagged sawtooth pattern uh emerging now um but again you know that's like it's it's a it's a difference in flavor but not in direction well it's like you said for one year is 21 years in crypto. So you can see this in any other market in 42 days, but two days here, it's totally normal. You just have to get used to the, I guess, the velocity of the volatility in this market. But what's interesting is that for the first time, we're seeing these huge buy orders and then we're seeing that Bitcoin moved immediately off exchanges and into cold storage, right? We're seeing these major outflows from centralized exchanges. And I think that that indicates that there's an intention to secure the assets and hold.

Yes. Yeah. Look, I mean, the fact that we are at historic lows in terms of Bitcoin being held in central services. It fills me with a sense of deep optimism. So at what point do you think we start to see the central bankers themselves interested in this as a reserve asset? We're obviously already seeing the micro strategies and a few companies starting to dabble and talk about it. But if Bitcoin truly is this great reserve asset, this great inflation hedge, when do the governments start to want their holdings? Well, I think it's already happened. I mean, Iran, Venezuela, North Korea, and Bulgaria all seem to have central bank or central government stashes.

And I think it's the same thing, right? I mean, in 2011, 2012, almost all the people who held Bitcoin were using dark markets, right? Right. The dark market, you know, for regular people is the equivalent of the iranian central bank for central bankers right um so if you look at the if you look at the same pattern of adoption four years from now major central banks are going to be holding victim right so

now it's the central banks that sort of have to right there that you know they have all of these uh the the u.s government is you, saying you can and can't do this. So it's sort of their, their hand is being forced. So you think that it evolves over the coming years from, it's an interesting take. And we're also seeing that those countries are mining like crazy. Right. Yeah. And it's, and that's the crazy thing about it. Right. I mean, you know, sovereignty has always been a game. It's like the Game of Thrones, right? It's like who gets to play with the sovereign money itself, create it ourselves.

It's the first time that we're at the table with table stakes. And now the sovereigns are having to play our game. The geopolitical importance of Bitcoin is going to start emerging. So China are putting out a digital sort of cryptocurrency, right? That's a shot across the bow at the US dollar. So what are the US dollar doing? The OCC has now made it possible to hold Bitcoin and stable coins by banks. What they're basically saying is, listen, you Chinese people think you're ahead of the game, but Tether is a $10 billion asset already, and we're about to turn it into a trillion dollar asset as well. And we're going to do that by letting JP Morgan have a Tether and by letting Citibank have a Tether.

And so you're going to see the US dollar continue to be used. But at the same time that they're doing that, they are introducing the on-ramps to Bitcoin. They're introducing the regulation that allows banks to hold Bitcoin. And they're introducing as a result the environment, which is going to make, you know, if the United States want to fight this Chinese upstart, well, that means that the central bank is going to look for ways to combat it, and that's stablecoins and Bitcoin. It makes the United States seem so incompetent. I mean, you think about it, it's like go into Afghanistan, right? Fight with the Mujahideen, kick out the Russians, and then leave a gaping hole, which becomes a bigger problem for the Americans than there ever was when the USSR was there, right? I mean, right. And we've seen the United States do this in countless places around the world forever. And that what you're describing

is somewhat the same thing, but with our money. So there was a Israeli ambassador to the UN called Abba Eben, who was eminently quotable. And Abba Eben has this great line. He said, the United States will always do the right thing after they've exhausted all other options. And that's what we're seeing, right? You know, the United States right now, they're flailing in every direction. On the one hand, banks are allowed to hold Bitcoin. On the other hand, we're going to try and introduce KYC on every single Bitcoin transaction. The flailing will end after they've exhausted all of those options.

China remains a threat. Russia remains a threat. And the only way to combat it is to do the right thing, which is going to be to hold Bitcoin. So that's the path to central banks holding Bitcoin. Absolutely. Option of last resort, effectively. Yeah. Yeah, I think so.

It makes so much sense. So that said, we have all these stable coins and you just talked about it. JP Morgan will get a stable coin. Citibank, it's like Oprah giving things out. You get a car, you get a car, you get a car, right? So then we're going to have this just incredible wealth of stable coins. They're not going to be interoperable. We're going to have this huge problem with too many stable coins doing too many things. And of course, that means the option of last resort is digital dollar, like a central bank digital currency, much like the digital you want. So how do we get to a point where there's one stable coin that actually works as opposed to this fractured sort of environment? And why wouldn't the United States at this point just make their own central

bank digital currency and skip all of that? I don't think that's ever going to happen. And the reason is the thing about money is it's most successful when it's most neutral right money is the way so why does money even exist right it's because at some point human society scaled to a point that you couldn't keep in your head like like who's close to you, who do I owe a favor to, you know, who can I trust? So it was initially like the ability for one tribe that didn't trust the other tribe to trade with each other. In other words, money is what glues together people who don't trust each other, which is why it has to be so neutral. The more the dollar becomes politicized, the less neutral it becomes, the less valuable as money it becomes.

But the United States government, the central bank, the federal government are addicted to the power that the dollar gives them. And so they are going to burn through that credibility until it's gone. They will. By printing. By printing. But printing is just the half of it. The other part is the sanctions. The other part is the financial surveillance, global financial surveillance, FACTA, FATF, KYC, AML, all of these letters, right? The more letters they throw at us, the more USD becomes devalued. And that is a path that they will not

be able to escape. Like a junkie, they will not be able to escape it until they've hit rock bottom, which is why stable coins that they will be issuing through their banks are going to be useful for a time and will ultimately be replaced by a global reserve currency. And luckily, you and I know the name of that global reserve currency. So we can get there before them. The moral of this entire conversation is buy some Bitcoin and hold it for a really long time, right? I mean, if you get anything out of what you're saying, and you've said it so many times in this conversation, all paths lead here.

Yeah, it's the one good decision. Every generation gets to have like, you know, one good decision they need to make. Right. In the forties, it was getting education. In the seventies and eighties was buy a house. And now it's plan B. Well, they ain't buy a house anymore. They prove that those go up forever until they don't. Right. And so we've seen the result of that crisis. Yeah, I love that analogy. I didn't say that before, but of buying a house for the last 40 years was that was it. Yeah. And I agree. I think Bitcoin is at this time. What can we look forward to from you and from Sovereign in the coming months, years, decades, as we start to see all these things that we discussed come to fruition? Well, right now, Sovereign is quite new and quite young. It's still limited in terms of the amount of transaction volume we allow through it.

As the system grows, you still need to get whitelisted in order to kind of need to get like an early invite in order to participate. Completely pseudonymous, no KYC, but it's still like a waiting list of wallets or addresses that can interact with it. I expect that by around March that will, you know, we will be convinced that it is Bitcoin safe and it will have gone through months and months of real testing with real funds and it will be completely accessible. We already have a whole bunch of, a whole community of developers who are working on it and more and more joining all the time.

And I think that it may not become the only, you know, if you think about every single industry that has been digitized, right? So travel got digitized. It got a few operating systems, just a handful of them airbnb booking.com expedia um e-commerce got digitized you get amazon walmart ebay um search you got google and you know maybe a few other like bing and google and then and then computers themselves the original digitization you've got a few operating systems the only real exception to this an industry that was digitized but didn't end up with some like open global operating system is finance and the reason is

regulatory capture i think the beautiful thing about DeFi is it creates an opportunity for truly borderless systems and I think we're going to end up with a global financial OS which is going to be vastly larger and have vastly more access to liquidity than any bank we can imagine today. I hope that there won't just be one of them, because I think it's good to have more than one, just like it's good to have Linux and Windows and Android, etc. And I hope it's not centralized, you know, not like a Ripple or a, you know, JP Morgan coin or whatever. And I think there's a very, very good chance that Sovereign will be a full stack financial operating system for a borderless future. I absolutely love it. So how can everybody sign up, participate and follow you after this conversation? Well, I can be found on Twitter.

I sometimes publish in CoinDesk or Bitcoin Magazine or some other places, but just Idan Iago, like at Idan Iago on Twitter. And Sovereign is at Sovereign BTC on Twitter or Sovereign.app is the website. And it would be awesome to see your listeners, you know, find their sovereignty. And if they like it, give the gift of sovereignty to their friends and tell other people about it. That is the best thing that you can possibly do. And so everyone knows that's S-O-V-R-Y-N. You'll see it obviously in the show notes, but it's a clever spelling and take on obviously being sovereign and sovereignty.

Well, thank you so much for this conversation. Very inspiring. And especially from someone who's been here the whole time and, you know, is unrattled and sees the future, obviously, because I think that a lot of people are awakening to this shared vision of what this can be, you know, what this movement can be based on Bitcoin. And I think you laid it out exceptionally well. Well, thank you very much. And it was great to talk to you again. And I hope we can do it again in the future. And in the meantime, let's all stay sovereign. Let's do it.

Thank you.