I’ve been exploring and studying the Bitcoin and crypto space for a number of years now. I was first drawn to Bitcoin for its technology and ideology, a digital rouge dark currency that couldn’t be controlled by any government. As someone who grew up in Argentina, and had seen the impact that inflation and crazy monetary policy had on society, I was instantly intrigued by it. Even though I don’t have a technical background, I have always been interested in new technology, back then I was also studying Philosophy at university. So Bitcoin literally ticked all my boxes.
Later I started diving into the Altcoin space, lured by the shinning promise of more innovation, specifically on privacy and more operability in the form of smart contracts. I remember in those early days the chatter used to be that all the useful things developed in this parallel Altcoin world would eventually come to Bitcoin.
Yet that has not happened, and more interestingly enough, the idea of having sidechains and “Layer 2” on Bitcoin is frowned upon by a loud (but I believe small) part of the community. I do not understand why this would be the case. Most “Bitcoin maximalists” claim that all you need is Bitcoin and that there is no value in other blockchains.
I do not share this point of view (though I do consider myself a Bitcoin maximalist), whether you think Smart Contracts, Stablecoins, NFTs are a good idea or not. The market is showing you that people want to explore the options these innovations can bring forth, and some use cases are emerging out of this experimentation phase.
The problem is, people need to go out of Bitcoin in order to interact with them. They need to buy other base layer protocols that sacrifice Bitcoins core principles, like the 21 million coin supply, decentralisation and security.
Most of the Altcoins have developed very loose monetary policy, and start to exhibit many of the problems inherent in our legacy institutions that we are trying to fix.
Yet they continue to drive users, investors and developers away from the Bitcoin ecosystem. So far our defence has been to tell them they are wrong, then we sit back and wait for their projects to crash. To a large degree this has not worked, with BTC losing in its dominance of the blockchain economy. Protocols like Ethereum are attracting the attention of most of the developers. And so much time has to be wasted for normal people to decide which asset is best to hold, as there are many competing narratives and no easy way to discern them.
I think this strategy Bitcoin has adopted is extremely counterproductive and shortsighted. Bitcoin is the most decentralised, neutral and unexploitable global ledger in the world. It should act as such, be the anchor that allows all the different protocols to operate and tie them to reality.
Sidechains and Drivechains make this happen. Popularised by Paul Sztorc, the idea is extremely simple, elegant and surprisingly effective.
Basically you can think of every Altcoin as a possible sidechain, so instead of having Ethereum, we would have a Bit-ETH chain (the name is made up as an example). This will behave just like the original Ethereum chain and developers could create the same types of applications. The main difference is, there will only be a maximum of 21 million Bit-ETH coins, and you can only get these coins by locking Bitcoins in the main layer, 1 Bit-ETH will always be worth 1 BTC, and anyone can exchange between them in a permission less way. So we could have a Bitcoin version of Ethereum, and any other chain like Monero (Bit-XMR), Stellar Lumens (Bit-XLM), and so on.
The key thing to note is that if you gather all the coins from all the sidechains chains and the Bitcoin main layer, you will still only have a maximum of 21 million coins, there would be no inflation whatsoever.
The key benefits of implementing this are:
-All the transaction fees get paid to the Bitcoin core miners, which could increase the security budget from 10x to 100 or 1000x. This makes mining more profitable, which attracts more mininers, which increases the security of the network.
-Users now only need to hold Bitcoin and they benefit from all the innovation and growth of all the chains combined. Which makes it easier to use (you only need one token) and makes BTC more valuable as a result.
-All the human power, creativity and ingenuity of developers is dedicated to bring value to the Bitcoin network. We can stop fighting amongst each other and unite under one flag.
-Increased utility and privacy of BTC. This can be done by having a sidechain that allows for Smart contracts, stablecoins, DEFI, NFTs and having other chains with the technology of Monero or Zcash.
-Essentially all altcoins would now be obsolete, as you would need to make a truly compelling case of why you are building away from the Bitcoin ecosystem. Anything built on other chains, could very easily be replicated on a BTC sidechain, which uses the largest and strongest computing network in the world.
-The Bitcoin network effect will increase, as it does, it will drive more people to use it, both as currency and a store of value.
-Increase bitcoin adoption. People who are not interested in Bitcoin but are instead buying NFTs will now be Bitcoin holders. In my personal experience there is nothing that will teach anyone the importance of sound money as owning some Bitcoins themselves.
To conclude, I think this is the best way for Bitcoin to move forward. At the moment most altcoin’s selling point is that their coin has some utility, feature or special gimmick that bitcoin does not have. Sidechains and Drivechains take care of that forever, building outside of Bitcoin would be ridiculous.
There are Testnets already running with this implementation and there are no issues with them. The main chain only needs to allow for users to peg in and out, there is no need for Bitcoin miners or nodes to know what is happening on the sidechains, and thus, no risk for the core chain whatsoever.
Once the digital economy gets unified under Bitcoin, and accepts the 21 million hard cap, a real open financial network can be enjoyed by the entire world.