What are sidechains and could they really make altcoins obsolete?

Prior to the Ethereum ICO of 2014, most early Bitcoiners were open to the idea of novel blockchain technologies. Even Satoshi Nakamoto, way back in 2010, took it for granted that an altcoin, BitDNS, would not only exist but would merge mine with Bitcoin’s hash rate.

During its early years, Bitcoiners anticipated that almost all public blockchain functions could integrate into the Bitcoin network in some way.

The community was tech-savvy and its cypherpunks, cryptographers, and computer developers could easily spot flaws in altcoins like the first Proof-of-Stake (PoS) altcoin, NXT. Dubious projects were quickly dismissed as irrelevant frivolities.

By 2015, Ethereum had raised some $18 million, promising attractive returns to investors who contributed BTC. In the words of Vitalik Buterin on March 6, 2014: “What we’re hoping is something like what happened with Mastercoin so… the value of Ether goes up by five [times].”

Many Bitcoiners like now-deceased billionaire Mircea Popescu lamented the get-rich-quick framing of altcoin promoters like Buterin. Some began believing that only Bitcoin mattered and Popescu began ridiculing all altcoins with religious fervor, fostering a Bitcoin subculture of toxicity.

Nevertheless, Ethereum survived and its price eventually far exceeded any of its founders’ original forecasts. Almost no one lost money investing in ETH.

By 2016, with Ethereum rallying, the culture of Bitcoin maximalism remained subdued. Indeed, it wasn’t until 2017 and the ICO bonanza that a sizable population of Bitcoiners began associating with maximalism.

According to a recounting by Jameson Lopp, “The use of the word ‘maximalist’ really came back into play during the scaling wars and 2017 ICO hype cycle. It seems that the use of ‘toxic maximalism’ as a descriptor really picked up mid-2018.”

Read more: Explained: Why bitcoin’s dominance is down this bear market

Soon enough, maximalists replaced the vision of Bitcoin becoming the base blockchain for myriad, alternative blockchains with a newer, far narrower mission: digital gold. Indeed, Digital Gold is the title of a book by one of Bitcoin’s most definitive historians, Nathaniel Popper.

As the pace of Bitcoin software upgrades slowed over the years and decision-making politicized, ambitious developers began building on non-Bitcoin blockchains.

Drivechain: New blockchains funded with BTC and secured by Bitcoin hash power

Taking the above as context, we can now envision the world in which LayerTwo Labs founder Paul Sztorc originally proposed Drivechain to the Bitcoin community.

In 2014, almost no Bitcoiner would have considered themselves a maximalist. Paul Sztorc was one such Bitcoiner. He bought his first bitcoin in 2011 and has actively contributed since 2014.

Subsequently, he formally proposed Bitcoin Improvement Proposals (BIPs) 300 and 301, bundling them together under the name Drivechain. He suggested Bitcoin reclaim its expansive power for platforming, mining, denominating, and securing alternative blockchains.

Sztorc saw that many Bitcoiners were interested in altcoins and rather than denounce and ridicule them, Drivechain would allow them to work on their code using Bitcoin’s network and the BTC asset.

Specifically, Sztorc envisioned a network of side-blockchains that merge mine with Bitcoin’s mining network and use BTC as their base asset. In essence, sidechains are alternative blockchains — complete with their own altcoins and market-determined values — that use BTC as their funding mechanism and Bitcoin mining for their security.

Non-custodial, peer-to-peer, two-way BTC peg

Right now, most Bitcoin sidechains like Liquid and Rootstock (RSK) are federated. Most have a couple of dozen parties who are de facto custodians of the sidechain’s BTC collateral.

Unlike federated sidechains, Drivechain retains most of Bitcoin’s decentralized, peer-to-peer, and permissionless features. Sztorc resisted the idea of introducing a federation because it relies on trusted third parties to hold assets.

The essence of Drivechain is more peer-to-peer. No federation controls the keys to the sidechain’s BTC. Instead, the entire Bitcoin mining network approves the creation of sidechains, secures sidechains’ proof-of-work (PoW) security, and allows sidechain participants to peg their sidechain value back into Bitcoin for BTC.

In order to protect the security of BTC from double-spending and other attacks, Sztorc proposes a six-month process for leaving a sidechain and settling into BTC with irreversible finality.

Blockstream CEO Adam Back has repeatedly endorsed Drivechain.

In Drivechain, BTC transfers from sidechains to Bitcoin’s base chain use conjecture and refutation instead of verifiable proof to confirm the transactions. In mathematics, conjecture describes a process by which problem-solvers can reach the correct answer through deductive reasoning. Refutation refers to a method by which deductive reasoning can be used to demonstrate whether an answer is correct or incorrect.

BIP 300: Hashrate escrows

BIP 300 describes Hashrate Escrows in which transactions from a sidechain to the main chain are ‘signed’ using hash power instead of a cryptographic key. Hashrate escrows enable a non-federated, peer-to-peer, two-way peg that allows users to transfer assets to the sidechain and then back to Bitcoin’s base chain. 

Many current sidechains use a one-way peg that allows asset transfers from the main chain to the sidechain, but not from the sidechain to the blockchain. A one-way peg effectively ‘burns’ the assets, rendering them unusable on the main chain.

It mentions the motivation to create sidechains in which developers can experiment with new features without creating another digital asset that competes with bitcoin. Hashrate escrows provide a method for compressing three to six months of transaction data into a 32-byte piece of data.

BIP 301: Blind merge mining

BIP 301 proposes blind merge mining, which enables mining data from sidechains without validating the sidechain’s operations.

  • With regular merge mining, miners must run a full node on all blockchains in order to validate each block.
  • In contrast, blind merge mining simply allows Bitcoin miners to accept a fee for including non-validated sidechain data within a Bitcoin block.
  • The sidechain uses this Bitcoin data for various proofs and attestations. However, Bitcoin miners need not validate any sidechain activity.

Blind merge mining allows miners to reuse their hash rate for sidechains without running any sidechain node. Bitcoin miners don’t need to participate in any sidechain activity whatsoever; they simply accept fees from sidechains to include data within Bitcoin blocks. Moreover, blind merge mining doesn’t require that miners be paid in any altcoin; they may only accept BTC.

Current state of Drivechain

A testnet for Drivechain already exists — complete with a Bitcoin version of zCash as a Drivechain sidechain.

Nearly a decade since his original proposal, Sztorc remains a Drivechain evangelist. He’s continued to present Drivechain at conferences and has a new company called LayerTwo Labs, which seeks the adoption of Drivechain with a consensus approval of BIPs 300 and 301 into Bitcoin Core.

Sztorc says Drivechain could have avoided various conflicts throughout Bitcoin’s history. Instead of contentious hard forks like BCH, these forks could have existed as their own sidechain, accruing value to the whole community while allowing independent development.

Drivechain solves the feuds between Bitcoin maximalists and altcoin-curious Bitcoiners by creating a BTC-denominated platform to experiment with new altcoins without forcing the main Bitcoin network to do anything.

Disagreements can lead to the creation of a new sidechain to work on an experimental feature. Users can simply transfer their assets back to the Bitcoin network when they’re done interacting with the sidechain.

In an email to Protos, Sztorc concluded, “Throughout Bitcoin’s history, people have disagreed over what the software should do. Drivechain allows the end user to choose their own software — they can set their own ‘blocksize,’ or their own smart contract stack. Bitcoin can now mimic any altcoin — thus, altcoins are obsolete.

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