Sovryn, a Bitcoin-based trading and lending platform
If you want to trade with Bitcoin or lend them out to generate an interest, you have to accept a risk which Bitcoin is supposed to overcome: you have to entrust your coins to a third party. You might know the slogan “Not your keys, not your coins”, but so far you had no choice but to transfer your coins to a company that would control your private keys. If you wanted to avoid this and go DeFi, you had to exchange your precious Digital Gold for Ether, which is not exactly an attractive alternative for die-hard Bitcoiners.
Sovryn changes this. It is a decentralized platform built on Rootstock smart contracts which run on top of the Bitcoin blockchain. Sovryn offers two services: a margin trading platform for risk-affine traders, and a lending platform which pays an interest to Bitcoin owners who lend out their coins to the traders who use them as leverage. In both cases, Sovryn does not act as a custodian. Its users always stay in control of their keys and their coins. The connections between buyers and sellers on the trading platform, as well as the ones between borrowers and lenders are entirely managed by smart contract.
Here is a typical use case:
Alice, a hodler, wants to put her Bitcoins to work by lending them to a margin trade. Bob, a trader, is so bullish that he isn’t satisfied just to HODL. He opens a long position on Bitcoin, borrowing the funds from Alice. Alice and Bob do not want to move their BTC onto a centralized service and give up control of their keys. Using Sovryn, Alice issues a peer-to-peer loan straight from her wallet and Bob trades straight from his. Alice is now stacking Satoshis without a risk, while Bob makes a good profit on his trades. They not need to comprome their privacy, control or ideals.
Sovryn has been launched on December 15, just one day after reaching a new all-time-high. Its founder Edan Yago half-jokingly linked these two events in a series of tweets, claiming that Bitcoin reached its new peak because it had gained “new superpowers”.
“For years, Bitcoiners have dreamed of creating easy to use, highly functional, decentralized alternatives to centralized services”, he writes. “DeFi on Ethereum has provided a glimpse of what decentralized financial services could look like, but many of those services have been only ‘decentralized theater’ and in any event they did not offer Bitcoin-native decentralization. With the launch of Sovryn yesterday, there is now a Bitcoin-native way to trade, leverage and lend your Bitcoin. So of course Bitcoin hit a new all time high the next day!”
Albeit made slightly tongue-in-cheek, Edan’s claim is not entirely absurd. In order to gain mass adoption, Bitcoin needs to be more than just a “store of value”. It can only live up to its promises if its principles of decentralization and trustlessness are fully realized not only for cash payments, but in all aspects of finance. A Bitcoin-native DeFi platform such as Sovyrn will be an important element of the Bitcoin ecosystem.
Margin trading has two main aspects: trading with leverage and shorting. In trading with leverage, a trader borrows assets to increase the amount of assets they are trading. By doing so, they magnify the gains or losses of their trade. The borrowed assets are known as a margin loan. To obtain the margin loan, the trader puts up assets that serve as collateral. The terms of the margin loan specify a collateral-to-loan ratio. If the trade falls below the specified ratio, the trade is liquidated and the lender is made whole using the trader’s collateral.
Sovryn allows for up to 5X leveraged trades, which will be increased in the future. The trader receives a margin call when his position approaches the margin maintenance threshold of 15%. If his margin slips below 15% his position will be partially liquidated. In shorting, a trader sells an assets he does not own. The short investor borrows an asset and sells it on the expectation that the assets will lose value.
One might think that the Bitcoin blockchain is too slow for this form of trading, but Sovryn is built on the Rootstock sidechain. While pegged to the Bitcoin blockchain and therefore secured by it, Rootstock offers block times of only 30 seconds, which is much faster than the Bitcoin average block time of 10 minutes.
Sovryn uses an Automated Market Maker (AMM) to allow trading, similar to Uniswap. This design does not allow for an orderbook hence there are no limit orders. In the future conditional orders will be added which will serve a similar purpose.
As there is no order book, prices are determined by oracles (currently Money-on-Chain, soon also Chainlink) which tether the price to the market price of Bitcoin.
Liquidity Providers can provide liquidity to the Sovryn Swap AMM. Unlike most other AMM’s, such as Uniswap, liquidity providers are not required to deposit both assets into a pool, they can add only one or both. By using oracles to rebase the ratio between tokens, most of the possibility for “impermanent loss” is eliminated. Sovryn Swap collects a fee on each side of the swap, which is distributed to the liquidity providers, which is currently set at 0.1%. In addition, the Sovryn protocol collects a fee on each trade that is performed, which is currently 0.15%.
Sovryn has raised 2.1 million US dollars in funding from VC companies Greenfield One, Collider Ventures and Monday Capital, as well as some private investors. They could have even raised more, but decided to cap the investment round to a symbolic 2.1 million, reminiscent of the maximum amount of 21 million Bitcoins.
In contrast to centralized platforms, in Sovryn no one can stop a transaction, ban an account or require an annoying „Know-your-customer“-procedure before one can start trading.
Edan Yago explains: “Sovryn is for those who value self-sovereignty and who want to maintain control of their keys and their private data. With Sovryn, lending, trading and leverage are permissionless and censorship resistant.”
By Aaron Koenig