disclaimer: I am not involved with the project at all and am also just wrapping my head around it like everyone else. prepare for text wall
Ok, so basically you would have the bitcoin network, and then an alternate network. Very similar to what we have already with the alt-coins. Each one with its own blockchain, token, set of rules etc.. However, instead of the primary difference being the different mining algorithms (SHA vs scrypt, or proof of stake, etc.), the main difference would be that the alt-chain mining process would not generate new coins, only collect transaction fees (which would probably be higher).
In order for a coin to be created on the side-chain, BTC would have to be suspended/frozen using a "transfer" protocol, which would provide cryptographic proof to the alternate network (which must follow the same rules for what counts as proof) that the coin was unspendable on main-net, and thus unlocking the equivalent token in the side-chain network. Same process would work vice versa for unlocking that same BTC (which might not be done by the same person). Coin moving out of a side-chain and back into main-net would have to reference the BTC that moved in.
This actually has quite a few implications. For one, it opens up a massive amount of possibilities to extend the BTC network. For another it helps to limit the overall money supply of cryptos (normal alts will probably always be around though), which may or may not be controversial to you. It basically eliminates the entire initial mining & speculative race during the early days (or most/all) of the alt-coins lifetime. It also eliminates the need for using an exchange to get that coin onto that alternate network. You can just go straight from BTC -> Alt wallet. The ultimate decentralized exchange. All thats needed is for the alternate network to follow the same transfer protocol
Any coin moved into a side-chain can still be at risk. Just like right now if you invest (usually only way is with BTC anyways) or move into an alt-coin, if the exchange you are keeping your coin on or the alt-coin ends up failing for whatever reason, you will lose your money. You still have to have some level of trust in the network you are moving money in to. The main difference being that you don't need to use an exchange, and you know as long as you have access to the coin on the alt-chain, you can transfer back into BTC.
The merged mining aspect seems to be getting a lot of attention. From what I understand though it's just a method of bootstrapping the side-chain to take advantage of the massive hashing power. I dont think this would be required though, because mining doesnt have anything to do really with the transfer protocol that would be used. There is no reason that you couldnt have a scrypt based mining system instead, or another algorithm. Transaction fees would be gathered in whatever the bitcoin-pegged alternate token is, then miners could convert it to regular BTC if they want.
The bitcoin - side-chain peg doesnt even have to be 1:1 either, it just has to be fixed. You could have it 1:100 or 1:1000 if you want. I think probably as long as 1 side-chain unit doesn't convert into less than 1 satoshi it should be good.
You can actually get around the whole money supply issue also. There is the possibility of having "secondary tokens". Since the side-chain network could have its own set of rules, own blockchain etc., why couldnt it support 2 types of tokens? One being the bitcoin pegged token, and the other being a network specific token, incompatible with the main bitcoin network, and could even be awarded just like normal alts as part of the mining process, or have other functions.
An example of a use case for secondary tokens in a side chain... Counterparty implemented into side-chain. Right now, Counterparty is built on top of the bitcoin network. It operates with bitcoin, but also has its own limited currency called XCP. The system works and is live and running now (http://counterwallet.co - web wallet), but a major problem it has is that in order to do anything or even see anything happen, you need to wait for confirmations to occur. Amount of data that can be recorded in each transaction is very limited, and it costs multiple transaction fees to do stuff. Also if you have pending exchange orders in escrow, any other transactions you send won't confirm until the orders expires or is completed, due to the spending of unspent outputs.
So if Counterparty was implemented on a sidechain... you could have the bitcoin-pegged side-chain token called.... bitcoin (BTC). Anyone who wanted to use counterparty could transfer their bitcoin into or out of the counterparty network. It would then have a secondary token (XCP). Since all XCP was already created during the "burn" period back in january, any XCP in the new side-chain network would have to come from XCP on the main bitcoin network being "burned" (one way) into the new network using a similar process. The whole counterparty protocol would then work just like it is now, except they could store much more data in each transaction (instead of being limited to 40 byes), easily push out new features and could enjoy very short block times to allow for quick and painless decentralized asset trading
Thats all I got right now. What do you guys think?
Sorry, no tl;dr on this one
submitted by cryptonaut420
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from Bitcoin http://ift.tt/1oZV0dG
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