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Does bitcoin need sidechains for its future? Today, the DeFi community is divided between “yes” and “no” in response to this question following the re-emergence of a six-year-old proposal. Since the controversy around sidechains involves advanced cryptographic language, let’s cover the basics first and then take a deeper look at the pros and cons of the proposal, as well as possible solutions.
Before delving into the details of BIP-300, it is worth mentioning that there are alternative approaches to expanding bitcoin‘s utility that do not involve sidechains. One such approach is merge mining, which allows bitcoin proof-of-work (PoW) to be shared with more chains at no additional cost. This is not only economically viable but also creates a symbiotic relationship with bitcoin rather than competing against it. For example, one way to achieve this is to employ alternative economies like EIP-1559 in the merged chains, making transactions more profitable.
The bitcoin improvement proposal in question is the BIP-300, commonly known as bitcoin Drivechains. Originally introduced in 2017, it basically proposes adding purpose-built sidechains, called “Drivechains,” on top of the bitcoin blockchain. A bitcoin Drivechain would function as a blockchain connected to the bitcoin mainnet and use btc as the primary currency.
Another point to consider is the incentive of miners. Merged mining essentially offers “free money” that miners can earn by doing something they are already involved in. This not only benefits miners but also adds an extra layer of security and viability to new chains merging with bitcoin.
One side sees the proposal as a revolutionary step forward, while the other argues that it could open the door to scams on the bitcoin network while also leading to greater scrutiny from regulators.
As the debate over BIP-300 continues, it is essential to analyze existing solutions that serve as proof of concept for the values we are promoting. After all, broadcast chains are surely not the only way to use bitcoin‘s PoW security for DeFi reasons. Other layer 2 systems exist to expand bitcoin use cases through immediate, secure and scalable paths.
But then again, why is the community concerned about adding more sidechains to bitcoin? Isn’t that what the ethereum ecosystem does every Tuesday?
Limitations of BIP-300
The main problem is that the BIP-300 allows the trustless movement of btc between the mainnet and these Drivechains on a two-way peg (2WP). The hard truth about bitcoin is that btc on the mainnet will never be able to truly leave the blockchain. Instead, the 2WP method creates the illusion of a transfer by locking the exact amount of btc on the mainnet that is “transferred” to a sidechain and then unlocking the equivalent token on the destination chain. The same process works in reverse when btc is “transferred” from a sidechain to the bitcoin blockchain.
At this point, it is easier to see the limitations of the BIP-300 and understand the concerns of the bitcoin community. For starters, implementing two-way pegging between the main blockchain and a sidechain could completely alter the economics and assumptions of bitcoin.
Critics also argue that Drivechains could cause a rise in bitcoin-based scams, as each sidechain would have its own version of btc. And, as recent years have shown us, the increase in fraudulent activity translates directly into regulatory crackdowns. From a technical standpoint, BIP-300 would also require a soft fork on the bitcoin blockchain, adding another layer of complexity along with potential points of failure to the equation.
bitcoin needs more use cases
While the concerns have valid points, it is also a reality that Satoshi Nakamoto has created bitcoin as electronic money, not as a store of value. That’s why we need ways to use btc within the broader DeFi ecosystem, or it would end up being too deflationary to really use it for anything other than a store of value.
So the bitcoin community needs a system that complements bitcoin instead of competing with it by trying to create new alternatives. One such solution is to build a merge-mined bitcoin blockchain. Merged mining allows miners to mine multiple blockchains simultaneously without incurring additional energy costs. A merged blockchain can take advantage of this by inheriting a significant portion of the steadily growing bitcoin hashrate without imposing additional energy costs on miners.
For btc hodlers, moving btc around the network can quickly become costly in gas fees. With a merged bitcoin blockchain, the fee required to make transactions or execute contracts could be reduced on the ethereum network with an EIP-1559-based economy. As EIP-1559 eliminates the fee market mechanism where the highest bidder is the first to process transactions, the native tokens of such chains have the potential to present incomparably cheaper gas fees for calculation than spending btc at each step .
It is important to remember that the base layer is just the beginning: to use bitcoin in more use cases, any L1 blockchain would require an additional layer to “interact” with users: a layer 2 where a wide range of applications and decentralized services. can be developed. Building an L2 ecosystem where bitcoin-powered dApps can thrive without the current limitations of sidechains would open the doors to a much larger user base in a secure and scalable way. In the end, it’s not just about adding features to bitcoin; It is about improving the entire blockchain ecosystem for the betterment of global society.
This is a guest post by Jagdeep Sidhu. The opinions expressed are entirely their own and do not necessarily reflect those of btc Inc or bitcoin Magazine.
