Sovryn: A Comprehensive Guide to Decentralized Finance on Bitcoin

What is Sovryn?

Sovryn is a decentralized finance (DeFi) provider. The protocol is running on a Bitcoin sidechain called Rootstock Smart Contract (RSK). Sovryn is a one-stop shop for decentralized financial services and offers lending, borrowing, trading, staking, and yield farming.

To govern the protocol, Sovryn has launched its native SOV token. SOV token holders can participate in Sovryn’s bitocracy by staking their tokens on the platform. This grants them voting rights and offers participation in Sovryn’s rewards and risks. By design, the SOV token is not required to use the platform’s services, as Sovryn aims to be heavily dependent on Bitcoin.

How Sovryn works

When it comes to decentralized finance, the Bitcoin network was forced to watch the ICO and DeFi boom from the sidelines. Even though Bitcoin is the largest cryptocurrency by market capitalization, the Bitcoin blockchain was left out of most of the innovations happening with DeFi due to its technical limitations.

This only started to change with the Bitcoin SegWit upgrade in 2017. The upgrade enabled the creation of Bitcoin sidechains, which was a major step toward decentralized finance within the Bitcoin ecosystem. These sidechains, which are linked to the Bitcoin blockchain in various ways and offer extended smart-contract capabilities similar to those of Ethereum. This allows the execution of smart contracts, which are necessary to run DeFi applications on the sidechains. At the same time, thanks to their linkage to the Bitcoin network, the sidechains inherit the security and settlement assurances thereof.

Sovyrn is running on the RSK sidechain. RSK is connected to Bitcoin by merged-mining. Merged-mining is a mechanism that allows Bitcoin miners to provide security for RSK and earn the respective block rewards simultaneously to mining Bitcoin. The magic of merged-mining is that securing a sidechain is a mere byproduct of mining Bitcoin. Thus, miners don’t have to dedicate any extra computational power to secure the RSK sidechain.

As an illustration, think of mining as searching for needles in a haystack. Bitcoin miners are looking for red needles in this haystack. Finding one of the red needles allows a miner to add the next block to the Bitcoin blockchain and thus earn a block reward. In the process of searching for the red needles, miners may also find green needles, which allow them to add a block to the RSK sidechain and earn its respective block reward.

As a result, the Sovryn protocol can run on a blockchain that has Turing-complete smart-contract capabilities and is secured by over 50% of Bitcoin’s hashrate.

Sovryn and RBTC

To send transactions over the RSK network, Rootstock Bitcoin (RBTC) has to be paid as gas. RBTC is Bitcoin that has been “transferred” from the Bitcoin blockchain to the RSK sidechain. Technically speaking, the coins don’t actually get transferred but locked on one blockchain and unlocked on the other. Consequently, 1 RBTC always equals 1 BTC. To use the Sovryn protocol, RBTC has to be paid for every transaction. But, as RSK is a sidechain, transaction fees are much lower than on the Bitcoin network.

The use of RBTC within the Sovryn protocol is one of the most distinguishing factors to competing Bitcoin DeFi protocols running on other Bitcoin-adjacent protocols like Stacks or Liquid. One of Sovryn’s main goals is to provide DeFi services for real Bitcoin. Many Bitcoiners believe that the Bitcoin network is the most secure blockchain in the world and thus bitcoin is the hardest money currently available. Consequently, they have been calling for DeFi services on the most secure chain in the hardest money possible.

Sovryn is therefore aiming to build DeFi services on a sidechain that resembles Bitcoin’s guarantees as closely as humanly possible. The RSK sidechain is currently secured by over 50% of Bitcoin’s hashrate, which is provided by proof-of-work Bitcoin miners. This makes the chain incredibly secure. Further, Sovryn enables investment opportunities for RBTC on their platform. RBTC is currently the closest a Bitcoin surrogate can be to native BTC on a sidechain. This makes Sovryn the go-to place for Bitcoiners seeking to put their bitcoin to use.

The single biggest challenge RSK and Sovryn are facing is the process of transferring bitcoin between RSK and the Bitcoin mainchain. It is technically challenging to build a fully decentralized and uncensorable bridging mechanism. Even though the current mechanism, called Powpeg, provides a high level of security, it is still not as decentralized as the Bitcoin blockchain itself. Should this mechanism ever fail or be hacked, then the locked BTC could be stolen or lost.

DeFi services on Sovryn

Sovryn offers a variety of financial services on their platform. Once you are in the Sovryn ecosystem, these services can be used in a truly decentralized manner without ever having to give up control over your private keys. Examples are:

• BTC ⇋ RBTC: Sovryn allows users to get RBTC by sending BTC to a uniquely generated deposit address — and vice versa.
• Fiat → RBTC: Sovryn provides users with a Fiat on-ramp where RBTC can get purchased against fiat. To use the service, KYC is required.
• Swap/Trade: Swap and trade coins and tokens, which are running on RSK
• Margin: Trade with leverage up to 5x
• Lend: Lend out your cryptocurrencies to earn yield
• Borrow: Borrow cryptocurrencies by depositing collateral
• Yield Farming: Earn yield by providing liquidity to a pool
• Staking: Stake SOV tokens to participate in Bitocracy and earn protocol fees
• Launchpad: Invest in upcoming projects