Nitty Gritty: Sidechains and Altcoins Credit to Pantera Capital, these are my notes from reading, contains some quotes and paraphrasing. https://cdn.panteracapital.com/wp-content/uploads/Pantera-Bitcoin-Letter-November-2014-1.pdf
Subtle difference between sidechains and altcoins:
Sidechain units of account are do NOT depend on intrinsic valuation. Rather, they can be thought of as =“bitcoins-by-extension” (they extend as a side chain from some particular coin.
In this case, BTC side chains are very popular, but they are NOT considered altcoins, which are their own algo. This largely due to bitcoin making up over 90% of all cryptocurrency market cap.
Bitcoin merge mined sidechain, the units of account derived from that sidechain, instead of, can only be valued in terms of bitcoins. -- side chain "unit of account" is BTC
-- casino analogy (chips are the altcoin) -- miners can merge-mine, where reward is bitcoin-redeemable chips from casino -- chips can be cashed out (hence, BTC-redeemable)
SIDECHAINS & ALTCOINS:
Innovations on top of BTC: benefits of open source protocol!
"Altcoins that fail to match the security of the Bitcoin network will ultimately perish or be reformed as BTC sidechains.
We believe that, with the adoption of sidechains, altcoin market share of all digital currencies will decrease to NEAR ZERO!"
"Altcoins currently represent only 6% of all digital currencies’ market cap."
Pump and Dump: Sidechains less fraud prone
We believe, in a sidechain world, fraud that has been typically associated with weak altcoin networks and centralized altcoin exchanges will be largely reduced.
Sandboxed sidechains BTC sidechains will adopt the improvements that altcoin innovations bring to light. Moreover, sidechains better promote these features as a testing, development, and deployment environment that has a negligible risk of fraud compared today’s altcoin ecosystem.
DAYS DESTROYED “Bitcoin days destroyed” attempts to weigh bitcoins by how long they have been dormant; i.e. amount of time since the coins last participated in a transaction. More accurate indication of Bitcoin network activity by adjusting transaction volume for attempts to inflate it.
For example, 1 bitcoin hasn’t been spent in 10 days (1 bitcoin * 10 days), it counts as much as 10 bitcoins that were received and spent in a single day (10 bitcoins * 1 day). "Bitcoin-days" build up over time until a transaction involving those coins is carried out. Once transacted, "bitcoin-days” are said to be “destroyed".
Financial Markets in Bitcoin
"The meeting on Bitcoin derivatives was the single largest audience for a U.S. Commodity Futures Trading Commission event historically. One of the largest audiences ever for a .gov webcast with high Chinese and European viewership"
CFTC head: "Bitcoin protocol or something like it is very, very likely here to stay."
FT Bottom as Contrarian Indicator:
Sept 19th 2014 "We’re going to stick our neck out and call this the end of Bitcoin." Ooops. BTC price up ~5% since (as of Nov 12th) ftalphaville.ft.com/tag/bitcoinmania/
Why they so negative?
Bitcoin currency, according to the FT and BoE "in its CURRENT fixed supply form would expose the economy to significant deflationary risk if it was ever to be widely adopted by the public" BoE:
"…the inability of the money supply to vary in response to demand would likely cause welfare-destroying volatility in prices and real activity."
What about pegged sidechains? It appears to me that bitcoin is in fact NOT at all supply constrained, as it is extensible through branches 'sidechains'. Thus, bitcoin can be viewed as infinitely divisible.
"On the level of assets, we no longer have a simple “one chain, one asset” maxim; individual chains may support arbitrarily many assets, even ones that did not exist when the chain was first created. www.blockstream.com/sidechains.pdf
Furthermore, BoE negative view shaped by fact that large scale bitcoin adoption "would seriously limit [BoE] power to manage systemic risk". Well, duh, that's the point!
BoE does acknowledge that a distributed ledger holds tremendous value:
Perhaps "the existing infrastructure of the financial system to be gradually replaced by a variety of distributed systems"
ie. ‘Coloured coins’, using digital currencies as tokens for other assets.
"This development could allow any type of financial asset, for example shares in a company, to be recorded on a distributed ledger. Distributed ledger technology could also be applied to physical assets where no centralised register exists, such as gold or silver."
It's a distributed asset management infrastructure that leverages the Bitcoin network, allowing individuals and companies to issue various asset classes”
Colour coins should be called corporate coins!
Business and organizations will have to issue their own bitcoin gift cards (or bitcoin currency as token, or sidechain). BOOM $1 Billion idea ;)
Summary: bitcoin is a novel innovation, based on the establishment of a protocol -- heretofore undiscovered, that allowed peer-to-peer trustless currency. Bitcoin is a currency, a protocol and an invention.
Pegged sidechains enable BTC and other assets to be transferred be multiple blockchains. By leveraging the existing bitcoin network, sidechains can more easily interoperate with each other, potentially avoiding the liquidity shortages and market fluctuations associated with new currencies.
If cryptographic break or hack of a sidechain, the damage is entirely confined therein.
Bitcoin is driven by capital: human, technical, physical and financial. Dollar volume traded per day, total number of wallets, total mining activity data continue to trend positively, making all time highs QoQ.
In 1983 David Chaum introduced digital cash: trusted 3rd party (to prevent double spending), and "blind signatures". 1983! One year before I was born.
in 2009, Satoshi released the first widely used implementation of P2P trustless cash.
Proof of work is utilized in combination with economic incentive to mine coins.
Bitcoin’s blockheaders can be regarded as an example of a dynamic membership multi-party signature (or DMMS), which we consider to be of independent interest as a new type of group signature. (crypto breakthrough)
Bitcoin is the first form of this type, a signature based on series of hashes that has NOT appeared in the literature previously.
DMMS is digital signature, in the case of bitcoin its blockheaders are DMMS due to their proof of work design. Any can contribute to the network, anonymously, without risk of newcomers or malicious attackers controlling the network.
For this reason, the DMMS has also been described as a solution to the Byzantine Generals Problem.
What is bitcoin and the block chain: Moar Sidechains
Early adopters of bitcoin unanimously dismiss altchains in favour of sidechains. There are many valid reasons for this view, the folks at Blockstream advance this idea in recent paper, http://blockstream.com/sidechains.pdf. Much of their work appears below, heavy editted and re-org'ed in places, copy and paste and others, these are my reading notes.
Bitcoin’s objective is relatively simple: it is a blockchain supporting the transfer of a single native digital asset, which is not redeemable for anything else.
Nakamoto’s key innovation: DMMS as signature of computational power, rather than knowledge. The strength of Bitcoin’s network is directly proportional to total computational power contributed by all miners.
Because signers prove computational work, rather than proving secret knowledge as is typical for digital signatures, we refer to them as miners.
To achieve stable consensus on the blockchain history, economic incentives are provided: rewards like fees and subsidies in the form of coins are awarded to miners.
They are valuable only if the miners form a shared valid history, incentivising honest behaviour.
In practice, it makes it infeasible for malicious actors to create their own ledger. A computational minority were to try and revise the DMMS-secured ledger, they will fall behind, continually unable to catch up to the moving target of the progressing consensus blockchain. (51% attack...)
Sidechains allow for interoperable altchains, easily created and used, without unnecessary fragmentation of markets and development. This means that bitcoin, because of it's prime mover advantage, has already won.
Our proposed solution is to transfer assets by providing proofs of possession in the transferring transactions, avoiding the need for nodes to track the sending chain. On a high level, when moving assets from one blockchain to another, we create a transaction on the first blockchain locking the assets, then create a transaction on the second blockchain whose inputs contain a cryptographic proof that the lock was done correctly.
These inputs are tagged with an asset type, e.g. the genesis hash of its originating blockchain.
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Assets should be moved without counterparty risk; that is, there should be no ability for a dishonest party to prevent the transfer occurring.
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We use bitcoin as an example because its strong network effects make it likely that users will prefer it over other, newer assets. However, any altcoin can be adapted to be usable with sidechains.
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Transfers should be atomic, i.e. happen entirely or not at all. There should not be failure modes that result in loss or allow fraudulent creation of assets.
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Sidechains should be firewalled: a bug in one sidechain enabling creation (or theft) of assets in that chain should not result in creation or theft of assets on any other chain
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Blockchain reorganisations should be handled cleanly, even during transfers; any disruption should be localised to the sidechain on which it occurs. In general, sidechains should ideally be fully independent, with users providing any necessary data from other chains. Validators of a sidechain should only be required to track another chain if that is an explicit consensus rule of the sidechain itself.
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Users should not be required to track sidechains that they are not actively using.