A few weeks ago I noticed a CoinDesk headline: “Why hard-nosed Bitcoiners can learn to love DeFi”. The title was designed for controversy. Decentralized finance (DeFi) seems to be everything Bitcoiners oppose: useless tokens created for random projects and quick fundraising powered by ponzinomics. All of this is happening on Ethereum, Bitcoin’s unprincipled competitor.
However, it would be a mistake to dismiss the play and its author Matt Luongo. Matt is a passionate bitcoiner who makes an argument that seems obvious to me. As a longtime Bitcoinist, it has always been my dream to extend the decentralization of Bitcoin to the entire economy. That’s exactly what Matt says: It’s 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 credit platform. CementDAO is a decentralized tool for uniting the fragmented stablecoin ecosystem.
We already have a decentralized currency; Now we should decentralize the services through which we use this currency. However, I disagree with Matt’s suggested solution.
The same day Matt’s article came out, we learned that BitMEX, where so many bitcoiners have deposited their bitcoin, is in danger. Not only does this put users’ bitcoin and private information at risk, but it also compromises the availability of a type of financial service that many bitcoiners have found useful.
Over time, all BitMEX-type services will be under pressure to be regulated. They ask users to dox themselves through KYC (Know-Your-Customer) rules. They continue to become centralized bottlenecks in the Bitcoin economy that authorities can pressure to control and expand their surveillance tentacles. In this way we are not building an uncensible, permissionless economy around Bitcoin. We need an alternative.
If we want to expand Bitcoin’s ethos of freedom and self-sovereignty beyond pure hoding, Bitcoin services must be decentralized. This is DeFi. The bottom line is that nobody should pay more attention to and support DeFi than Bitcoiners.
There is simply no reason to build “Bitcoin DeFi” on Ethereum.
Where do Matt and I disagree? Matt suggests achieving this by leveraging the Ethereum-based DeFi services. To make this possible, he worked intensively on tBTC, a more decentralized method of tokenizing Bitcoin on Ethereum.
In Ethereum, he argues, the action is where the DeFi services are, that’s where the network effects are built. All of this is true. However, it is also true that BTC tokenized on Ethereum, as well decentralized as the tokens may be, will always be a second-class citizen. The base currency is Ether (ETH), the transaction fees are paid in ETH, the security guarantees are those of Ethereum.
For me, and I suspect many, this is a major disadvantage at best and a fatal error at worst. There is simply no reason to build “Bitcoin DeFi” on Ethereum. Bitcoin Layer 2 has all the tools to do this in a Bitcoin-native environment, with clearer security guarantees, lower fees, and no competing altcoins.
See also: DeFi Dad – Five years later, DeFi is now defining Ethereum
The Bitcoin sidechain, named RSK, hosts a growing number of Bitcoin DeFi services that provide key financial functions. Money-on-Chain creates a Bitcoin-backed stable coin that allows Bitcoiners to access US dollar-denominated funds without having to touch fiat. Sovryn will soon offer permissionless and uncensored spot trading, leveraged trading, borrowing and lending.
As Matt suggests, bitcoiners have a valuable asset and should be able to generate returns on it without resorting to centralized service. That is possible today without Ethereum or other altcoins. Bitcoin’s huge pool of users and value is the biggest network effect in crypto. People are awakening to the fact that Bitcoin, the original DeFi, is now gaining even more decentralized superpowers.