BlueMeanie Blog. Cryptocurrency / Cryptofinance
BlueMeanie Blog. Cryptocurrency / Cryptofinance
So no doubt you’ve heard the news- Sidechains is the greatest thing since sliced bread. You’ve told investors you’re a Bitcoin expert so you are eager to blurt out pretty much anything in reference to Sidechains that sounds informed and convincing. If you’re like 95% of the people flooding the Twitterverse about Sidechains, you really have no idea what they are and what they are for. This article is for you.
TL DR; I’m a business person- can you tell me what Sidechains will do for me? Sidechains are a way of extending the basic functions of Bitcoin without interfering with the core technology. In the latest phase of cryptocurrency, Bitcoin had been somewhat overcast by the proliferations of Altchains- alternative block chains that are not directly connected to bitcoin, and the monetary units on these chains float against the price of Bitcoin. This was a threat to several parties, namely 1) mining interests 2) Bitcoin investors 3) and the promotion/development complexes funded and supported by the first two groups. So as an normal user, Sidechains wont give you anything Altchains(or Altcoins) can’t. If you are a Bitcoin investor, it comes as an advantage because(hypothetically) a bitcoin can now do all the things Altcoin can do. Are you excited? keep reading.
How do Sidechains work?
Bitcoins live on something called a blockchain, which is a record secured by cryptography that says that transactions happened in a certain order. Bitcoin has a very unique and powerful way to coordinate and validate this order by an unbounded set of peers. This method is called Proof Of Work and it was invented by Adam Back, one of the authors of the Sidechains paper and a founder of Blockstream – a company who aims to profit from/monopolize on Sidechain methods. So a block chain, in it’s simplist form looks like this:
And what Sidechains does is allows Bitcoins to jump off this ledger onto another ledger, where it lives by completely different and arbitrary set of rules. That’s the exciting part. So now a Bitcoin can maybe become a Smart Contract with complex logic or other forms of value. The promises are compelling but the delivery on them is not. So a side chain lives next to the block chain and coins move onto this chain. I must confess, I lied. A block chain doesn’t look like the first image, it really looks like this:
Which is the basis for one of the major problems with Sidechains. As indicated in the paper, the technical challenge lies in the prospect of a reorder event, where competing consensus peers rewrite the order of transactions. This is neither an extremely rare nor damaging event in standard Bitcoin. The problem is when you introduce Sidechains, the side chain must refer to a durable moment in block chain time. If the Sidechain refers to a moment that is rewritten(reorg) then the side chain becomes invalid. This would result in very bad things. Peter Todd, a person who tweets a lot about Bitcoin, says this is a big problem and with all fairness Peter does have a good grasp of these subjects in addition to having a relatively unbiased point of view.
Demurrage
As soon as I saw a reference to the Cult of Demurrage, my expectations for this paper took a precipitous drop. Demurrage, like most cultic things looks very promising at first glance, however it is rarely if ever taken seriously by real economists – because it does not function differently than something we use all the time, inflation. The idea can be traced back to a so-called economist by the name of Silvio Gessell, who supposedly conducted an experiment using Demurrage that resulted in huge gains. Since then the cult has expanded and even includes a myth starring Hitler where Demurrage could have- if only we lived without economic sin, saved the world from the holocaust. Today, Demurrage is used as a device to ascribe magical properties to an economic scheme. It has a following mostly in Western Europe with groups who wish to use financial tools but cannot overtly acknowledge or admit to using them. It may be analagous to ‘Red Mercury’. It is popular in some pockets of academia and social activism. It is not altogether a malicious thing, but it tends to be used as a distraction for more pestilent programs and such. Demurrage has never been successfully used for an extended period including it’s latest incarnation, Freicoin. Would you use a money system where your balance decreases over time? Demurrage, is like most utopian ideas, concerned with how one believes the world should be, not how it actually is in reality. Freicoin was founded by Jorge Timon, who is also a member of Adam Back’s company Blockstream.
OK so who wins with Sidechains?
The paper’s publication was obviously heralded as a great event in the cryptocurrency space. The people who were excited were mainly those with significant investments specifically in Bitcoin(miners, long speculators). The paper does describe some advantages,
1) unifies development efforts
This may be a plus or a minus. Some view Bitcoin as being too ‘Cathedral’ style and view the organization as a minus. Granted, most Altcoin projects greatly underestimate the efforts that go into making a secure p2p money system and I do recognize that scale of efforts put into this.
2) translation of monetary value
This means that my Bitcoin can now do anything I wish(hypothetically). The paper seems to illustrate a scenario where happy Bitcoin users can now do a variety of things with their bitcoin and don’t have to involve exchanges to move that value between chains. In a sense, Sidechains does impact the cryptocoin exchanges like Bittrex and Bter who specialize in Altcoin exchange.
Why Sidechains again?
What the paper doesn’t spell out is one important thing. Sidechains says plainly that other forms of block chains are not only possible- but valuable. If that is true, then Bitcoin itself has questionable intrinsic value. Secondly we have the problem of block chain scaling. If everything is going to be on ONE block chain, how will we store all this information in every p2p node? So this contributes to the problem of an ongoing theme in the Bitcion world, that of Centralization. This theme has many sub-motifs such as mass surveillance, monetary dominance, market rigging, and other factors to which average users are averse. It seems this theme is rather virulent and some forces have a lot invested in maintaining programs to progress this goal and hide their agenda from the public. The problem of moving value between different chain types was already solved by Cryptocoin exchanges, however Sidechains privileges a new group- the group that traces and tracks coin usage ie. surveillance interests. In an cryptocoin exchange scenario, ownership qualities are destroyed the moment coins enter into an exchange.
Conclusion.
Sidechains are a technology to maintain Bitcoin Monetary Dominance and may contribute to centralization or other negative factors. There are few pluses mainly consolidating development efforts.
