Is the future of Bitcoin dependent on sidechains? The DeFi community is currently divided between “yes” and “no” when it comes to this question after a six-year-old proposal resurfaced. Due to the advanced crypto language surrounding the controversy, we will first cover the basics and then delve deeper into the pros and cons of the proposal as well as potential solutions.
Before we discuss the specifics of BIP-300, it’s important to note that there are alternative methods of expanding Bitcoin’s utility that do not involve sidechains. Merged mining, for example, allows Bitcoin’s Proof-of-Work (PoW) to be shared with more chains at no additional cost. This not only makes economic sense but also creates a symbiotic relationship with Bitcoin rather than competing against it. For instance, one way to achieve this is by implementing alternative economics like EIP-1559 on the merge-mined chains to make transactions more cost-effective.
The Bitcoin Improvement Proposal in question is BIP-300, also known as Bitcoin Drivechains. Initially introduced in 2017, it essentially proposes the addition of specifically designed sidechains, named “Drivechains,” on top of the Bitcoin blockchain. A Bitcoin Drivechain would operate as a blockchain connected to the main Bitcoin network and use BTC as the primary currency.
It’s also important to consider miner incentivization. Merged mining essentially offers “free money” that miners can earn by engaging in an activity they are already involved in. This not only benefits the miners but also adds an extra layer of security and viability to the new chains that are merge-mined with Bitcoin.
One side views the proposal as a revolutionary step forward, while the other side argues that it could open the door to scams on the Bitcoin network and lead to increased regulatory scrutiny.
As the debate around BIP-300 continues, it’s essential to examine existing solutions that serve as proof of concept for the values we are promoting. After all, drivechains are not the only way to use Bitcoin’s PoW security for DeFi purposes. There are other layer-2 systems to expand Bitcoin’s use cases through immediate, secure, and scalable paths.
Nevertheless, why is the community concerned about adding more sidechains to Bitcoin? Isn’t that what the Ethereum ecosystem does on a regular basis?
The Limitations Of BIP-300
The main issue with BIP-300 lies in allowing trustless movement of BTC between the main network and Drivechains in a two-way peg (2WP). The hard truth of Bitcoin is that BTC on the main network can never truly leave the blockchain. The 2WP method creates an illusion of a transfer by locking the exact amount of BTC on the main network that’s “transferred” to a sidechain and then unlocking the equivalent token in the target chain. The same process works in reverse when BTC is “transferred” from a sidechain to the Bitcoin blockchain.
At this point, the limitations of BIP-300 become more visible, and it’s easier to understand the concerns of the Bitcoin community. Implementing the two-way peg between the main blockchain and a sidechain could potentially disrupt the economics and assumptions of Bitcoin.
Critics also argue that Drivechains could potentially contribute to an increase in Bitcoin-based scams, as each sidechain would have its own version of BTC. The recent years have shown that an increase in scam activity directly results in regulatory crackdowns. From a technical standpoint, BIP-300 would require a soft fork on the Bitcoin blockchain, adding another layer of complexity and potential points of failure to the equation.
Bitcoin Needs More Use Cases
While the concerns are valid, the reality is that Satoshi Nakamoto created Bitcoin as electronic money, not just a store of value. This is why we need ways to utilize BTC within the larger DeFi ecosystem, or else it would end up being too deflationary to be used for anything more than a store of value.
Therefore, the Bitcoin community needs a system that complements Bitcoin instead of competing with it by creating new alternatives. One such solution is building a blockchain merge-mined with Bitcoin. Merged mining allows miners to mine multiple blockchains simultaneously without incurring additional energy costs. A merge-mined blockchain can take advantage of this by inheriting a significant portion of Bitcoin’s hashrate that is steadily growing without imposing extra energy costs on miners.
For BTC holders, moving BTC around the network can quickly become expensive in gas fees. With a Bitcoin merge-mined blockchain, the fee required to conduct transactions or execute contracts could be significantly reduced using EIP-1559-based economics on the Ethereum network. As EIP-1559 removes the fee market mechanism, native tokens of such chains have the potential to present gas fees much cheaper for computation than spending BTC at each step.
It’s important to note that the foundation layer is just the beginning. To utilize Bitcoin in more use cases, any L1 blockchain would require an additional layer to “interact” with the users — a layer-2 where a wide range of decentralized apps and services can be developed. By establishing an L2 ecosystem where dApps powered by Bitcoin can thrive without the current limitations of sidechains, the doors would open for a much bigger user base in a secure and scalable manner. Ultimately, it’s not just about adding features to Bitcoin; it’s about enhancing 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.