Topic: Sidechain Observer - Bitcoin L2 Projects & current state of development (Read 1048 times)

Hey everyone,

I've been spending some time lately diving into the world of Bitcoin sidechains, and I wanted to share some thoughts and hopefully spark a useful discussion. While the basic concept of sidechains—scaling Bitcoin while maintaining its core security—is relatively well-understood, there are many nuanced details that often get overlooked.

The original post does a great job outlining the general idea and some of the main projects, but I think it's important to go a little deeper and discuss some of the practical considerations and challenges.

One of the biggest hurdles, as was rightly pointed out, is the two-way peg. The "peg-in," where you burn BTC on the mainchain and receive a corresponding token on the sidechain, is relatively straightforward. However, the "peg-out" back to the mainchain is much more complex. It requires a way to ensure that the BTC is truly available, hasn't been double-spent, and that the sidechain token is legitimate.

Here are some thoughts on the different types of sidechains, building on the original post:

Drivechain: This approach is fascinating because it places the power of peg-ins and peg-outs in the hands of the miners. However, the need for new opcodes in Bitcoin Script creates a significant hurdle, as it would require broad community consensus and acceptance from the Bitcoin Core developers. It's also worth noting that this approach potentially creates an enormous power for those that can mine Bitcoin, and presents a significant centralization risk.

(Static) Federated Sidechains: While currently operational with projects like Rootstock and Liquid Network, I agree that these models introduce a level of centralization. A multi-sig federation, although often comprised of reputable entities, still presents a single point of failure. It's important to carefully consider the entities involved in these federations and to understand their motivations and history.

Dynamic Federations: The idea of using sidechain governance to manage the federation is promising. However, projects like Nomic, Stacks, and BEVM, each take different approaches and come with their own sets of trade-offs. Nomic's reliance on a partly premined token for PoS is something to consider, while Stacks still has to make its bridge fully operational, and BEVM has yet to prove itself in the long term.

Rollups: While widely used on Ethereum, I believe that the Bitcoin community needs to explore more fully the potential of rollups and to further study the trade-offs between optimistic and ZK rollups. These solutions can potentially enable more efficient scaling, but the technical implementations can be complex, and we should also focus on the different requirements when porting Ethereum technologies over to Bitcoin.

Extension Blocks: The idea of adding sidechain blocks to the mainchain header is intriguing, but the need for core protocol integration makes this approach rather less likely to be adopted in the near future. I’m curious about how the MimbleWimble extension blocks on Litecoin have been doing in the long run and what lessons we can learn from it.

A Few Key Takeaways and Questions:

Trust and Centralization: While the goal is to create a decentralized Bitcoin scaling solution, it's crucial to acknowledge the centralization risks that many sidechain designs introduce. How can we evaluate and mitigate these risks, and what should we, as users of these technologies, be looking for?

Security: Sidechains are only as secure as their weakest link. The pegging mechanism, the consensus protocol, and the governance structure are all potential vulnerabilities. What are the biggest security challenges for each of these methods, and how can we avoid them?

Adoption: Beyond the technical hurdles, what will it take to get broader adoption of Bitcoin sidechains? User experience, clear use cases, and education will be key.

I'm personally very interested in the research around ZK-Rollups and the different ways we can leverage them, as they could offer an ideal blend of scalability and security, but I believe that we must also understand all the potential drawbacks of all these systems, and to be realistic about their complexities.

What are your thoughts on these points? What do you consider to be the most promising path for Bitcoin sidechain development? And what are the most significant challenges that you feel need to be overcome?

Let's use this space to share our knowledge and help advance Bitcoin's scalability.

Thanks!"

Fully agree on the terminology issue. I for myself wouldn't like to reinvent the wheel, but I could live with the following terminology:

- Bridge - catch-all term for all technologies where a token is pegged to another token
- Centralized bridge - single custodians are responsible for the bridge (high risk, risk depends on trust into custodian) - Example: cbBTC
- Static Federated bridge - idem, but with a federation of centralized custodians (medium to high risk, depending on the custodians) - example: Liquid, Rootstock, Stacks
- Dynamic Federated bridge with incentived peg - renewable multisig federation responsible for peg (medium risk) without full-fledged two-way peg - example: Thorchain
- Sidechain - all technologies with a real two-way peg, where one mainchain token is locked for each sidechain token
- Sidechain with PoS-governed two-way-peg - renewable multisig federation responsible for a full-fledged two-way peg, with slashable security deposits for the federation members (medium risk) - example: Nomic, tBTC
- Sidechain with (PoW) miner-governed two-way peg (low risk) - example: Drivechain

we are still in the era where buzzwords and network categories are not solid in description/type, but with that said if any side/sub network has a deviating peg where you cant guarantee you'll get out what you put in, people need to be aware of that financial risk no matter the buzzword used

as for you thinking its difficult /not normally possible, well if it involve third party 'federations' the simple question is do you get to be a significant signer or is it a 'not-your-key-not-your-coin' lock, which you deposited into

we need to solidify definitions to make it easy for people to understand financial risks of offramping/locking in/bridging to other networks
not with some undescriptive buzzword that has no meaning. but a word that in itself has a dictionary definition that explains what it does
EG instead of bridges and ramps.. words like locks and vaults

afterall what does the words side chain and drive chain really explain to the uninitiated just from hearing the word

the buzzwords need to easily explain if its a feature locked to one mainnet and designed purely to aid that mainnet and be able to easily jump back and forth.. or if its complicated whimsy between many networks where value can be lost and hard to get back to certain mainnets.. but the main need of the buzzword, is financial loss risk

This may happen in Thorchain-style "Layer 2"s, where there is a market-enforced peg based only on "incentives", e.g. by PoS slashing, but no BTC are locked. I wouldn't even call these tokens "bridges" but only "Bitcoin stablecoins" (= BTC stablecoins).

In chains where you can exit via an 1:1 peg where a BTC is locked for each sidechainBTC, such a manipulation is normally not possible easily, if the peg-out mechanism work (in tBTC/Nomic-style sidechain tokens, this means that the federation votes positively to prevent being slashed) then the peg is 1:1 and can't be changed as you get one BTC of the custodians for one sidechainBTC.

The only exception is when the federation colludes to steal the Bitcoins and at the same time to short the "sidechainBitcoin" (for example, on a CEX where BTC and sidechainBTC are traded). In this case however, the profit must be high enough to outweigh the "slashing", and that can in theory be prevented adjusting the security deposit.

In Drivechain, this should normally not be possible as you should be able to exit the sidechain to mainchain unilaterally as it would be difficult to incentive miners to participate in such a theft.

though these weak 'federations'(colluding signers) are more of a security threat of centralisation, i would more conclude if something is a 'layer' (subnet/sidechain) vs bridge to altcoin, if the value peg is fixed or variable

if you lock in xxxxsats and later(without spending) cant get out your same xxxxsats due to some market manipulation of pegging, then your just playing with a altcoin

I wouldn't put all sidechain projects in the same bin. There are some where you're totally right that they are very dubious. And of course some of the smart contracts could leak into the dev's wallets or be exploited by hackers if they're not well designed.

But some projects, with Paul Sztorc's Drivechain being the best example, rely on quite robust security mechanisms as far as I can tell (in Drivechain, the Bitcoin miners manage the peg, and the withdrawal is very slow, taking months but being almost unbreakable). If the chain itself uses conservative technology (i.e. mainly Bitcoin Script without "turing-complete" smart contracts), this would perhaps not make the sidechain more powerful in terms of expressiveness, but could serve as a good scaling tool and to battle test the pegging mechanism.

Yes, most current sidechains indeed use an "utility token", which in most of the cases is premined, so it has centralized elements, but they also use a pegged token. The "main token" of the "subnetwork" is thus the non-pegged utility token (managing the sidechain consensus, like STX in Stacks), while the "pegged token" is something like Stacks' sBTC.

The current Stacks peg, relying on a 15-participant federation (which in theory can even be hacked), is in my opinion not robust and decentralized enough to be really considered a Bitcoin second layer (or a "subnetwork") and is indeed more a wBTC-style bridge than a sidechain. In this case we'll have to wait if the decentralization upgrades after March 2025 can improve on that, or if it has to be considered vapourware.

we are meandering away from topic of sidechains due to conversations of valuations of different networks

but when it comes to side chains my view is if they are sidechains and 'layers' of a main network. the different unit of measure on the subnetwork to the mainnet should be a fixed/stable peg, to easily get in and out of the networks without loss of value....
as appose to altcoins that have de-fi exchange/bridges to mainnets which can have variable pegs and have their own 'market caps' and other value measures

in short: to be a subnetwork/sidechain (aka 'layer') they need to be fixed peg if using different unit of measure

thus locked value of bitcoin in a 'vault'/smartcontract would also be the value of the other sidechain unit. thus not offsetting/doubling/creating more 'market cap' valuation silly games people play to make bitcoin look less valued

for instance, (i have not researched much into it but just using it as conversation piece)
d5000 mentioned a 'STX' network coin.. which has its own market and in just 3 months has lost 50% peg to bitcoin (0.00003600->0.00001800) so i would not call that a sidechain/subnetwork of a mainnet, but instead just a bridge to an altcoin

Talking about market caps of altcoins is like too blindly and naively believe in a whore.

Altcoins can be created and minted from the air and this abusement of code makes altcoin market caps are like big jokes.

Like talking about cap of fiat currency, that does not exist because government can order central bank to create more fiat currency and add it to circulation anytime.

Bitcoin vs. Altcoins – projected Marketcap

Like there is only one Bitcoin and people are preferrable to say Bitcoin market cap dominance decreases with time, but they don't see a big fact that there are more and more thousands of new altcoins created by scammers with time.

you just stop caring about market cap.. its meaningless

as for calculating the underlying value of a coin, thats for another topic that has already been answered multiple times over the years on this form [use search]

So how do you know the true marketcap or value of an altcoin, or calculate it?

you are talking more about altcoins, not what this topic describes as 'sidechains', but lets clarify a few things about those altcoins

ethereum and solano are not at market prices due to speculation of their own merit of utility. but instead they are used by traders as a arbitrage path round the order books back to the main bitcoin market

people only stake these altcoins because the market is bubble manipulated to premium prices due to bitcoin arbitraging, and with such a low cost to stake-to-mint new coin, they take the risk of reward to get literally free coins via staking, hoping they dont get hacked(by simply not changing their wallets to some wacky hackers wallet.)


altcoins are not worth tens of billions.
there is no billions of dollars held in vaults backing a coins market cap.. i still laugh at anyone that thinks a '$$ marketcap' means anything... its just blind math of one units $ price multiplied by total units in circulation.. there is no $$ held in vaults to cover the market cap

anyone can create a new currency thats pre-mined/minted with a trillion coins. then public market spend 1 coin for $1 and create a market cap of trillions for the cost of $1.. yep thats how easy it is to manipulate market cap $ measures

in short, stop caring about $$market cap.
its the single unit price per coin that matters, and then looking into why it sits at the level it does, which explains if its useful or desired or not

bitcoin has alot of resources protecting the blockchain via mining costs which gives bitcoin a nice healthy support value bottom that is roughly $60k right now. meaning the speculative 'bubble' ontop is just 1.5x of value, which is a healthy market price

ethereum however has a stake-to-mint validator combined cost of just $50/eth, meaning it is at a 65-70x premium market bubble, which if you look at the btc:eth rate went from a 1:12 in the change-over time of PoW-PoS to now a 1:29 meaning ethereums losing its grip of the market (comparative desires/demand)

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as for this topic, unlike altcoins and altnetworks that have de-fi/contract bridges to bitcoin, when bitcoins are locked up to offramp users to then play with transactions on sidechains/subnetworks, those other tokens should be pegged and backed by bitcoin and not have a depreciating peg rate, whereby the 'cap' of a sidechain/subnetwork should be of locked/vaulted up bitcoin

It amazes me that people are still screwing around with staking and smart contracts after what happened to Blockfi and Celsius.
Even on ethereum and solana the biggest altcoins, stakers are still getting hacked on a daily basis. The altcoin market is a hackers paradise.

It boggles my mind as to how all these alt cryptos are still worth tens of billions or hundreds of billions of $, just proves that people are stupid AF.


www.youtube.com/watch?v=A5os37wUgbw

not only hacking, but mostly internal collusion and bad practice.. but also as d5000 example of STX shows, someone locking in EG 0.0036btc to play with 100stx (1stx=0.00003600btc) in september, but if you want to convert that 100stx back this week, you would only get 0.0018btc which is half the amount
the stx example is not a fixed peg sidechain, but instead a variable rate peg bridge to an altcoin

I would never touch any sidechain or defi crap, too much risk of hacking and losing your funds to hackers. Leave this crap to the shitcoins. 
Even lightning wallet is designed for only small transactions, so you are only risking small amounts.

I mostly agree with you, @franky1.

It seems also investors are not really happy: looking at the Stacks / BTC evolution, the price of the Stacks "utility token" went only downhill in comparison to BTC since sBTC was enabled. It had pumped a little bit before and after the November 29 announcement of the rollout plan, but this couldn't change the general downtrend. I guess this means that many are feeling Stacks had delivered less than promised.

Of course the unilateral withdrawal problem ("unlock coins out of the 2-way peg without needing approval") is common to most sidechain designs, even more decentralized ones. AFAIK from the designs which already have a mainnet none solves it, and from those with a testnet, Drivechain seems to be the only one with a mechanism allowing an unilateral withdrawal, with only Bitcoin miners being able to prevent a withdrawal to happen, so the withdrawal mechanism basically occurs "inside" Bitcoin's incentive system.

no one should lock funds into a system:
1. that prevents withdrawals:
       a: by having the signers 'collude' to agree not to sign, as its evidence the can do it at anytime thereafter too, meaning
           people dont get decentralised control of choice of when to withdraw, but have to hope the signers are in a happy/willing mood
           emphasis: if there is a way to prevent withdrawals now, they can prevent it later too, heed the warning

       b: requiring a protocol update thats not released/tested, because there might be issues later. meaning the colluding group 'could'
           claim a bug/hack in march, offer 5%(5c of dollar) bankruptcy/liquidation/payout.. then rugpull a sign/unlock to keep 90% as profit

2. that businesses wont want to use yet, because they too cant withdrawal to restock their products
3. that has suggested timeline but shows limp thought about guarantee of implementation
4.where you cant get funds out if the bitcoin price ATH to cash out for a re-buy after correction opportunity. meaning it sounds suspect they want you to lock funds up right in the prime period of an approaching ATH and not allow unlocks/withdrawals during this prime period

id suggest wait until april+ and let others mess with/lose/test it first. dont be a victim based on 'trust of dev' especially not around this period of the market cycle.. there are too many greedy colluding temptations for others to scam users

Stacks has launched its sBTC "sidechain Bitcoin" on December 17. It's currently only available for deposits on the sidechain, withdrawals according to the roadmap will be enabled in March 2025. The rollout plan can be seen here.

Unfortunately, the initial sBTC implementation is quite disappointing. It is currently a static federation of 15 "community-elected" so-called "signers", mainly businesses of the DeFi/altcoin sector. The list is included in the rollout document linked above.

Steps towards the "dynamic federation" they promised will only be taken after the March 2025 upgrade, with no ETA still. Even Liquid seems to be more advanced as of now, as they have implemented already a "replacement voting" system.

So for now, Nomic and tBTC seem to be still the only projects I know where a truly dynamic federation was implemented.

I looked a bit into Botanix Labs' Spiderchain project, as I recently heard news about its adoption by a major DeFi player (Aave). Spiderchain is still a testnet, but gets regularly mentioned, also on more seriously/academic-looking websites, so it might be worth a look. It is EVM-compatible.

On their documents on the website, Botanix describes their project as a "distributed network of decentralized multisigs safeguarded by a randomized subset of participants". Another claim: "Anyone will be able to stake their bitcoin on Bitcoin."

Spiderchain nodes are called Orchestrators. Orchestrators need to deposit a certain amounts of coins, which will be slashed when the orchestrator misbehaves. Orchestrators hold Bitcoin multisig wallets. Every Bitcoin block a new multisig wallet is created and assigned to a random number of orchestrators.

So far the design resembles Nomic and tBTC, but with a difference: on the sidechain, there seems to be no native token. This means, the deposits and also the PoS staking are all done in "sidechainBTCs". This raises questions about potential risks if the sidechain's supply changes drastically, however this problem should be similar in other concepts like Drivechain.

The deposit/withdraw process of the first version is described here, although not in the detail I'd liked (incentives, risks). There is also a centralized server, the SideCar, involved, which "helps" users with peg-ins and peg-outs. According to the docs however this is an early version and would be decentralized further over time.

So far this concept seems interesting above all because no pre-mined token is involved and thus it seems to combine the advantages of Liquid and Nomic/tBTC. Once its mainnet gets launched I will probably investigate it more deeply.

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Sorry to respond late to this. According to BitcoinLayers, Fractal's bridge is managed by a single, centralized custodian (Bool Network) and the code of the bridge is not even open source. So basically it's not better than Liquid.

There is no new development for Gelios, I think people find out already and that's part of the reasons why the volume keeps going down, the team are not reachable anymore too, I believe they abandon the project already.

One provides seemless integration and infinite scalability with Bitcoin, and this one uses the Bitcoin core code outta box for unlimited layer scaling, still pretty new and the reason why I find this one better is the fact that it gained attention.

Since its launch now many Bitcoin miners have moved over 30% of mining power to this L2 project, because it is a PoW coin just like Bitcoin too, I don't think that many people are aware of this new kid on the block yet.

The name is Fractal Bitcoin.

I don't know much about Bitcoin Layer-2s and will dedicate time in the coming days to absorb as much knowledge on Bitcoin Layer-2s as much as I can. I'm really hoping that Bitcoin doesn't following the same path that Ethereum took when they made Layer-2s, the focus of their roadmap, neglecting Ethereum itself and that is beginning to hurt their community. I do not wish for such for Bitcoin but I'm very happy that builders are building on Bitcoin now more than ever.