The most important thing for non technical users to understand about sidechains
Sidechains are some of the most interesting technical proposals in the blockchain space. A sidechain allows you to use a blockchain’s token as the underlying asset for another blockchain. An example of this could be using bitcoin as the underlying asset for big block version of bitcoin. This means we do not need to reboot the network effect of money for this new blockchain — we can also avoid the scammy behavior that goes along with creating a new token. As Paul Sztorc says, they are anti scam technology.
There have been various proposals for sidechains — and all have different security models. The most important question to ask when evaluating a sidechain’s proposal is ‘Who is the custodian of the bitcoin while I am transacting on the sidechain?’
The old adage in bitcoin is ‘if you don’t control the keys, you don’t control the coins’. This applies with sidechains as well. I’m going to write about what the custodial models are various sidechain proposals I am aware of
Federated Pegs
A federated peg is just a fancy word for a m of n multisignature contract on the bitcoin blockchain. Blockstream’s Liquid product is the most famous federated peg. Blockstream is creating a consortium of exchanges to operate as functionaries. If there is 7 exchanges in the consortium, you need 5 of 7 of those exchanges to sign a bitcoin transaction to withdraw from the federated sidechain. Therefore 5 of the 7 exchanges act as a custodian for the entire backing of the sidechain.
SPV Pegs
This was the idea behind the original sidechain’s whitepaper. The idea was the sidechain’s funds are locked in an output with a new op code called OP_WITHDRAWPROOFVERIFY. You need to provide an SPV proof to this op code to get it to unlock funds from the sidechain’s reserve. This means anyone that hash enough hash power could fabricate a spv proof to unlock these funds. Therefore miners end up being the custodians of the bitcoin, as they have the power to fabricate these SPV proofs, and the power to censor OP_REORGPROOFVERIFY — an opcode designed to prevent fabrication of spv proofs — from the blockchain.
Drivechains
Drivechains are designed to be up forthcoming with the fact that miner’s are the custodians. With drivechains every block bitcoin miners vote on the validity of the withdrawals from a sidechain. I.e. upvote if you think the withdrawal is valid, downvote if you believe the withdrawal from a sidechain is invalid. Currently the drivechain BIP allows each drivechain to pick what this threshold is. I.e. maybe you want 90% of miners upvoting, maybe only 50%. It is a very tricky number to pick as you give a lot of power to minority miners the higher the percentage is — i.e. only 10% of the hash rate can block withdrawals — but if the number isn’t large enough — say 50% — that means 50% of the hash rate can steal the backing.
Mainstake
Proof of Mainstake is an attempt to solve the ‘miners as custodians’ problem. The goal is to use a Proof of Stake like system (minus the bad parts hopefully) to be the custodians of the sidechain backing. That means you have to put your bitcoins at stake — you can’t send them to an exchange if you try and steal the sidechain backing — to be able to mine the sidechain. You could argue that stakers are miners — they are just miners of the sidechain and not bitcoin. This means if they do something to hurt the price of bitcoin they suffer as well since they cannot sell their coins — they are frozen on the bitcoin blockchain along with all of the sidechain user’s coins. This means they feel the economic effects of bitcoin price going down along with the users of the sidechain. Since the requirements to be a mainstaker is just bitcoin— you can think of everyone that owns bitcoin as the custodian of the sidechain. This also provides a way for bitcoin user’s to generate revenue if they just HODL.
