Forget Ethereum, DeFi Is Being Built on Bitcoin

Edan Yago looks to reclaim "decentralized finance" as Bitcoin's, not Ethereum's, turf.

AccessTimeIconOct 22, 2020 at 12:00 p.m. UTC
Updated Sep 14, 2021 at 10:22 a.m. UTC
AccessTimeIconOct 22, 2020 at 12:00 p.m. UTCUpdated Sep 14, 2021 at 10:22 a.m. UTC
AccessTimeIconOct 22, 2020 at 12:00 p.m. UTCUpdated Sep 14, 2021 at 10:22 a.m. UTC

A few weeks ago a CoinDesk headline,"Why Hardnosed Bitcoiners Can Learn to Love DeFi," caught my eye. The title was designed for controversy. Decentralized finance (DeFi) seems to be everything Bitcoiners reject: useless tokens created for haphazard projects and quick money-grabs driven by ponzinomics. All of this happening on Ethereum, Bitcoin's unprincipled competitor.  

Yet, to dismiss the piece, and its author Matt Luongo, would be a mistake. Matt is an ardent Bitcoiner making an argument that to me seems obvious. As a long-time Bitcoiner, it has always been my dream to extend Bitcoin's decentralization to the wider economy. That is precisely what Matt is saying: It is time for us to take our belief in decentralization to the next level. 

Edan Yago is a contributor to Sovryn and founder of CementDAO. Sovryn is a decentralized bitcoin trading and lending platform. CementDAO is a decentralized tool to unite the fragmented stablecoin ecosystem. 

We already have a decentralized currency; now we should decentralize the services through which we use that currency. I disagree, however, with Matt's proposed solution. 

The same day Matt's article came out, we learned BitMEX, where so many Bitcoiners have deposited their bitcoin, is under threat. Not only does this place users' bitcoin and private information in jeopardy, it also threatens the availability of a type of  financial service that many Bitcoiners have found useful. 

Over time, all BitMEX-type services will find themselves under pressure to become regulated. They will demand users dox themselves through know-your-customer (KYC) rules. They will continue to become centralized chokepoints in the Bitcoin economy where authorities can exert pressure, control and extend their tentacles of surveillance. This is not how we build an uncensorable, permissionless economy around bitcoin. We need an alternative.

If we want to extend Bitcoin's ethos of freedom and self-sovereignty beyond just hodling, then bitcoin services must become decentralized. That's what DeFi is. Bottom line, nobody should be paying more attention and be more supportive of DeFi than Bitcoiners. 

There is simply no reason to build "Bitcoin DeFi" on Ethereum.

So where do Matt and I disagree? Matt suggests the way to accomplish that is by taking advantage of the DeFi services being built on Ethereum. To make this possible, he has been working hard on tBTC, a more decentralized way of tokenizing bitcoin on Ethereum

Ethereum, he argues, is where the action is, it is where the DeFi services are, it is where the network effects are being built. All of this is true. However, it is also true that on Ethereum, tokenized BTC, however well decentralized the token is, will always be a second-class citizen. The base currency is ether (ETH), the transaction fees are paid in ETH, the security assurances are those of Ethereum. 

For me, and I suspect for many, this is at best a major disadvantage and at worst a fatal flaw. There is simply no reason to build "Bitcoin DeFi" on Ethereum. Bitcoin layer 2 provides all the tools to do this in a bitcoin-native environment, with clearer security assurances, lower fees and without creating competing altcoins. 

The Bitcoin-sidechain called RSK is host to a growing number of Bitcoin DeFi services that provide the core financial functions. Money-on-Chain creates a bitcoin-backed stablecoin, giving Bitcoiners access to U.S. dollar-denominated funds, without having to touch fiat. Sovryn will soon provide permissionless and uncensorable spot trading, leveraged trading, borrowing and lending. 

As Matt suggests, Bitcoiners have a valuable asset and should be able to earn yield on it without going through a centralized service. That is possible today without Ethereum or any other altcoin. Bitcoin's massive pool of users and asset value is the biggest network effect in crypto. People are waking up to the fact that Bitcoin, the original DeFi, now is gaining even more decentralized superpowers. 

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