21 Million Bitcoins to Rule all Sidechains: The Perpetual One-way Peg
Update: This concept is now known as “Spacechains” — see this video.
There currently is a glaringly huge incentive problem in blockchains. It is worth experimenting with new chains and technology, but in order to do so, each chain needs its own token. And whenever a token is involved, human greed inevitably takes over and even the most well-intentioned projects turn into marketing-driven price pumps. What I propose here instead, is a viable way to allow for new experimental chains to be linked to Bitcoin in such a way that speculation is largely taken out of the equation. The one caveat? It won’t be able to act as a store of value like Bitcoin.
Back in 2014, one area of exploration was the decentralized two-way pegged sidechain. If it were possible to trustlessly move coins from one chain to another, then Bitcoin’s 21 million coin limit could be used as a base upon which all experimentation takes place. This was once thought to be possible through the use of SPV proofs, but was quickly abandoned due to being insecure.¹ Perhaps in the future zero-knowledge proofs can reliably provide this functionality, but as of today, the closest thing we have are Drivechains (a somewhat controversial idea which relies heavily on miner incentives and UASF) or trusted federations (e.g. Liquid or Statechains).
This brings us to the one-way peg — burning bitcoins in order to receive tokens on another chain. Burning one bitcoin would be equal to receiving one token (preserving the 21M limit), and moving back would be impossible. Projects have done this in the past (e.g. Counterparty), but they only allowed burning for a limited period of time, after which speculation would still run rampant. What I propose here instead, is a perpetual one-way peg (P1WP), meaning users can move to other chains at any time they want.²
From a value perspective, the main thing to notice is that this makes BTC the superior speculative asset, since you always have the option to convert it. Anyone who thinks that one of these new P1WP sidechains might be better than Bitcoin, should therefore logically still prefer to hold BTC. This means speculating on the new asset is near-pointless³, and Bitcoin’s network effect is retained as new technology gets developed on top of these sidechains.
If a new sidechain does well, more and more people will want to burn their coins.⁴ If it doesn’t do well and dies off, it only affects those who were brave (or foolish) enough to use the sidechain. They will have burned their BTC for what is now effectively a worthless token. The key here is that in either scenario, Bitcoin holders are strictly positively affected, since their coins increase in value when others burn theirs.
But why would anyone be willing to burn their bitcoins? There can be only one reason: there is an immediate need to use that token to pay for transaction fees. The token essentially reflects the current demand for block space on the sidechain. You can think of Bitcoin as an orchard and the token as apples. You only buy apples when you are hungry (for block space), not because you think someone else will pay more for them next week. Apples are a bad store of value. If you want to invest in the future of apples, you invest in the orchard (Bitcoin).
The inability of moving back to the Bitcoin blockchain (other than trading with someone) essentially means the sidechain tokens will never be an appealing store of value, but every other use case becomes possible without needing to introduce yet another highly speculative token. Think colored coins with privacy features (enabling federated BTC two-way pegs), experimental smart contracts, DAOs, DeFi, or any of your other favorite buzzwords.
Ironically, the P1WP actually realizes a famously misleading marketing claim Ethereum made at launch: it’s just “gas” and not competing with Bitcoin as a store of value.⁵
While the P1WP can function on a sidechain with its own independent consensus algorithm, it makes a lot of sense to utilize Blind Merged Mining (BMM), since that’s another mechanism that synergistically ties it to Bitcoin.⁶ BMM essentially outsources the act of mining to the Bitcoin miners without requiring them to validate the BMM blocks. Anyone can create a BMM block and have miners include it in a block by paying them a regular Bitcoin fee. Since this transfers all the fees in the BMM block to miners, this increases the PoW security of the Bitcoin network.⁷ My fully functional design for bringing BMM to Bitcoin can be found here.
So there you have it. If your chain is not trying to be a store of value, you have no more excuse. You don’t need to issue a new speculative asset — all you need is the perpetual one-way peg.
¹ The general issue was that 51% of all miners could create a fake SPV proof and take all the coins, which would be particularly problematic if the sidechain has low security and stores many coins.
² Adam Back entertained the idea back in 2013. Note that a perpetual peg means that the parent chain needs to be continually validated in order to witness when new coins are created through the burning process. SPV proofs are also an option, but less secure.
³ If too many bitcoins are burned or demand drops, it’s possible for the token to become worth less than one bitcoin. Consequently, if demand picks back up, the token will go back to being worth one bitcoin. This is an event that can still be speculated on.
⁴ While extremely unlikely, it’s even possible that the new sidechain is so popular that everyone moves over, making this essentially an opt-in hard fork.
⁵ First finish reading this article, then see the picture below these footnotes.
⁶ There is a theoretical problem where the Bitcoin blockchain gets reorganized after a burn, causing unbacked token inflation. BMM makes this impossible, because a Bitcoin reorg would also mean the BMM chain gets reorganized.
⁷ This may prove to be crucial in light of the subsidy decreasing and the block space market needing to compensate and generate a higher fee income for miners.