This is an opinion editorial by Nikita Chashchinskii, a software developer working on BIP300 sidechains.
Drivechain as defined in BIP300 and BIP301 offers a new vision for Bitcoin, in which the following problems are solved:
- It offers an alternative to our existing contentious and political process for changing Bitcoin. “Layer 1” rules never have to change, and new features are instead introduced by adding opt-in sidechains.
- It removes all reasonable arguments in favor of Bitcoin’s competitors by copying any 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 be “money.”
- It provides a feasible way to generate enough transaction fees to support the Bitcoin security budget. This is especially important, since the block subsidy will inevitably fall due to halvening over the years, and the existing alternatives for funding the security budget are highly problematic: introducing tail emission removes the 21 million BTC limit via a hard fork, switching to proof of stake requires a substantial technical overhaul of Bitcoin and a hard fork, tying fee amounts to transaction values opens Bitcoin to competition from altcoins and fiat payment systems offering lower fees.
All of this is achieved by a soft fork that enables sidechains with three important properties:
- Mainchain nodes only validate a small, simple and fixed set of BIP300 and BIP301 rules, and all of the sidechain rules are validated by a completely separate piece of software that can be safely ignored if you don’t care about that sidechain.
- Sidechains don’t need to create a new asset, BTC can be deposited into a sidechain and then withdrawn back to mainchain at a one-to-one exchange rate, so unlike altcoins, they don’t fragment the network effect and don’t compete with BTC.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 of the sidechain transaction fees go into Bitcoin’s security budget, instead of going into the security budget of a competing altcoin.
Bitcoin would have a portfolio of these sidechains. Whether or not a sidechain is included in this portfolio would be determined by its potential for generating transaction fees. That 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’s development would be decided by Bitcoin users’ revealed preference. This economic decision-making process could replace the existing political decision-making process of deliberation within the community.
Some sidechains would be built from scratch, introducing new functionality that wasn’t implemented well by any altcoin yet. And some worthwhile altcoins would be converted into sidechains, with 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 the exact same functionality as the original altcoin.
So, by adopting BIP300, it would be possible to:
- Expand Bitcoin’s functionality with opt-in sidechains, without ever changing the mainchain.
- Convert any useful competing altcoin into a sidechain that is strictly superior to the original altcoin, which would lead to Bitcoin eventually absorbing that altcoin’s market share.
- Support Bitcoin’s security budget after the block subsidy is gone, without tail emission or other problematic alternatives, by collecting all the transaction fees from our portfolio of useful sidechains.
Most likely, a high transaction throughput sidechain will be added, and it will generate an amount of transaction fees proportional to the extent of Bitcoin’s adoption.
Can Sidechains Generate Enough Transaction Fees To Sustain 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 can’t 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 (when adjusted for inflation) for a transaction.
So, to get a security budget in 2040 that is comparable to today’s security budget, either the bitcoin price will 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 have to increase substantially.
Let us estimate how many 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 around $250 per second (based on the block reward of a 6.25 BTC subsidy plus a 0.1 BTC total fee awarded every 10 minutes, and given the $23,600 BTC price). An average transaction fee as of July 20, 2022, is around $2, but let us be conservative and bump it down to $1. So, to match the current security budget with just the transaction fees, we will need 250 transactions per second (TPS for short).
For comparison, Visa processes around 1,700 TPS (based on the 150,000,000 transactions per day figure Visa provides here). We can match the existing security budget at 250 TPS, which is around 15% of Visa’s TPS.
With these back-of-the-envelope calculations, we have established that, given pretty reasonable assumptions of increased use and adoption of Bitcoin, it will be possible to match the existing security budget using sidechains even after the block subsidy is substantially reduced.
Bitcoin’s security budget would scale with user demand for processing Bitcoin transactions, which is not a bad thing, because the amount of capital deployed to deter a potential attacker would be proportional to the value of the Bitcoin network. If the network’s value will fall, this capital would be freed up for other uses. If the network’s value will rise, the network will command more capital for its defense against a 51% attack.
Possible Sidechains For Bitcoin’s Drivechain Portfolio
In conclusion, I will list some possible sidechains that are likely to be developed and included in the sidechain portfolio:
- A privacy sidechain (there already is a working zcash sidechain implementation, converted from the original zcash altcoin)
- A distributed DNS sidechain
- A digital assets/colored coins/NFTs sidechain
- A high transaction throughput sidechain, as already mentioned
- A prediction market sidechain
And, of course, any existing or future altcoin offering useful technology can be converted into a sidechain at a fairly modest development cost.
This is a guest post by Nikita Chashchinskii. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.