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A few weeks ago a CoinDesk headline, “Why Hard Nosed Bitcoiners Can Learn to Love DeFi,” caught my eye. The title was designed for controversy. Decentralized finance (DeFi) seems to be all that Bitcoiners reject: useless tokens created for random projects and quick money taking driven by ponzinomics. All of this happens on Ethereum, Bitcoin’s unprincipled competitor.
However, ignoring the piece and its author Matt Luongo would be a mistake. Matt is an ardent Bitcoiner making an argument that seems obvious to me. As a longtime Bitcoiner, it has always been my dream to extend Bitcoin’s decentralization to the broader economy. This is exactly what Matt is saying: it is time for us to take our faith in decentralization to the next level.
Edan Yago is a Sovryn collaborator and founder of CementDAO. Sovryn is a decentralized platform for trading and lending bitcoins. CementDAO is a decentralized tool to unite the fragmented ecosystem of stablecoins.
We already have a decentralized currency; now we should decentralize the services through which we use that currency. However, I disagree with Matt’s proposed solution.
The same day that Matt’s article came out, we learned that BitMEX, where so many Bitcoiners have deposited their bitcoins, is under threat. This not only jeopardizes bitcoin and users’ private information, but also threatens the availability of a type of financial service that many Bitcoiners have found useful.
Over time, all BitMEX-like services will come under pressure to be regulated. They will ask users for the dox through the Know-Your-Customer (KYC) rules. They will continue to become centralized bottlenecks in the Bitcoin economy where authorities can lobby, control and extend their surveillance tentacles. This is not how we build an immeasurable, permissionless economy around bitcoin. We need an alternative.
If we are to extend Bitcoin’s ethos of freedom and self-sovereignty beyond simple hodling, bitcoin services must become decentralized. This is what DeFi is. In conclusion, no one should pay more attention and be more supportive of DeFi than Bitcoiners.
So where do Matt and I disagree? Matt suggests that the way to do this is to leverage DeFi services built on Ethereum. To make this possible, he worked 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 built. This is all 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 guarantees are those of Ethereum.
For me, and I suspect to many, this is a major drawback at best and a fatal flaw at worst. There is simply no reason to build “Bitcoin DeFi” on Ethereum. Bitcoin Level 2 provides all the tools to do this in a native bitcoin environment, with clearer security guarantees, lower fees, and without creating competing altcoins.
See also: DeFi Dad – Five Years In, DeFi Now Defines Ethereum
The Bitcoin-sidechain called RSK hosts a growing number of Bitcoin DeFi services that provide the main financial functions. Money-on-Chain creates a bitcoin-backed stablecoin, giving Bitcoiners access to funds denominated in US dollars, without having to touch fiat. Sovryn will soon provide permissionless and uncensored spot trading, leveraged trading, borrowing and lending.
As Matt suggests, Bitcoiners have a valuable asset and should be able to earn a return on it without going through a centralized service. This is possible today without Ethereum or any other altcoin. Bitcoin’s huge user pool and asset value is the biggest network effect in cryptography. People are realizing that Bitcoin, the original DeFi, is now gaining even more decentralized superpowers.
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