This is an opinion piece by Nikita Chashchinskii, a software developer working on BIP300 sidechains.
The chain of transmission as defined in BIP300 and BIP301 offers a new vision for Bitcoin, in which the following issues are resolved:
- It offers an alternative to our existing contentious and political process for changing Bitcoin. The “Layer 1” rules never have to change, and new features are introduced instead by adding opt-in sidechains.
- It removes all reasonable arguments in favor of bitcoin’s competitors by copying all the useful features they might have, likely turning bitcoin into a monopoly in the cryptocurrency market, which is very helpful for an asset that aspires to to be “money”.
- It provides a workable way to generate enough transaction fees to support the Bitcoin security budget. This is particularly important, as the block grant will inevitably decrease due to halving over the years, and the existing alternatives for funding the security budget are highly problematic: the introduction of tail emission removes the limit from 21 million BTC via a hard fork, moving to proof of requires a substantial technical overhaul of Bitcoin and a hard fork, tying fee amounts to transaction values opens up Bitcoin to competition from altcoins and fiat payment systems offering lower fees.
This is all achieved by a soft fork that allows sidechains with three important properties:
- Mainchain nodes only validate a small, simple, fixed set of BIP300 and BIP301 rules, and all sidechain rules are validated by completely separate software that can be safely ignored if you don’t care. of this side chain.
- Sidechains don’t need to create a new asset, BTC can be deposited into a sidechain and then withdrawn to the mainchain at a one-to-one exchange rate, so unlike altcoins they don’t fragment the network effect and don’t. compete with BTC.
- Sidechains are secured by the existing Bitcoin hash rate and all sidechain transaction fees go into Bitcoin’s security budget, instead of going into the security budget of a competing altcoin.
Bitcoin would have a wallet of these sidechains. Whether or not a sidechain is included in this portfolio would be determined by its potential to generate transaction fees. This would happen because miners, being reasonably rational and self-interested agents, will only activate sidechains that maximize their profits. So, ultimately, the direction of Bitcoin development would be decided by the revealed preference of Bitcoin users. This economic decision-making process could replace the existing political decision-making process of community deliberation.
Some sidechains would be built from scratch, introducing new features that were not yet well implemented by any altcoin. And some interesting altcoins would be converted into sidechains, the sidechain version being strictly superior to the original altcoin, because it would inherit bitcoin’s larger network effect, larger security budget, and it would have exactly the same functionality as the original altcoin.
Thus, by adopting BIP300, it would be possible to:
- Expand the functionality of Bitcoin with opt-in sidechains, without ever changing the main chain.
- Convert any useful competing altcoin to a strictly superior sidechain to the original altcoin, which would lead to Bitcoin eventually absorbing that altcoin’s market share.
- Support Bitcoin’s security budget after the block grant ends, without tail issuance or other problematic alternatives, by collecting all transaction fees from our helpful sidechain wallet.
Most likely, a high transaction throughput side chain will be added, and it will generate an amount of transaction fees commensurate with the extent of Bitcoin adoption.
Can sidechains generate enough transaction fees to support Bitcoin?
As of this writing, the block subsidy is 6.25 BTC (at around $23,600/BTC) and it will drop to 0.390625 BTC (a drop of around 94%) by 2040. We don’t cannot expect users to be willing to pay transaction fees that are much higher than they are today, and in 2040 users are still very unlikely to pay much more than 1 $ or $2 (after adjusting for inflation) for a transaction.
So, to get a security budget in 2040 comparable to today’s security budget, either the price of bitcoin would have to rise to around $350,000 (which would also make the bitcoin network a 15 times more valuable target to attack) or the number of transactions will need to increase substantially.
Let’s estimate the number of transactions on a high throughput sidechain it would take to match the existing security budget. As of July 20, 2022, the Bitcoin security budget is approximately $250 per second (based on the block reward of a grant of 6.25 BTC plus a total fee of 0.1 BTC awarded every 10 minutes, and account given the price of $23,600 BTC). The average transaction fee as of July 20, 2022 is around $2, but let’s be on the safe side and lower it to $1. So, to match the current security budget with only transaction fees, we will need 250 transactions per second (TPS for short).
For comparison, Visa processes about 1,700 TPS (based on the 150,000,000 transactions per day provided by Visa here). We can match the existing security budget at 250 TPS, or about 15% of Visa’s TPS.
Currently, Bitcoin’s TPS is technically capped at around 5, but arbitrarily large transaction throughput is achievable without altering the mainchain in any way beyond adopting BIP300 and BIP301.
With these bottom-of-the-envelope calculations, we’ve established that, given fairly reasonable assumptions of increased Bitcoin usage and adoption, it will be possible to match the existing security budget using sidechains even after that the global grant will have been considerably reduced.
Bitcoin’s security budget would scale with user demand for processing Bitcoin transactions, which is not a bad thing, as the amount of capital deployed to deter a potential attacker would be proportional to the value of the Bitcoin network. If the value of the network were to drop, this capital would be freed up for other uses. If the value of the network increases, the network will command more capital for its defense against a 51% attack.
Possible Sidechains for the Bitcoin Drivechain Wallet
In conclusion, I will list some possible sidechains that are likely to be developed and included in the sidechain wallet:
- A privacy sidechain (there is already a working zcash sidechain implementation, converted from the original zcash altcoin)
- A distributed DNS sidechain
- A digital assets/colored coins/NFT sidechain
- A sidechain with high transaction throughput, as already mentioned
- A prediction market side chain
And, of course, any existing or future altcoin that offers useful technology can be converted into a sidechain at a fairly modest development cost.
This is a guest post by Nikita Chashchinskii. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.