Development of open finance dApps on Bitcoin by projects such as Sovryn proves the RSK protocol is beginning to gain traction.
Decentralized Finance (DeFi) is a multi-billion industry that promises to revolutionize traditional finance. Nonetheless, there are aspects of the space that need regulatory clarity.
Bitcoin DeFi and Sovryn
Recently, the chair of the U.S. Commodity Futures Trading Commission (CFTC), Heath Tarbert, said he was impressed by Ethereum. The success of DeFi, he adds, will see governance tokens classified as commodities.
Sovryn, a margin trading and lending dApp is anchored to the Bitcoin network’s benefits through the RSK smart contract platform. Sovryn aims to further propel DeFi through its trustless and non-custodial lending platform.
The security of the protocol used by Sovryn depends directly on the hashpower of Bitcoin’s Proof of Work miners. Sovryn is a lending, borrowing and trading platform. Users will earn BTC depending on the demand for borrowing on the platform.
10 percent of interest paid by borrowers is for the insurance fund. The fund protects the lender whenever the borrower defaults on their loan.
Besides lending, users can earn interest by providing liquidity through the Sovryn automated market makers (AMMs).
Problems Faced by Providers of Bitcoin on Ethereum
Presently, projects tokenizing BTC on Ethereum fall short in decentralization, capital inefficiency, and security.
wBTC is the largest form of tokenized Bitcoin in use today and is essentially an ethereum token pegged to Bitcoin. But it suffers from centralization, as all Bitcoin is custodialized by BitGo, who in return issue tokenized IOUs. The protocol relies on the ability of one custodian to keep clients’ funds secure.
If the security is compromised, the money is gone, with no way to retrieve the funds.
The arrangement in renBTC is no better. This Bitcoin token depends on five multi-sign clients who technically control millions of dollars of BTC. A lot depends on them not colluding or manipulating.
The Sovryn Solution
Considering the glaring challenges in present solutions, Bitcoin on RSK appears to be the most viable solution for DeFi on Bitcoin and leveraging the coin in DeFi operations.
All transactions in Sovryn are validated by 60 percent of the total Bitcoin hash rate and no other asset besides BTC is used within this alternative DeFi ecosystem.
If the user still wished to continue with ERC-20 tokens, the token bridge between Ethereum and RSK enables interoperability between the two networks. ERC-20 tokens can be used to move value between the two networks as the user deems fit.
Notably, the user can decide to opt for a different consensus algorithm, for example, or opt to transact in a low-fee environment supported by the RSK protocol owing to its flexibility.
As such, nearly all products or protocols that can be built on Ethereum can be launched on RSK.
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