#498 Edan Yago on Decentralized Infrastructure for Bitcoin

Today’s episode is with Sovryn community founder Edan Yago. This podcast is a a recordeding from a Youtube Livestream on 2-15-21. In this conversation, we discuss decentralized infrastructure, synthetic assets, Bitcoin, Ethereum, oracles, permissionless innovation, wrapped Bitcoin, and Bitcoin mutants. ======================= Remote makes it easy for companies of all sizes to employ global full-time employees and contractors. We take care of international payroll, benefits, taxes and local compliance, so you can focus on growing your business. Learn more about Remote and their new Remote for Startups program at https://www.remote.com. ======================= OKCoin.com is the leading crypto exchange for both beginners and experienced users. You can fund your account in under 2 minutes, and get access to the most advanced trading engine, all while paying the lowest trading fees in the industry (0.1%). Visit www.okcoin.com/pomp and open your account today. ======================= Did you know only 1% of day traders actually turn a profit? So why are so many of us mistaking picking stocks for serious investing? You can’t control the markets, but you can control your risks. So how do billionaire investors control their risk? They invest in blue-chip art. If that sounds unusual to you, you’re not alone. But the ultra-wealthy have been investing in art for centuries. And since 2000, art has outperformed the S&P by an incredible 180%. Just a few years ago, a single work sold for $450 million! Imagine... Being able to invest in the very same paintings as millionaires and billionaires, at a fraction of the cost. Masterworks.io is an exclusive platform that makes it as easy as trading stocks online. And the best part is: you don’t need to know anything about art. Their experts will create a custom portfolio to meet your investment needs. With Masterworks.io you don’t have to choose between big risks and big returns. Sign up today, select POMP and you can skip the 70,000 waitlist to get first dibs. Just go to www.masterworks.io and use code POMP. =======================

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:02Anthony Pompliano?

  What's up everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Let's kick this thing off. Today's episode is with sovereign community founder Eden Iago. In this conversation, we discuss decentralized infrastructure, synthetic assets, Bitcoin, Ethereum, oracles, permissionless innovation, wrapped Bitcoin, and Bitcoin mutants. I really enjoyed this conversation, and I hope you do as well. Before we get into the episode, though, I want to quickly talk about our sponsors. First up is Remote.com. In 2021, every business is a global business. But how do you pay your global team and comply with international labor laws?

• 0:44Anthony Pompliano?

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• 1:28Anthony Pompliano?

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• 2:10Anthony Pompliano?

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• 2:54Anthony Pompliano?

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• 3:34Anthony Pompliano?

  But no longer. Masterworks.io is making art investing accessible to everyone regardless of accreditation. If you're looking to diversify outside of the stock market, contemporary art has the lowest correlation too of all 10 major asset classes. The best part, you don't even know anything about art to invest. Masterworks has experts that will create a custom portfolio to meet your investment needs. You can learn more if you go to masterworks.io and use promo code POMP. That's right, that's masterworks.io promo code POMP. If you use the promo code POMP at masterworks.io, you'll skip their entire waitlist.

• 4:14Anthony Pompliano?

  Masterworks.io promo code POMP, go get you some art and make sure you are protecting yourself. All right, let's get into this episode of Eden. I hope you enjoy this one.

• 4:25Anthony Pompliano?

  Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only.

• 4:56Anthony Pompliano?

  Eden, how are you doing?

• 4:58Speaker 01

  Pretty good. How are you?

• 5:01Anthony Pompliano?

  I got no complaints, man. As, as people come in here, we're going to quickly figure out first just where they are, where they're coming from. So if you're starting to get in here, let us know in the comment section where exactly you're tuning in from around the world as we do this live stream. We're going to be talking about decentralization. We're going to be talking about Bitcoin, all kinds of great stuff today. And we have one of the world's experts here with us with Iago. So in the chat section, go ahead and leave a comment in terms of where are you tuning in from today to watch this? And I'll read some of them out. Say hello to people before we get started. Let's see, who do we

• 5:45Anthony Pompliano?

  have? Let's see, let's see.

• 5:50Anthony Pompliano?

  Takes a second for the comments to load.

• 5:57Anthony Pompliano?

  All right. So let's get started now. We've got about a good number of people watching. And so maybe I go, let's just get started with your background. Where exactly did you grow up? How did you get into technology? When did you discover Bitcoin? And what kind of fascinated with you?

• 6:14Speaker 01

  I grew up in apartheid South Africa to a family that had managed to survive the hyperinflation of the Biomer Republic and then the Holocaust by basically converting, liquidating all of their earthly money into gold and gems.

• 6:38Speaker 01

  And they went through all kinds of remarkable stories and terrible suffering. And then when I was growing up in South Africa, many of them were members of the ANC, which was the, it's basically Nelson Mandela's, eventually a political party fighting for for freedom in South Africa. And because they were associated with the ANC, they were at some point declared terrorists by the South African government. And so in the middle of the night, one night when I was just a little kid, I was woken up by a lot of commotion and I kind of grabbed my pillow and walked out to see what was happening.

• 7:19Speaker 01

  And my uncle was kind of out of breath and had just arrived at our doorstep. My grandfather was giving him a piece of the car because he needed to switch cars so he wouldn't be traceable. And he's, he and his wife drove out of South Africa through the lights to Swan. And not long after, I became a gold smuggler because my mother started buying Krugerands and sewing them into my clothes and sending me a loan overseas because they wouldn't search little kids in the Antsnots Airport and we needed to get money out of South Africa to our family. So sometimes I joke that I've been a Bitcoiner for, you know, thirty years, but.

• 8:05Anthony Pompliano?

  Explain the gold smuggling a little bit more because that's a fascinating story. So kind of walk through exactly what was happening and what you were doing.

• 8:13Speaker 01

  Yeah, so, so there were a few things. First of all, you know, a part of my family had, as I mentioned, fled South Africa as political escapees, basically. And to get money to them wasn't simple because at the time in South Africa, they were very substantial capital controls. But South Africa produced eighty percent of the world's gold at the time and that's what South Africa was famous for. And the South African government minted a gold coin called the Krugerand, which was one ounce of gold, and then traded it substantially more than the value of one ounce of gold because it was so rare because you couldn't get them out of South Africa.

• 8:54Speaker 01

  Uh, and so what my parents decided to do was they bought a bunch of cougar ants. And then um what they would do when is when it was winter, they would sew these cougar ants into my winter coat. And then they would send me overseas alone. The reason they would send me overseas alone is because when you went through Yanspots Airport as a nine or eleven year old kid at the time, uh, you were basically chaperoned, but you weren't searched. And so I, I, I was the best conduit for getting funds out of the country. And mid, a few years later, uh, we, we left South Africa as well. And, and the first winter that I was living in Israel,

• 9:38Speaker 01

  uh, the first day of winter, I went to school and I put my hands into my pockets and I was like, uh-oh. Because I realized that I was at school, sitting on a whole stash of cougar ants that we had forgotten to take out of my jacket. So, um, so I had to spend the whole day at school, being very careful not to lose my, my gold coins. Um, so, yeah, so that, you know, I come from a family that's always been extremely politically active. Um, we have in one way or another been on the bad side of totalitarian governments, from communists to the Nazis, to the apartheid government, uh, across the twentieth century. And, uh, when I grew up, I studied neuroscience, uh, and in particular neural networks.

• 10:20Speaker 01

  And I then immigrated to the United States because I thought that the United States was the country of freedom. Um, as the country of free markets, and I wanted to be part of that. And I started a biotech company. And, uh, my focus was on neural networks and using basically machine learning to try and create better diagnostics. Um, and, um, so I was reading a lot of papers in network science. And, uh, one of the papers that I came across in, in early two thousand and eleven, I think it must have been around now, like February two thousand and eleven, uh, was the Satoshi White Paper. And I remember I had, you know, it was freezing Pittsburgh day, February.

• 11:03Speaker 01

  And I had my coffee and I spilled my coffee all over my laptop because my mind was blown by, by that paper. A lot of people, you know, have the story that they kind of took a long time to warm up to, to Bitcoin. And I think because of my background. I I was primed, like I was into network science, I was into, I I understood the value of having sovereign money. And that afternoon, I sent out an email to everyone I knew saying, this is, this is what you need to be getting into now. And I was ignored by basically everyone. But it but it screwed up my life because I've been, I've been in it ever since.

• 11:39Anthony Pompliano?

  So when, after you sent that email, what was the first thing that you did? Did you know that you wanted to go and buy a bunch, did you want to work on it? Um, kind of, what was the next couple of things that you did?

• 11:49Speaker 01

  Well, I was very poor at the time because I had started the startup and put all my money into the startup. Um, I had about two hundred and thirty dollars in the bank. And I was still trying to figure out how I can get Bitcoin. I was trying to figure out how I, how you wire two hundred and thirty dollars to Mt. Gox without, to like Japan, without it costing you two hundred and thirty dollars in fees. Um, and eventually what I did is I left my startup and I, um, I moved to San Francisco and I took a job with a company called Zynga, which at the time was the fastest growing game company in the world. And the reason I wanted to work for Zynga was because I was sure the digital assets are going to be the future. And no company knew how to mainstream digital assets better than Zynga.

• 12:34Speaker 01

  And our primary customer was Midwestern Housewife. We had, you know, hundreds of millions of customers around the world shortly after I joined. And so I, I was with that company for several years all through the IPO. I helped, uh, turn Zynga into one of the first companies in the world to accept Bitcoin as a, as a means of payment. Um, and, um, and then I, I, uh, when I left Zynga, I, I helped set up an organization called Data, uh, to try and work on the regulatory issues of Bitcoin. Uh, and then, uh, in two thousand thirteen, I, uh, I, I set up not one, but two Bitcoin companies.

• 13:19Speaker 01

  Uh. One was BXIL, which was designed to help uh exchanges that were losing their bank accounts per se payments. And the other was more ambitious. It was called Epiphite. And um uh the goal with Epiphite was to uh work with banks to turn Bitcoin into the global settlement mechanism and replace SWIFT. It's kind of like Ripple but without the shitcoin. Um. And uh our customers included Barclays, Air Bank, BBVA, CBA. We had um seven out of the ten largest banks in the world as our customers uh in two thousand and fourteen, two thousand and fifteen. But they were terrified by the uh like, the innovation departments

• 14:01Speaker 01

  loved it. Um. The actual board of directors uh usually wouldn't approve it, didn't approve it ever. And so we we pivoted to using the technology that we built, basically um turning fiat into Bitcoin in one place, converting it into fiat in a different place, allowing basically almost instantaneous transfer to uh mechanism for getting remittance, to allowing remittance payments. So we were sending funds from Europe to um Africa, to Latin America, to East Asia. And then two thousand and sixteen, seventeen hit, and we started making uh extraordinary profit because um we basically could go to our customers and say, we will do free remittance

• 14:44Speaker 01

  for you. Uh. And we were buying Bitcoin in uh Europe or the UK and then sending it to Thailand, Brazil, Zimbabwe, Nigeria, where it was trading at a five, ten, fifteen, twenty-five percent premium. And so we were making on every single transfer, sometimes fifteen percent, uh sometimes more. And uh and we were using our customers' funds as basically free float. Um. So it was an extraordinarily profitable business, and that was part of the reason why it got shut down. Uh. At the time, we started doing, our volumes um went up uh dramatically, and the banking partners that we had uh one by one started shutting us down. Uh. And later, we discovered that a lot of it was pressure from JP Morgan at

• 15:28Speaker 01

  the time, who were the primary US um uh clearing bank for most of our banking partners. So yeah, yeah, uh it's I I after that, I was I was done with with the fiat world. I and I haven't been, I haven't been in fiat ever since.

• 15:48Anthony Pompliano?

  All right, before we get into what you're building now, I want to talk about the importance of decentralization, especially around infrastructure. So everyone is very familiar, if you're familiar with Bitcoin, around decentralized money. I think it's pretty clear as to why there's significant advantage to Bitcoin being decentralized rather than centralized. But one of the things that we've seen is all of the infrastructure, or most of the infrastructure, especially up until recently, has been centralized around Bitcoin. There's a number of other places in the market where there's been decentralized infrastructure, or decentralized applications being built. But Bitcoin, specifically, most of it, that has been built in terms of the exchanges, the custody providers, the lending, you know, platforms, all of that has been centralized. And so, maybe just kind of give

• 16:31Anthony Pompliano?

  us a quick, high-level overview of like, why do you see the infrastructure, the applications around Bitcoin being so important as decentralized versions? And then kind of how do you evaluate where we are today outside of what you're building?

• 16:45Speaker 01

  Right. I think that's a great question. You know, for me, the magic of Bitcoin, yeah, I didn't get into Bitcoin because I wanted to get wealthy. I got into Bitcoin because I wanted to improve the world. Specifically, I thought it was important for people not to be enslaved to a financial system where they were out of control, right? Bank could confiscate their funds, the government could confiscate their funds, their funds could be censored. And, you know, part of this is due to the experiences that I'd experienced. And so, the magic for me about Bitcoin is that it is this revolution in creating liberty,

• 17:30Speaker 01

  a sovereign monetary system available to everyone in the world, but it's dressed up as a get-rich-quick scheme, so it gets adoption. And...

• 17:44Speaker 01

  The frustrating thing throughout the years, and I think this is, you know, I think back to the conversations I was having in, you know, pre, let's call it 2015, with Bitcoiners. Everyone was sure that we were going to have decentralized exchanges, decentralized lending, basically all of the financial services around Bitcoin would be decentralized. And the reason was obvious. You have this amazing decentralized, permissionless, uncensorable monetary asset. And if you then, you know, have to use it through a centralized service, you give up all of those properties.

• 18:26Speaker 01

  So the exchanges get hacked, the exchanges require KYC, the exchanges become regulated. And Bitcoin loses the very properties that it has that made people want it in the first place. What I think happened over time is people discovered that it's difficult to decentralize Bitcoin in a responsible way. It was easier to start building decentralized projects on Ethereum and other services. And then over the last few years, we've seen the explosion of DeFi.

• 19:06Speaker 01

  Now, DeFi has the Ponziomics part of it, right? Where people are just kind of looking for 200% APY yield and creating token upon token upon token. And that's sort of the noise, but the fundamental value it provides is phenomenal. The fundamental value of decentralized finance is the ability to retain your control over your keys, over your assets, even as you begin to lend, transact, and create a new financial system.

• 19:39Speaker 01

  And so... Uh, I think the thing that we need to give credit to Ethereum for is reawakening the interest among Bitcoiners in creating this decentralized finance, giving us the feeling that it is now within our grasp. And in conversations that I started having earlier this year, and particularly after the pandemic hit, more and more people who I'd known in this, you know, in the Bitcoin space for years, started talking about their frustration

• 20:16Speaker 01

  that there wasn't DeFi for Bitcoin. And, um, and yeah, I think to me, having decentralized patience for Bitcoin is a necessary step in all of the things that mentioned Bitcoin being to achieve. That hyper Bitcoinization means you're going to have to have a financial system based on Bitcoin. The way you do that is by having a decentralized financial system. Retaining your control over your keys can only be done in a decentralized financial system. And having permissionless innovation in finance can only be done in a decentralized financial system. So I think if we want to see Bitcoin achieve its full

• 20:58Speaker 01

  potential, it has to have a cloud of decentralized financial services around.

• 21:04Anthony Pompliano?

  So before we go any further in terms of that decentralized infrastructure, the term permissionless innovation, I think is one that doesn't get evaluated enough or discussed. Talk a little bit more about like, what does permissionless innovation mean and why is that important?

• 21:24Speaker 01

  Yeah, so I think, um, you know, almost everyone's seen the charts where, um, the cost of education has just gone up and up. The cost of housing has just gone up and up. The cost of healthcare has just gone up and up. But at the same time, the cost of computers has gone down. The cost of services that are provided digitally has gone down. Google is free. Facebook is free. Why, why, why, why that weird bifurcation? And I think the reason is that industries have permissionless innovation. In other words, anyone can become a competitor. Anyone can challenge the incumbents. And some industries are so protected by regulation

• 22:06Speaker 01

  uh that entry into those industries is impossible. The incumbents never need to change because nobody can compete for them. And as a result, they become more expensive and worse year after year. The worst example of this is the financial system, right? Uh, the big banks, the large financial institutions have hardly had to compete uh at all. Uh, and they've hardly, you know, we, we still have bank branches because they felt the need to, to, to, to figure out how to provide us with a fully digital experience. And most recently, with the whole Wall Street's Fed saga, uh we saw that when somebody actually does create a model which may compete with them, right?

• 22:51Speaker 01

  It allows people to, you know, uh, try something like shorting, uh, you know, squeezing the hedge funds. The regulators, in concert with the large financial institutions, can basically uh turn it off. So the reason that permissionless innovation is so important is because without permissionless innovation, you actually don't have competition. And uh, and the reason permission-based finance is so important is because

• 23:24Speaker 01

  Facebook is cool, right? Like, talking to friends is very important. Searching for information is very important. But at the end of the day, we all spend eight to 10 hours every single day working for money. We all purchase the things that we want with money. We all manage the security of our futures and our families' futures with our finances. We basically um express ourselves and, and our biggest desires and needs in the way that we manage our finances more than any other thing that we do. And so if there's one place that we need to be free, one place that if we're not free, they can really squeeze us, it's our finances. And that's why permissionless innovation in finance is, is probably more important than any other single field.

• 24:10Anthony Pompliano?

  So today decentralized infrastructure is basically there's two schools of thought. One is that we are going to take Bitcoin, which is decentralized money. And we are going to bring it into the Ethereum or other smart contract platforms. There's things like wrapped Bitcoin and many variations of them. The other is that we're going to build new decentralized infrastructure on Bitcoin and around Bitcoin, not including those smart contract platforms. How do you break down that framework? How do you evaluate what is most likely to work? And then we can, after we go through that, get into exactly what you're building. But just walk us through kind of philosophically or theoretically, how those two different worlds. Is it a zero sum game? One wins, one doesn't.

• 24:55Anthony Pompliano?

  Is it coexistence? How do you view this?

• 24:59Speaker 01

  Yeah, I think maybe I'll start with the end, whether or not it's a zero sum game. I think that's a very dangerous approach for us to take because it creates a tribalism that we see. And the reason that the tribalism or sort of the blockchain versus Ethereum versus BCH versus Ripple, right, we're all enemies. The reason that bothers me so much is because I think what we're trying to accomplish is extremely built and extremely ambitious. We're trying to take on all of the governments of the world and replace, you know, these fiat currencies with a sovereign currency where we are in control. Right? So all of the established powers of the world are a raiders.

• 25:44Speaker 01

  And I think it's going to take all our concerted efforts to be able to achieve our goal. So I don't want to create situations. I don't think it's good that we create situations where there's an opportunity for divide and conquer.

• 26:02Speaker 01

  That said, I think for us to come together, we should come together around one monetary asset. And I think that monetary asset needs to be the one which has the best chance of becoming the new currency, the new reserve currency of the world. And I think that's unquestionably.

• 26:19Speaker 01

  So I I think we, you know, I think ultimately this entire industry is it it moves with Bitcoin, right? We talk about the price of DeFi going up and then people have all kinds of theories about why DeFi is going up or why the price of Ethereum is going up or whatever, right? But we know why they're growing up because the price of Bitcoin is going up. It's the center of gravity and if it goes down, everything else will go down as well.

• 26:47Speaker 01

  So now to to the to the first part of your question, right? So, okay, so where do we build? We do it on Ethereum? Do we try and build it on other systems? I think that if you look at what's happening with DeFi for Bitcoin, which to my mind is the most important type of DeFi, right? Because Bitcoin is the most important asset.

• 27:14Speaker 01

  DeFi for Bitcoin hardly exists or maybe doesn't exist at all on Ethereum. The vast majority of Bitcoin on Ethereum is wrapped Bitcoin, which is basically you go to a company called BitGo. You give them your coins, you lose control over those coins and then they give you a token representing coins that sit in their vault. So maybe you can use DeFi systems, but you can't use DeFi.

• 27:42Speaker 01

  So if we want to build DeFi for Bitcoin, it has to be built in a Bitcoin native way. It has to be built on the Bitcoin ecosystem, secured by the Bitcoin miners and the the the way that you use this Bitcoin should be as trustless as possible. And for that, I think we need to use Bitcoin Layer Two solutions. And that's why I got some interested in Sovereign, which is a form of DeFi being built on Bitcoin Layer Two.

• 28:10Anthony Pompliano?

  So let's talk about Sauber. Maybe we could start with just kind of the impetus of the creation and the original idea. And then kind of what your involvement with the with the project is.

• 28:21Speaker 01

  Right, so. Yeah, as I, as I mentioned, you know, especially when COVID hit, a bunch of Bitcoiners started getting together and talking sort of online. Things kind of slowed down. There was more private conversation and there was also a need to come together. One of the things that, one of the initiatives that I was involved in was an initiative called Block 19. And the idea was to try and get masks to people around the world who didn't have them. And we were going to take Bitcoin and we took Bitcoin donations to make it happen.

• 28:54Speaker 01

  And because we were taking the donations of Bitcoin, we wanted to build this in a way which was going to be Bitcoin native. And as a result, we we built part of the system on a Bitcoin sidechain called Rootstock.

• 29:10Speaker 01

  And while this was happening, we were having conversations about all the things that we had experienced and sort of talking about where things went and how what we were surprised about. So how things have played out and ways which were different from what we hoped or anticipated. And you know, kept coming, we kept coming back to this, that there was no decentralized financial system being built. System, but. And. At some point, we just decided, all right, screw it. We're going to have to do it ourselves. And so around June of last year, we started working on.

• 29:45Speaker 01

  Trying to see how far we could take the Rootstock system. Which is a system which has smart contracts, but is merge mining Bitcoin. And and so extends the capabilities of Bitcoin into the smart contract space. And then we did sort of like gives gives Bitcoin the capabilities of Ethereum.

• 30:01Anthony Pompliano?

  Explain that process real quick. Explain merge mining for those that don't understand it in terms of how you're taking the smart contract capabilities and essentially combining it with Bitcoin.

• 30:13Speaker 01

  Sure. So, um, merge mining is basically a way of piggybacking on the Bitcoin network's security, right? So you get all of these Bitcoin miners and they're, they're in a constant race to look for the correct hash for the next block, right? While they're doing this, they're generating millions of other candidate hashes, which are the incorrect hash. But if, uh, but so, so what you do is you create the system

• 30:44Speaker 01

  where it will allow you to be looking for the Bitcoin hash. And at the same time that you're generating those hashes, you could, it could turn out that one of the other hashes is sort of like lottery ticket for a block to a separate chain. And so you have the ability to create a separate chain, which has different properties. In this case, it has smart contract properties. It has an EVM or the Ethereum virtual machine, allowing you to create Ethereum-like smart contract. But it is mined by Bitcoin miners and basically shares the same hash power as Bitcoin. And one of the cool things about that is that

• 31:24Speaker 01

  not only does the chain inherit the security properties of Bitcoin, but Bitcoin miners inherits the additional, um, revenue that the new chain provides. You're basically adding to the security budget of Bitcoin.

• 31:41Anthony Pompliano?

  Got it. And so talk there a little bit in terms of, um, how Sovereign is specifically leveraging this idea of merge mining and the smart contract capabilities?

• 31:51Speaker 01

  Right. So Sovereign is built, uh, to be merged mine in this way. And to have smart contracts, which basically allow you to have a system which provides you with the same functionality that you would expect with a regular exchange, but in such a way that you never have to give up control of your keys. You transact directly from your wallet. And the system is unseparable. So there's no KYC. There's no one who can even try to KYC you. There's, uh, no, uh, way for people to shut down the system. There's no one who can confiscate your funds.

• 32:33Speaker 01

  And so what Sovereign has now, after several months of development, is it has the ability for you to trade, for example, to trade against stablecoins like U S D stablecoins. It has the ability for you to convert a Bitcoin into a Bitcoin-backed stablecoin. So you can hold into your Bitcoin but get liquidity in dollars. You don't have to sell Bitcoin to stop spending dollars. It has the ability to have a leverage trading, currently up to about, up to 5x leverage, although that's going to increase. And it has, which is being the most exciting thing, the ability to borrow and lend in Bitcoin. For example, I lend out my Bitcoin in a way which is trustless.

• 33:16Speaker 01

  I'm not, I don't have to go to a centralized service and I'm earning extra money on my Bitcoin. So my Bitcoin works.

• 33:24Speaker 01

  And the, the original goal of Sovereign,

• 33:31Speaker 01

  the original ambition was to, to basically do that. Provide a, a, a service which is like an exchange and provides lending and trading services, which, but in an alternative environment, we don't have to give up your control.

• 33:46Speaker 01

  What we weren't anticipating was how much excitement. We, we were, we thought that maybe no one had built this because nobody cared. And it would end up being a niche product for people like us. What we didn't anticipate was how many people would care. How, how, how many people would be like, yes, this is what I've been waiting for. How many people shared our experience? And so we've seen the community of developers grow very, very quickly. We now have over 40 developers contributing to writing, auditing code, documenting code. A community of several thousand users. We have people, we have artists writing comics about the thing.

• 34:27Speaker 01

  We have people creating documents and videos and just trying to spread the word and everywhere they can.

• 34:36Speaker 01

  And as the community has grown, so have its ambitions. And people are now talking about putting sovereign into the open source operating system of finance for the future. There's, and you know, one of the things that I think I've heard you say is a decentralized version of anything will be larger than the centralized version. All right, today we have, you know, different banks in different countries because they can't be global because the regulations are sort of fixed to different countries. And then on the other hand, we have Facebook, which are global, basically dominate this space. They've become operating systems for search or for, for social, right?

• 35:19Speaker 01

  So imagine you had a borderless financial system, right? Which is able to do everything mortgages, pensions, uh, uh, uh, creating stable, like fiat in the form of veteran bank stable coins, trading, lending, everything, right? But it was borderless, it was permissionless. Anyone could use it and it could be anywhere. Uh, the more and more of the community are now talking about, well, I mean, this is what we could build. We can build the next layer of Bitcoin, take the, the, the, the, the asset which recreated the monetary system and recreate the financial system in the same way.

• 35:53Anthony Pompliano?

  So when you think through this, um, there's a whole bunch to unpack here, right? Let's start first with the non Bitcoin decentralized world. Is this something where you say, uh, right ideas, interesting execution, not valuable and sustainable over the long term? Is this something where you say right ideas, uh, good execution, uh, will coexist? Like, how do you just view, I guess, everything that's not being built on Bitcoin today, uh, over maybe a 10 year period? So the short term, ignore that, just over a longer time horizon. Kind of what do you think happens there?

• 36:29Speaker 01

  I think for me, I've gone through a bit of a journey. I started out extremely skeptical of Ethereum. I didn't think it would scale. I didn't think it would be secure. Um, I didn't think it would work. And in many ways, maybe I was right, right? Like Bitcoin, like Ethereum today maybe has the most hyper-inclusive culture of any blockchain tribe, but from a practical perspective, it's become hyper-exclusive. Like only very wealthy people can afford to transact when the transaction fees are like a trade of 200, 300 dollars. Um, but at the same time, I was wrong about so many things. The system has proven to be robust and secure. It's lasted for seven years.

• 37:14Speaker 01

  Uh, more and more sophisticated things have been built and really remarkable tools have been invented. The first, uh, uh, truly permissionless F, uh, we, you know, the, the causes we got so far to, to a permissionless competitor, the Federal Reserve, was MakerDApp, which created a Ethereum-backed stablecoin. Compound has created a decentralized money market. UStop has become the first decentralized exchange to um, beat even the biggest centralized exchanges in terms of volume. I think these are not just sustainable. I think they're real important innovations.

• 37:54Speaker 01

  And, and I've kind of come to realize that if we want Bitcoin to succeed, we can't ignore these things. We have to be curious about them. In fact, nobody should be more curious about these things than Bitcoiners. Uh, nobody should be, uh, more excited and, and, and, uh, and more interested in developing decentralized financial systems than Bitcoiners. And, and I'm sometimes disappointed that

• 38:26Speaker 01

  Part of the Bitcoin community, sort of the kind that you'd maybe call Bitcoin maximalists, have become a little bit narrow-minded, too close-minded for Bitcoin's own good in not exploring this space more and not realizing that there is a huge opportunity here. There used to be, there are a bunch of important memes in the Bitcoin world. One of those memes, "You're key, you're close." Another meme is "Hodl," right? Another meme is "Short the bankers," right? Bitcoin.

• 38:58Speaker 01

  There used to be a really important meme, which is as important as any of those, which was, "Anything, any technology that improves upon Bitcoin will simply be adopted by Bitcoin." We just don't hear that anymore. And I kind of want to bring that back, because I think it's a very, very important idea, that because Bitcoin is digital money, we can build on top of it. We don't have to change the base there. We can build on top of it in layer two, layer three. And anything which is useful to Bitcoin can and should be adopted by Bitcoin.

• 39:35Anthony Pompliano?

  And so when you think through this, let's walk through some of the products that you have at Sovereign. So the exchange is a great example. I am with you that it's nearly impossible to ignore some of the innovations that are happening just from a size and market adoption standpoint, right? I am very fond of saying, "My opinion doesn't matter, neither does anybody else's." Like, the market is the referee. And so when you think of your exchange, walk through, what is the difference between, let's say, the Sovereign exchange versus Uniswap versus a Coinbase? So it's a kind of a centralized version, then you've got two different decentralized exchanges. So how do those three differ from each other?

• 40:14Speaker 01

  So I think the easiest one to differentiate with is Coinbase, right? So Coinbase, I think, is a really important role to play. It's sort of like the entryway. I think, you know, you could think of being a Bitcoiner as in sort of like steps that you take towards your sovereignty, right? You start out, you don't know anything, you dismiss Bitcoin, you're a no-good. Then you become a little bit curious, you're kind of bi-curious, right? Then you buy your first Bitcoin and you keep it on Coinbase. And so you play Bitcoin, but you don't really own Bitcoin. And then you become more self-sovereign, because you brought on the exchange, put it onto your hardware or wallet, right? I think the the stage after that is that you no longer need to use the exchange,

• 40:58Speaker 01

  the centralized exchange, you can use a decentralized alternative. So it requires a higher level of sophistication, but it provides you with much more control, much more sovereignty for yourself. So that's how both Uniswap and Sovereign are different from Coinbase. Now, the difference between Coinbase, uh, sorry, between Uniswap and Sovereign, there are two obvious ones to my mind. One is, uh, Uniswap is built on Ethereum, and Ethereum is competing with Bitcoin on features, right? It's competing because it's got the smart contracts, it's competing because, uh, you know, they they they try to introduce more technological innovations all the time,

• 41:42Speaker 01

  like proof of stake they want to introduce. I don't think that you can compete with a global reserve currency and features, right? That that's the wrong way to view it. It's not a technology, it's a, it's a, it's a special consensus.

• 41:58Speaker 01

  And, and the, and I think that the technology, the specific features that you want can be implemented on any chain, including effectively through merge mining on Bitcoin. So that's one difference, right? I don't think that, I think Ethereum has provided an opportunity for massive community growth, it's brought huge numbers of people into the crypto ecosystem, and it's created new, important and exciting tools.

• 42:28Speaker 01

  I just think that, um, that needs to integrate much more deeply with Bitcoin if we want to have a shared mission across the entire crypto community.

• 42:40Speaker 01

  The other difference is that Uniswap is designed as a single-purpose product, right?

• 42:47Speaker 01

  And the theory in the Ethereum ecosystem is that you're building these Legos, right? You're building, you know, Compound is the money market, Uniswap is the swaps, uh, Fulcrum is the leverage trading, et cetera, et cetera, et cetera. The, and that's a very compelling idea because it seems extremely decentralized and I think it actually makes a lot of sense under some circumstances. But there's a problem. And the problem is that you can't build everything on Layer One. Uh, Ethereum is proving that with the extremely high fees. There's, there's, there's no way to build a Layer One which is going to scale, uh, enough. And so what you end up doing is you, you need to have a sort of fractal system where you keep on rolling up.

• 43:32Speaker 01

  Uh, you know, you have, you take things off-chain like with Lightning or you, or like with Asper, they roll up and then you like hash them together and put them back ultimately to the, the core blockchain. If you're doing that, you need to have something which is far more vertically integrated. Because until our technology improves quite a lot, and this will take several years, the easy interoperability between different systems which are not on the same Layer One just doesn't exist, it's not there. Um, and right now, the Ethereum ecosystem is fracturing. Uh, people are going up into what, you know, these rollups or these side chains on Ethereum.

• 44:12Speaker 01

  So Matic, Optimism, Arbitrum, these are all, uh, tools which different depths are migrating to because the fees on Ethereum Layer One have become too high to work with. And that's breaking the composability which allows you to use these different Lego blocks together. And so what we've done with Sovereign is we've built a system which provides you with effectively a vertical integration, kind of like the, the, the, the Mac or the Apple of, of D-Fire, right? It just works, the lending just works with the trading, just works with the swaps, et cetera. And the other advantage that this has is that now you don't need to do liquidity mining and a different token for every single service and start creating this, this ecosystem

• 44:54Speaker 01

  of never-ending sort of token upon token upon token upon token whose value sort of becomes this Ponzi-like scheme.

• 45:03Anthony Pompliano?

  When you think through, um, kind of 10 years from now, right? So kind of the future product suite of sovereign and the decentralized infrastructure around Bitcoin. Is this something where we can maybe sharpshoot and improve on certain financial applications? Or is this a complete rebuilding of the system where, uh, literally financial institutions in the legacy world will have to embrace and start to play in this world? Or they literally will be disrupted and left behind? Like, is this an alternative system and the legacy system persists? Uh, or is this full on disruption where, uh, if you do not embrace the new system, then, uh, you basically are rendered, uh, valueless?

• 45:46Speaker 01

  I mean, the other day, someone asked me, someone, it was a government organization, but they asked me to send them a fax. So, uh, old technologies never quite die, just like shitcoin chains never quite die, right? Um, I don't think we're going to see the financial system that we're familiar with completely disappear. I don't think we're going to see fiat currencies completely disappear. But I think they're going to have to learn to adapt to an environment where they're no longer the center of gravity. And, um, and I think that what happens when you introduce permissionless innovation into any industry is that, uh, it starts off slowly and then you hit an inflection point and suddenly

• 46:31Speaker 01

  everything changes, right? Suddenly retail disappears, suddenly, uh, uh, you know, um, television, like no, people don't have like television antennas anymore, they have Netflix. It happens like very, very quickly. A blockbuster goes bankrupt quickly, right? So what I think we're going to do, um, what I think we're seeing happen now is that Bitcoin is reconfiguring the way currency goes, the way central banks do. They're all now trying to figure out how do they get in? How do they create their central bank digital currencies, right? And I think what's going to happen next is as we introduce that same kind of permissions,

• 47:15Speaker 01

  innovation to finance, we're going to see at the beginning, nothing. And then suddenly, all of the banks, all of the financial institutions, all of the insurance companies will have to scramble to figure out how they now fit into a new ecosystem, which, which doesn't look anything like the ecosystem that they effectively created.

• 47:33Anthony Pompliano?

  When you think through that world, talk a little bit about synthetic assets and kind of their importance in the ecosystem. Is that something that is sustainable? Kind of how you see that synthetic asset vertical playing out?

• 47:48Speaker 01

  Right. I think, you know, there are two roles for synthetic assets. One is to act as sort of like a derivative. So let's say you want to take a long position on oil or Bitcoin, it doesn't matter. You can create a token or representation of, you know, which, which goes up with 2X and down 2X in volume of Bitcoin, that's a derivative, right?

• 48:14Speaker 01

  The second type of synthetic is there are a huge number of assets, the vast majority of assets, they are not represented sort of natively on any blockchain. And so people who want to trade Tesla shares, you can't trade Tesla, you have to, you know, and you don't want to do it on the NASDAQ, you want to do it on FTX, so you want to do it on decentralized exchange, you need a synthetic representation of Tesla share. So I think the first form, right, the, the, these derivatives, they're always going to be there, they're sustainable. The synthetic versions, I suspect that over time, just because it's the most secure, most public, most available way of representing any type of financial asset, what we're going

• 48:58Speaker 01

  to see is we're going to ultimately see all types of equity, all types of bonds, debt instruments, where all migrates to be natively blockchain, you know, represented on the blockchain.

• 49:10Anthony Pompliano?

  There's folks who are asking, and for those who are watching live, go ahead and if you leave comments in the chat, I'm monitoring them and I'm trying to weave some of those questions in here. There's folks asking on the lending side, how do the rates on something that is decentralized like Sovereign compare to the centralized kind of peers? So is it higher, lower, the same? How does that work?

• 49:30Speaker 01

  Right. Truth is, we don't quite know yet because the volumes on Sovereign right now are quite limited. Due to our strong emphasis on security, so we've been live since September, but we're only slowly adding the ability for more people to join and for larger and larger transaction sizes. So right now, the amount being earned by people lending out Bitcoin is quite low. I think it's about 2.3%. What we expect will happen is that as it opens up, basically, you know, the barriers to entry or diminish, it will probably start migrating towards being the same

• 50:13Speaker 01

  market rates as any other venue. With one difference, so if you look at like the big players in the Bitcoin lending space today, I think, you know, you're looking at BlockFi, you're looking at Nexo, you're looking at Celsius, there's one thing that they can do to sort of juice their rates, which Sovereign will never be able to do. So some of the biggest borrowers on BlockFi or Nexo or Celsius are institutional borrowers who are borrowing for carry trade or market making or arbitrage. What they do is they borrow without putting down collateral, or putting down relatively small amounts of collateral. In other words, they come to Celsius,

• 50:56Speaker 01

  or they come to BlockFi as a financial institution, and they say, "Look, we have a credit score, we have a reputation, right? So lend us the Bitcoin and we will pay you back." Whereas, in a decentralized system, you can't do that. You have to have, you can't have fractional reserve, right? Because that is basically a fractional reserve system. You can't have fractional reserve in a decentralized blockchain basis. And so it may be that centralized services will always have somewhat, I mean, it'll be arbitrage as well, but they may always have somewhat higher rates that they can pay lenders. And I, I think of that sort of amount that we may be foregoing as sort of the price of freedom, and I think it's something that we pay.

• 51:37Anthony Pompliano?

  There's questions about the oracle problem, specifically kind of third-party versus first-party. How do you see oracles playing into this? How important are they? And any thoughts on first, first, third-party?

• 51:51Speaker 01

  Yeah, so with sovereign, we use oracles and we use oracles to get exogenous prices into the system. In other words, the prices that are happening in the rest of the world. So that prices reflected in sovereign are more, more robust.

• 52:09Speaker 01

  You, any, any sort of central point in, in a system is a potential vector of attack or weakness. And oracles can potentially be centralized. So the decision that we made was to have multiple decentralized oracle systems feeding us information all the time. And what we, what, what the sovereign system does is it, it takes this information from the money and chain oracles, the chain link articles, and it compares them. And if there's a divergence in these prices, it, it can halt trading automatically. In other words, the protocol itself can pause trading until the prices realign.

• 52:52Speaker 01

  So it's not a perfect system because you're still relying on, on other parties and third parties to provide information. And because the system can end up being halted. So far, we haven't had that happen.

• 53:06Speaker 01

  But it is quite a robust system because there really is no central provider of data to the system. Anyone who permissions, they can come and sort of acting as a provider of, of data to the system without pricing or anything.

• 53:22Anthony Pompliano?

  Got it. What's the part that is the most difficult, do you think, as you build kind of more decentralized infrastructure on Bitcoin? Is there one specific product or one part of what would be considered traditional financial products that you think is more difficult than everything else?

• 53:34Speaker 01

  Yes, there's one non-traditional part that is very difficult and is at the center of everything and where we put a lot of concentration, which is making sure that, that, hey, now is it, when you're using your Bitcoin on the system, that it is, that you can use it trustlessly on the system. Because these are not transactions that are occurring on Bitcoin main chain. Which means that you need to kind of, hey, you, you lock up your Bitcoin on the main chain and now you begin transacting on it in a different shape. So having a truly trustless pay. Is a technical challenge, which

• 54:09Speaker 01

  we're not 100% there, so you are, you're not using, you don't have the same kind of security insurances that you have with Bitcoin. You have lower security insurances.

• 54:20Speaker 01

  And that's something which is being proved on all the time.

• 54:25Speaker 01

  With regards to the other question that you asked, there's also another really simple thing that you can't do in a decentralized exchange, which is like simple everywhere else, but extremely exotic on DeFi, right? And that's just having a way for people to take cash directly, you know, like money in your bank account or money you wanted and use it on the exchange. They always need to find some kind of gateway right now. And so interestingly, it's like the basic things, the simple things, really on the off ramps, which are the biggest challenges where we've been spending some, like probably most of our time.

• 55:03Anthony Pompliano?

  Before I dig into a bunch of these questions that people have, where can people go if they want to learn more about Sovereign, if they want to use their products?

• 55:13Speaker 01

  So the Sovereign website is sovereign.app, spelled S-O-V-R-Y-N.app.

• 55:21Speaker 01

  And it's, if you go into the Library of Dior, right? The Library of Do Your Own Research on the website, you can find a wealth of information. You can also try out the system. So right now, you'd need to wait to get whitelisted to use the live system, but you can try it out on testnet, so test.sovereign.app. And if you just want to keep updated, you can, you can follow the Sovereign community, sort of like a whole bunch of people are tweeting through the same account at sovereignbpc.

• 55:57Anthony Pompliano?

  And so there's a bunch of questions about the token involved. Everyone from why do you need a token to will the token eventually be traded on centralized exchanges like finance? And how you feel about that? Maybe just talk a little bit about the token and kind of, you know, what the logic and structure of it is. And then also kind of your thoughts on how that will be treated by the rest of the community.

• 56:22Speaker 01

  Yeah, so I think that the idea behind the token is extremely simple. The token is not an altcoin. It's not trying to be a coin at all.

• 56:32Speaker 01

  The token, which is SOV, is designed to do something extremely simple, which was invented hundreds of years ago. It's basically a way of coordinating the efforts of a large number of people by having them have the ability to vote on the system and to earn the revenues on the system. So in that way, it's kind of like decentralized equity in a way, right?

• 57:00Speaker 01

  The difference is that you have to be an active participant in order to earn the revenue, which you have to actually participate in the governance. And it's not that your claim on the on the system is not endorsed or protected by any court of law anywhere. You know, right? If you if you buy shares in Tesla, Tesla have to behave in a certain way and pay you, you know, if they're going to pay a dividend, give you your right to vote, right to vote. Because otherwise you can sue them. There's no one to sue the sovereign. But at the same time, you don't have to sue anyone because the system is governed by the code with which it's written

• 57:45Speaker 01

  and and effectively is secured by the Bitcoin chain itself. So it can't it can't do arbitrary things. It can't it can't change its mind about how it's going to treat you as a customer.

• 58:00Anthony Pompliano?

  So I see a bunch of people being incredibly kind in the comments, young investor, a few others. If you're watching this live, go ahead and smash the thumbs up. Yes, that does help more people on YouTube watch it. And if you share it on Twitter and tag me or Iago, we would greatly appreciate it. Yeah, one other thing that I find really fascinating about all of this is it appears that decentralized financial system to some degree is having structural issues, right? From just a performance standpoint and central banks and all the officials have to keep stepping in and kind of intervening. But also there's a sentiment change and that sentiment change is more psychological than anything.

• 58:44Anthony Pompliano?

  We saw that with obviously the GameStop and Wall Street Bets. But there's been this kind of underlying sentiment for a number of years now. How much of that is a tailwind for what you're building and for Bitcoin in general? Versus do you think that these technologies would be successful even if that sentiment change wasn't occurring?

• 59:08Speaker 01

  That's a great question. I, I think that these technologies would be valuable regardless. Right? I mean, when I first got interested in Bitcoin, I had no idea that there would be a Wall Street Bets, GameStop, anything. Right?

• 59:25Speaker 01

  But what I did recognize was that

• 59:31Speaker 01

  we, we give governments a huge amount of power, give them the monopoly of violence, give them the monopoly over creating the currency that we use to store and represent all of the effort that we put in, in our work.

• 59:46Speaker 01

  And, and maybe have time and time again acted irresponsibly. Now, a lot of people, I maybe am sort of lucky, right? So to speak that I got to experience this first hand in a country that felt like it was a developed country. A lot of people who have grown up in Europe or in the United States, they haven't experienced this in this generation. And so maybe they think it can't happen in the United States or, you know, in Germany. But not that long ago, in the nineteen thirty six, the United States confiscated everyone's gold. In nineteen thirty six, Germany was going through hyperinflation.

• 1:00:28Speaker 01

  This is not an unusual occurrence. It is unusual to go through periods where these things do not happen, where fear is involved. So, to my mind, having a technology which provides an insurance policy against that was always going to be valuable. And we would always at some point reach the point where the game of just printing was going to come to its natural end. And that feels very much like that's where we are now, unfortunately, in the advanced economies of the world, because that's a dangerous time to be alive.

• 1:01:10Speaker 01

  And it's really important that we have a solid alternative.

• 1:01:18Anthony Pompliano?

  I tend to completely agree. I'm going to wrap us up here in a second. But one other question that I've seen a couple of people ask is just in terms of how they can help, right? So obviously, using the product is one thing. If there's developers out there that want to work with you, but some of them are another. But just maybe talk through a little bit, as much people watching, as much people who watch this afterwards, what can they do to help you and your team be more successful and continue to kind of push forward the decentralized infrastructure around Bitcoin?

• 1:01:51Speaker 01

  Right. So it's all really is a community effort. And we have people joining us in one way or another all the time. It's really easy if you're a developer, especially if you have experience with Bitcoin or smart contracts.

• 1:02:04Speaker 01

  But even if you're not a developer, we, you know, there are people who are creating sovereign art. You can see some of it like behind me. Like, these are, these are different people have created different sort of like superhero batteries. And you can test the system, right? We have, we have, we have an extremely enthusiastic, we don't have any people who are doing QA, right? We have a community that we say, look, here's a new feature, go test it. And a day later, we have a hundred complaints, which is exactly what we want, right? So you can test out the system. You can tell your friends and give them the gift of sovereignty. Let them know that it's now possible.

• 1:02:44Speaker 01

  And, and I think the easiest thing is to just join our Discord. You can find the link on the website at sofern.app. And, and, and go into the bounty channel, go into the, the user feedback channel. See what people are talking about. You can see the devs talking about all the work they're doing in real time. And just jump in.

• 1:03:04Anthony Pompliano?

  I love it. Before I let you go, any words of encouragement or any thoughts on Bitcoin in general? In terms of all of the, the adoption, the recent news, Elon Musk and Tesla, Michael Saylor, Michael Strategy? Just any kind of things that are not sovereign related, but Bitcoin related?

• 1:03:27Speaker 01

  I always knew this was going to happen and I'm still shocked that it actually is.

• 1:03:33Anthony Pompliano?

  I'm right there with you. I, I said to somebody the other day, it's, the two things that I know to be true are, one, there's a foregone conclusion that you, myself and many others have in our heads. But every milestone along the way is just kind of, you take a step back and breathe. You're like, oh my God. And then the second thing is that every Bitcoiner I know wants the price to stay as low as possible for as long as possible.

• 1:04:01Speaker 01

  It's so true. Every time the price goes up, I feel such pain.

• 1:04:05Anthony Pompliano?

  It uh I continue to tell people that ultimately the price will not matter, right? Because things will just be priced in in satoshis and and bitcoin, I think. But on the way up is exhilarating. It is fun. It is this kind of adrenaline. But every bitcoiner kind of deep down, they they do not want to see the price go up. In fact, they want it to stay as low as possible for as long as possible. So I think it's it's pretty funny that those two things happen.

• 1:04:34Speaker 01

  Cool. Yeah, completely agree. Listen, it's been absolutely amazing being on this on this call with you and being able to talk to you about these things. Check out Sopra.

• 1:04:47Anthony Pompliano?

  All right. Listen, thank you so much for taking the time to do this. I think people will really enjoy it and I'll have to again in the future.

• 1:04:53Speaker 01

  Awesome. Cheers, man.