Here you'll find an assorted mix of content from yours truly. I post about a lot
of things, but primarily
Day 6: Rubin's Bitcoin Advent Calendar
03 Dec 2021
Welcome to day 6 of my Bitcoin Advent Calendar. You can see an index of all
the posts here or subscribe at
judica.org/join to get new posts in your inbox
Now that we’ve established the four pillars of Privacy, Decentralization, Self
Custody, and Scalability, let’s get into smart contracts. But first…
DOES BITCOIN HAVE SMART CONTRACTS?
There is a lot of fuss around if bitcoin has or doesn’t have smart contracts,
and this is usually people talking past one another. Bitcoin does have enough
functionality to create certain smart contracts. But Bitcoin does not “have
Smart Contracts” in the same way that, say, Ethereum “has” Smart Contracts.
Sure, one can argue that because Ethereum is weaker in terms of its fulfillment
of the four pillars, it doesn’t really have smart contracts either. But almost
undeniably there is something happening in the Ethereum Ecosystem that isn’t
happening for Bitcoin – yet.
Often, Bitcoin Boosters will say that the types of things happening on Ethereum
aren’t desirable at all and are just scams. Many of these Boosters then go on to
promote projects of similar dubious nature… but that’s off topic for this post!
While there are many projects that frankly suck, there are also many projects on
Ethereum that are relevant to the interests of Bitcoiners! Examples of projects
that advance Ethereum’s realization of these 4 pillars that would be difficult
to build on Bitcoin include: Gnosis Safe for Custody; Tornado Cash for Privacy;
Optimistic/Zero Knowledge Rollups for scalability; SmartPool for on-chain mining
pool coordination. It’s claimed that any time something of value proves out in
the other ecosystems, Bitcoin can easily just incorporate the highlights.
My position is somewhat unique on this matter: Smart Contracts aren’t something
you build on top of a layer with good decentralization, privacy, scalability,
and self custody – Smart Contracts are a central part of what makes achieving
those pillars possible! In other words, we need a Smart Contract ecosystem that
enables broad innovation in order to make our four pillars robust. This is not
the same as saying we need the Ethereum VM, but we do need something to be
different than the status quo today to empower builders to create new tools on
top of Bitcoin. This differs from a traditional Bitcoiner perspective which is
more along the lines of once we improve our (insert generic property here); then
we can consider figuring out how to add more smart contracts.
That bar sucks it’s too crowded
Another reason sometimes given for not wanting smart contracts is that they’re
too expensive and won’t scale. While this is a valid concern, the story around
fees is somewhat interesting. You may have seen people complain about high fees
on other platforms and say therefore it sucks and should die. It’s a bit like saying
a crowded bar is no good. Obviously, if people are at the bar it is good. That
your enjoyment is less is solely because you’re antisocial. On other platforms,
there are users paying exorbiant fees to do transactions… but would they be
doing them if they weren’t getting commensurate value? Let’s have a look at some
data from cryptofees.
Name |
1 Day Fees |
7 Day Avg. Fees |
Ethereum |
$62,620,320.03 |
$55,285,528.00 |
Uniswap |
$11,315,687.79 |
$10,507,247.12 |
Binance Smart Chain |
$7,240,187.13 |
$7,525,565.73 |
Balancer |
$1,572,934.46 |
$445,368.69 |
Aave |
$1,465,761.04 |
$1,354,792.55 |
SushiSwap |
$1,379,856.87 |
$1,664,071.03 |
Bitcoin |
$1,160,676.57 |
$730,368.10 |
Clearly a lot of folks are willing to pay for Ethereum and projects on top of
it. Bitcoin is ultimately a business, and it relies on its customers paying fees
to incentivize the production of blocks. More fees, more incentive to provide
security for Bitcoin. It’s a little problematic, therefore, when users are
getting more utility from (by virtue of how much they are spending) other chains
than Bitcoin.
Although we need to be careful to not hurt Bitcoin’s essential properties, it’s
clear that smart contracts provide massive leverage for incentivizing users to
do transactions to pay for block production, without which Bitcoin falls apart.
Capitalist or Communist?
The last point I’ll leave you with is perhaps a bit charged / “problematic”, but
I think it’s a good one. Bitcoin is a bit like America. Ethereum is a bit like China.
Provisionally, America is the Free Market Capitalism country and China is the
State Controlled Communist Markets country. In practice, if you visit a market
in China there seems to be a lot more capitalism than in the US. Tons and tons
of small businesses, operating with (seemingly) little regulation. On the other
hand, in San Francisco you can spend
$200k
trying to get permits for an Ice Cream shop and fail. On the flip side, in the states once you’re
successful and operating it’s pretty darn hard for the government to substantial interfere.
In China, your CEO might vanish for a few weeks like Jack Ma.
Bitcoin is a bit like America. Building on it is incredibly hard, but if you
figure it out and crack the code it’s supposed to work forever and devs bend
backwards to ensure your use case won’t break.
Ethereum is a bit like China. Building on it is incredibly easy – at first –
but if what you’re doing violates the “social order” your thing will get rekt by
king VB with EIPscallibur. Examples of this include the removal of refunds for
clearing space which bricked a popular gas fee arbitrage token.
Now, obviously this description is tinged with preference. I love America.
Best country in the world (or, rather, terrible country, just better than all
the other terrible countries). However, Bitcoin is not America and Ethereum is
not China. There can be a middle road, and benefits from such an approach as
well. Smart contracts seem to be really good at enabling permissionless
innovation. Permissionless innovation is great for capitalism! Capitalism is
great for improving utility of users and coordinating people. Wouldn’t it be
nice if building on Bitcoin didn’t require getting proposals passed the
developer “commitiburo” and more innovators picked Bitcoin as the best chain to
build new ideas on top of? Obivously we don’t want to sacrifice the other parts
that make Bitcoin great, but we can still entertain the types of economic
benefits we would see by enabling more permissionless innovation. Because
ultimately, and perhaps tautologically…
As described, Bitcoin has certain positive and negative properties. Ethereum
too. At the end of the day, in aggregate, what “matters” is what participants
choose to use and rely on through a free market selection process. That’s why
despite not offfering the playground of Ethereum, Bitcoin has something that
people value more: stability. However, stability and stagnation are two sides of
the same coin. Stagnate for too long and competitors will eat your lunch. And
perhaps the stability that makes Bitcoin unique will eventually be convincingly
present in other ecosystems, despite Bitcoin’s head start in that endeavor.
Spooky Scary!
In the coming posts we’ll review the concepts more in depth, the state of the
art research for Bitcoin Smart Contracts, and get into some examples of useful
Bitcoin contracts.
Day 5: Rubin's Bitcoin Advent Calendar
02 Dec 2021
Welcome to day 5 of my Bitcoin Advent Calendar. You can see an index of all
the posts here or subscribe at
judica.org/join to get new posts in your inbox
Privacy is foundational to Bitcoin. Fundamentally, we care about censorship
resistance so folks can’t stop you from doing activity they can tell you’re
doing… but what if they couldn’t tell you were doing anything at all? The more
private a system is, the better it is at ensuring that all participants are free
to do as they wish.
Unfortunately, privacy is one of the most difficult things to achieve in the
universe. For every action there is an equal and opposite reaction; if one wants
to make an action, how can one ensure the reaction is not observable? And if one
masks the reaction, how can one hide the masking?
Privacy exists in a delicate position in our society. America is hands down the
leader in rights to privacy of any society, but citizens still face a barrage of
assaults against their privacy. Privacy from the government also differs from
privacy from corporations, and the corporations often times can be in cahoots
with the government. Some regulatory regimes (e.g., the EU) claim to be “better
on privacy” than America, but have overall a weaker sense of individual rights
than in America (so they may be better at the privilege of privacy, but not at
the right to it).
Why is privacy so delicate? In part, because unlike speech there’s no explicit
enumerated right to privacy. Privacy is an unenumerated right under
the American constitution. What this means is that legally we do believe it to
be a right because it seems to be implied by other constitutional protections
that could not exist without it (e.g., the right to not be searched without due
process). Because there’s not explicit protection of privacy, it’s a constant
battle to determine what constitutes an violation of privacy. For example, if
your house is extra hot because you’re growing pot in it (or hint hint Bitcoin
mining), can police use thermal cameras to detect it and then establish probable
cause to get a warrant and raid your house? See Kyllo v. United States, that’s
an illegal search baby! However it’s possible that this line would erode over
time as the expectation of privacy changes – if everyone had thermal camera
sunglasses and could see your pot growing plain as day, maybe it’d be
unreasonable to think
you’re private!
Cryptographic research has yielded amazing tools for creating provable privacy
for digital actions. For example, it’s possible to send a digital message in a
manner such that only the intended recipient can read it. And as long as your
spying adversary isn’t standing over either of your shoulders looking at your
screen (or more realistically, running a scanning program on all your data like
the one Apple said they might be doing earlier this year), the only people who
will know the contents of the message are you and the recipient.
The government kinda sorta hates this stuff!
Because the bad guys can use it! But, because America is super free privacy
loving country, citizens still have a basically unlimited protected right to use
whatever privacy technology they want. Many politicians have mentioned wanting
backdoors into software, but none have truly succeeded to introduce much truly
limiting. Not to mention you can’t make math illegal, which is all that
cryptography is. Alphabet soup agencies resort to trying to insert backdoors,
but these are still subject to public review and the information revealed could
only really be used legally for big “national security issues” like against a
group with a pre-existing warrant, but the general collection of information
would be illegal under the expectation of privacy right. At least in theory –
Snowden showed us that mass data collection
does still happen… But cryptography gets better, and open-source supply chain
devices become better, so inserting backdoors in the code becomes harder and
harder.
So great, probably solved for Bitcoin, right? Just Crypto It. Not quite. While
systems like ZCash do exist that make transactions much more private, they take
up more space, so they decrease the availability of block space… however,
perhaps with better privacy, there’s less ability to discriminate against
different transaction sources, so less decentralization is needed to guarantee
censorship resistance.
This points to another conflict, which arises with privacy: auditability v.s.
transparency v.s. Deniability.
An auditable system means that anyone can verify the history of all transactions
and check for validity transparently. Many bitcoiners have a preference for
“elementary school math”, where validating the transaction record requires very
basic math in the code, and not much else. However, if you go to a fully
encrypted form, you might no longer be able to easily check important rules like
the amount of coins not being increased through a crypto backdoor. This type of
auditability where you could “do it by hand on a calculator” we’ll call
transparency, since you can see everything! If it were encrypted, it would be
opaquely auditable. You could tell it’s valid, but not the specific transfers
that happened. Maybe no one person is going to look through all the data, but
across all humanity someone is bound to audit at least the transactions they’re
involved in.
Deniability stands in contrast to either of these properties. If, say, a
government agency comes to you and says “hey, we know you controlled key X,
please show us all transactions that X was involved in”, a deniable system would
allow you to produce any answer, making such a query useless. However, if a
system was strongly deniable like that, it would be very hard to audit because
the audit could potentially turn up differing results. So Bitcoin transactions
aren’t particularly deniable by default.
One of the drawbacks of Bitcoin’s auditability is that the auditability is
forever. So if you have a lapse of privacy, all your old information can be
checked. So let’s say you bought a coffee in 2021, and in 2055 the government
decides all coffee drinkers are going to go to jail to pay for their drug use
sins, then your old cafe might be able to reveal you as a customer. Bitcoin
never forgets.
It’s My Data and I want it Private Now
Therefore it’s an urgent priority to make Bitcoin as private as possible as soon
as possible in order to keep users safe now and forever, or else the fundamental
usability of the system is at risk. However, compromising on auditability or
decentralization would be unpopular, so it’s not as simple as adding ZCash and
increasing block space.
There are a lot of different pathways Bitcoin can take to increase privacy. For
example, the lightning network can mask and make many payments ephemeral, as
well as adding deniability if one continually signs false histories of revoked
txns. Sidechains can add all sorts of privacy primitives, if they want. And
on-chain techniques like swaps or joins can be used to make the base privacy
better as well.
In future posts we’ll explore how covenants can have a role in improving
privacy!
Day 4: Rubin's Bitcoin Advent Calendar
01 Dec 2021
Welcome to day 4 of my Bitcoin Advent Calendar. You can see an index of all
the posts here or subscribe at
judica.org/join to get new posts in your inbox
Many may have tried, but few have successfully characterized what “being
decentralized” means in an objective / quantitative sense. Instead, we’re left
with soft “know it when I see it”s.
Decentralization may be a pillar of Bitcoin with a lotta fanfare, but it’s still
just a means to an end. It’s about the Pantheon, not the pillars! A system can
be very decentralized and still kinda suck. Much like pillars with no roof won’t
keep the rain out!
Got Gas?
For a more than slightly contrived example, imagine a pre-internet driver
navigating gas stations prices. Kind of “decentralized”, right?
Users/purchasers operate on local information to see pricing and make a decent
decision, and sellers operate on local information to stay competitive. Over
time the network should “converge” a sellers learn who has better prices
throughout town, but from the perspective of an individual purchaser it’s really
hard for them to determine within their remaining tank range/willingness to
drive across town for a dollar who has the best prices. So while the market
works as a decentralized pricing system, it’s not highly consistent!
It’s Hard; No CAP
Computer network nerds have three rules for keeping their jobs: consistency,
availability, and partition tolerance. What do these mean in practice? Thinking
back to our gas analogy, gas stations are very available (you can always get gas
at some price), they’re strongly partition tolerant (i.e., if you can’t see
other gas station’s advertised prices you won’t know if it’s better, but you can
still get gas). But the pricing might be all over the map! No consistency!
It’s really hard to achieve all three properties – there even exist proofs of
its impossibility. Instead, engineers make tradeoffs to achieve different
amounts of guarantee across the properties.
For Bitcoin we care a lot about consistency. If I send money to
Alice, I should not be able to send it to Bob. We also care a lot about
partition tolerance. If some group of participants should shunt themselves out
from others, the system should still operate? So do we inherently care less
about availability? Well, kinda! If the “blockchain is closed” and you can’t
transact, at least you still have your money. And technologies like Lightning
Network can help bridge the gaps if the Bitcoin blockchain is unavailable that
you can still fully confirm transactions as long as it comes back eventually.
So, interestingly, Availability seems like the property we need to care about
the least… but it’s one of the main reasons we need decentralization! That’s
because even though we might have a design that elevates the other two
properties, it doesn’t mean that availability is unimportant. And availability
is not one monolithic level, there are many different types of availability
fault one might experience on a network. For example, you might experience
reduced or no availability if:
- The network doesn’t have blockspace at your price
- The internet is down
- Your usual peers are offline
- Theres a fire at a major data center
- Your battery on your phone dies
- A big solar flare happens
- An evil government changes your DNS records to your mining pool and you don’t know the IP address
- An evil government runs the network entirely and doesn’t like your transactions so they get censored.
Some of these problems, decentralization can help us with! Some,
decentralization can’t help with. And some are caused by decentralization. Uh
oh!
For example…
A fire a major data center can be defrayed by being more decentralized – a fire
can only spread so far! The other data centers should be fine, since Bitcoin is
partition tolerant, the overall network is available.
If a big solar flare happens, there’s not much any of us can do if all the
internet is down and our devices got fried. Too catastrophic… We can recover
eventually, your metal seed plates will be fine, but hopefully someone had some
Faraday cage shielded backups.
If blockspace is too expensive, decentralization may be the cause!
In order to keep the network decentralization friendly, Bitcoin uses far less
bandwidth and storage than a centralized system (like Google) could use. This
ensures that participants on the network need not be particularly well resourced
or well connected to be a meaningful, full participant in the Bitcoin Network.
That’s because of another availability issue: censorship. Bitcoin fundamentally
stands as a fuck-you to the entrenched powers that be. As such, Bitcoin uses
decentralization to guarantee censorship-resistance against state actors. While
there’s been much ink scaled about the censorship of scalability v.s. the
censorship of state actors, Bitcoin is hyper focused on providing some form of
“equal protection”.
Everyone hates that you lose availability from high tx prices, and all are
equally affected. Everyone hates solar flares, and all are equally
affected. But with state actor censorship, enemies of the state, be they Jews,
Conservative Non-Profits, Black Americans, Gazan Chocolatiers, People who
believe things posted on *******’s Twitter Account etc, can be picked
apart and subjected to selective abuses. If anyone can run a node (and
hopefully miner), and most people don’t have a political agenda, we can maybe
protect individuals of any background.
As such, Bitcoin’s decentralization is focused on censorship-resistance, even at
the expense of on-chain availability.
The Neverending Story
The story doesn’t end there. Decentralization, as we noted earlier, is very
tough to quantify. Even if we can’t quantify it, we can still reason about
decentralization efficiency. Given the “costs of decentralization”, how much
censorship resistance do we get? Can we decrease the costs and achieve the same
amount? Can we keep the cost the same and gain more censorship resistance?
Or… do we need to increase the costs, because we’re not censorship resistant
enough? Stay tuned for future posts we’re we’ll see if we can’t do something
about it!
Day 3: Rubin's Bitcoin Advent Calendar
30 Nov 2021
Welcome to day 3 of my Bitcoin Advent Calendar. You can see an index of all
the posts here or subscribe at
judica.org/join to get new posts in your inbox
Not your keys, not your coin. A simple maxim often repeated by Bitcoiners, but
an important one. Why?
That thing about the gold standard you probably heard before:
In the existing financial system, your assets aren’t really your assets. Let’s
suppose you own a share of Google. You don’t really own that share, you own a
virtual claim and the actual certificate sits somewhere with a corporation like
The Depository Trust & Clearing Corporation (DTCC). So what? Why does it matter
who holds the paper?
The U.S. Dollar is a great example of why you should care. One dollar used to
represent an amount of Gold you could redeem for real physical
bite-it-to-see-its-pure gold. This was a promise of course, the paper dollar did
not have the actual gold in it. This was all good and dandy until in 1933,
Executive Order 6102 was put in place which made the holding of physical gold
illegal. Get arrested and go to jail illegal. EO 6102 mandated that all Gold be
turned in to the Federal Reserve. This was quickly followed by a devaluing of
the redemptive value of the dollar in Gold by the government from $20.67 per
troy ounce to $35 as a “one time” move. Today a troy ounce costs around
$1,800. This is because in 1971 an Executive Order was put through that ended
the dollar’s gold backing entirely.
What’s this got to do with Bitcoin?
If Bitcoin is held in accounts at regulated entities like exchanges a similar
act to 6102 could make redeeming actual bitcoin impossible for users of those
services. Suppose those users are forced to receive in place of their exchange
Bitcoin a Bitcoin Note that is backed by bitcoin. And then one day, the amount
of Bitcoin per Bitcoin Note can be reduced
– or worse, completely unlinked.
If this happens, all is lost. Bitcoin is fundamentally about a monetary standard
for the world where no self-important rulers can manipulate the currency. Self
custody is a requirement for Bitcoin to avoid these sorts of takeovers.
OK, OK, I’ll keep my coins off exchange…
Just fixing your behavior isn’t enough, to keep Bitcoin functional you need most
users to follow suit. Yet many users today do choose to keep some or all of
their Bitcoin on centralized services (yours truly included!).
This is for two main reasons:
- Game Theory: we can’t do anything about this. As long as not too many other
people are using an exchange for custody, it doesn’t matter if you are since a
regulatory takeover won’t be too effective. So selfishly, you may as well
benefit from the ease of keeping your coin on a service (assuming it is easier)
rather than taking responsibility for your own assets. Likewise if no-one else
is self custodying there’s not much advantage for you to be either.
- Software freakin’ sucks for self custody! We can fix this. Although the
quality of wallets has improved dramatically from Bitcoin’s early days, it’s
still incredibly difficult to do well. Further, self-custody solutions don’t
have solid options for handling many common needs such as inheritance, spending
limits, and more.
If we work on strengthening the fully self-sovereign self-custody options that
Bitcoin users have at their disposal, we can help more Bitcoin users to choose
to keep their funds themselves and achieve “herd immunity” against future
executive order 6102s. If we self custody in great number, we don’t permit them
the immediate victory over most users. You can’t arrest everyone, not easily at
least.
in short…
PLEBZ
TOGETHER
STRONK
Day 2: Rubin's Bitcoin Advent Calendar
29 Nov 2021
Welcome to day 2 of my Bitcoin Advent Calendar. You can see an index of all
the posts here or subscribe at
judica.org/join to get new posts in your inbox
This is the first of four posts in an advent mini-series about four fundamental
pillars of Bitcoin. I know, I know, a series within a series. What am I, nuts?
But it’s important that we begin our journey by setting the stage with a few
big picture objectives for Bitcoin before we get into why Smart Contracts
matter.
After all, we’re trying to build the hardest money possible, not Crypto
Kitties… right?
The four pillars I’ve chosen to focus on are Scalability, Self Custody,
Decentralization, and Privacy. Are there other properties that are also
important? Sure. Might there be a “more fundamental” name for each pillar? Ok.
But generally I find that these 4 categories are different enough from one
another and capture a very wide swath of what Bitcoin is and not overly
specific or overly general. Otherwise we’d just have one pillar for Bitcoin:
“To Fix This”.
Now onto the content.
Scalability is a controversy generating issue. Throughout Bitcoin’s history
there have been acerbic disagreements about what sort of scale is required and
how to accomplish it. Back then I even helped create a conference series,
Scaling Bitcoin, where people got to present to/shout at each other in person!
But why is scalability so important? And why does it generate controversy?
Famously, certain folks have remarked that, “you can’t buy coffee with Bitcoin”
because fees would be too high. This is an issue that’s easy to empathize with;
if transactions cost $10 who wants to do that for a $5 coffee – No One!
The common response is that Bitcoin isn’t for trivial purposes like buying a
cup of coffee, it’s The Hardest And Most Sound Money To Ever Exist And If You
Buy Coffee With It You Are Stupid.
There’s some truth to that. Bitcoin doesn’t need to function to enable your
trivial day to day purchases, it needs to exist to help you take self-sovereign
control over your money! Forget about your coffee, stack sats, survive
hyperinflation, avoid the pod, don’t eat the bugs. Capiche?
So what’s the rub? Well, if Bitcoin is to really be the vaccine against
autocratic rulers and corrupt financial systems, it needs to protect everyone,
not just elite sat-stackers who can afford to use it. Scalability represents
our desire for Bitcoin to be affordable for all who could benefit from it. Many
who live under abusive or corrupt regimes today might already be priced out.
Imagine earning 1000 satoshis per day and spending 300 satoshis to do a
transaction. Real bummer. And what if fees go up? There’s also the insulting
concept of dust in Bitcoin, 546 satoshis, currently about $0.30. Some people
work hard just to earn that much! Where do you think people who fall on this
low end of the economic spectrum live… in the freest of the free western
countries? No, they’re Congolese children mining cobalt. Maybe it’s OK that
they’re priced out: Bitcoin preserves wealth (and freedom), it doesn’t create
it. And just having cheaper fees isn’t going to free the child workers. But
still, wouldn’t you rather have Bitcoin be able to benefit anyone who might
have the need to use it, regardless of net worth?
Good news: there are techniques that exist today for scaling access to Bitcoin.
Bad news: they all have different tradeoffs.
Just Make the Blocks Bigger Bro
Early on in Bitcoin’s history a contingency of Bitcoiners
felt strongly that Bitcoin should scale by increasing the size of Blocks to
accommodate more transactions per second and keeping fees low. While mild block
size increases (e.g., as done with SegWit) are probably ok, the ever-increasing
block size would threaten Bitcoin’s decentralization and make it harder for
anyone to be able to run and audit the system. And if you can’t run and audit
Bitcoin yourself, you might as well be using the legacy financial system.
There are some efficiency improvements that can shrink transactions marginally,
contributing to an effectively larger block. But Blockspace will always be
scarce, no matter how space efficient transactions are.
Lightning Network
The Lightning Network is a very popular means of scaling bitcoin. It makes a
second layer on top of Bitcoin where you can make cheaper and lower latency
payments. It functions sort of like the equivalent of Venmo versus Bank Wire
Transfers. You set up a “payment channel” with a counterparty, and are able to
make many cheap payments between you and the counterparty. You can even route
payments through friend’s channels if you don’t have a direct link. A few major
downsides to this approach are as follows:
- That it requires an active online presence and ability to get bitcoin
transactions confirmed (which still costs money!)
- It requires some form of durable storage any time you make a transaction.
- That in order to receive funds, you have to have someone loan you the
“potential” capital (think credit worthiness, which requires some sort of
reputation system and identities).
In countries like El Salvador, which have begun adopting Bitcoin as legal
tender, many users of the Lightning Network are doing so through a centralized
service provider which doesn’t protect users from the types of abuse possible
in current banking paradigms. In theory, this central service provider isn’t
there because the El Salvador government is some kind of soon-to-be
dictatorship, but rather because solving the problems of capital loan, regular
online presence, and durable storage are hard problems for citizens of a poor
country.
Sidechains
Another popular approach is to make federated sidechains, such as
RootStock, Liquid, Nomic, or ThorChain, etc. A Federated Sidechain is
essentially a “fancy multisig”, where funds are sent into the custody of a set
of entities (usually such that many independent entities would have to collude
to steal funds). The federation then runs some sort of cryptocurrency backed by
the deposits. Users are granted virtual bitcoin on the sidechain which they can
use in accordance with the rules of the sidechain. Eventually they may request
that whatever balance they have on the sidechain be sent out of the sidechain
and into a normal bitcoin address of their choosing. This achieves a sort of
scalability because the base layer does not have to validate or store any of
the transactions occurring on the sidechain. However, the tradeoff is severe:
the funds are completely owned by the Federation, which means that users are
not guaranteed to be able to access their funds. It’s basically a bank with a
cool API.
This post doesn’t end in a fun or upbeat way: we want everyone to be able to
access and benefit from Bitcoin; we can’t get everyone for access in the obvious
way of bigger blocks or we risk unravelling Bitcoin’s core guarantees; and the
solutions using layers on top of bitcoin reduce some of the core properties that
make Bitcoin valuable to society in the first place. Some of these tradeoffs may
be acceptable in certain cases, but we must always strive to support the most
users with the strongest Hard Money properties we can.
In future posts we’ll see how more sophisticated smart contracts could improve
Bitcoin’s scalability, or at least provide a different set of tradeoffs compared
to the solutions above.