Preface:

I presume most people understand what pegging means with regards to currencies. I use the term Destructive in lieu of Proof of Burn because it doesn't matter if the bitcoins are actually permanently burned or just spent. That is a legal and incentive issue and not a technical issue. I would personally prefer the burning method and will include those properties as well. Destructive Chains are not to be confused with Colored Coin type derivatives (i.e. Mastercoin, Counterparty, etc.) that use bitcoins for transactions.

Premise: A Destructive Chain requires the Bitcoin Blockchain only to verify their origin. A Pegged Chain is reversible.

Pegged vs Destructive Side Chain as Bitcoin Derivative Assets.

Pegged Chains

Pegged Chain Pros:

1. Organic adoption based on its success.
2. Has a (more or less) fixed 1:1 exchange with bitcoins less fees.
3. If the asset fails to be adopted, I can get some or all my bitcoins back.
4. If Bitcoin security is compromised, the entire Bitcoin Derivative Asset is not irrecoverably lost because the pegged bitcoins can be moved.
5. Resistant to pump and dump because it can instantly inflate and deflate through 1:1 arbitrage.
6. More functionality adds to the Bitcoin overall ecosystem because it's non-parasitic.
7. Is better money than Bitcoin (though poorer currency because of clones).

Pegged Chain Cons:

1. Less fees for Bitcoin miners unless merge mined.
2. Sucks development and interest from Bitcoin to replace Bitcoin with a superior (or inferior) cryptocurrency.*
3. Bitcoin becomes a reserve currency.
4. Trades some security risk for greater functionality.
5. Security costs are high with maintaining the Bitcoin peg bridge.

Destructive Chain

Destructive Chain Pros:

1. Less bitcoins circulating means my bitcoins are worth more because the burn is a one time event that can be accounted for.
2. More incentive for development because pre-mined assets can be sold.
3. Adds functionality to the overall Bitcoin ecosystem.
4. As a parasite, it requires the Bitcoin host to remain healthy or it will die. Bitcoin will be a safer store of value.
5. Can be a better currency than Bitcoin (though a poor money because it lacks the liquidity of pegging).

Destructive Chain Cons:

1. Failure of the asset is total loss.
2. Drain on Bitcoin Core development.
3. Easy to pump and dump because it's deflationary.
4. Scam coins are possible.

Conclusion:

There are advantages and disadvantages to both Destructive and Pegged Chains. Both add to the Bitcoin Ecosystem. Pegged Chains can add floating destructive assets from transaction fees. Destructive Chains have greater potential for functionality improvements without threatening Bitcoin. Altcoin developers can choose which type of Bitcoin Derivative Asset would best serve their needs. They can also choose hybrid or layered. Developers can choose hybrid designs with advantages and disadvantage tradeoffs that fit their needs. They can also or instead add layers of pegged assets, though the security costs of pegging grow.



* May be pro or con depending on point of view.

I could see that if they use the sendmany command or some multisig scheme. Perhaps raising the 1 meg blocksize cap will encourage acceptance of more outputs and larger fees.


I suppose I should have asterisked more. I would actually prefer if Bitcoin became a reserve currency in most jurisdictions. It would be a better store of value and be more portable than a local derivative asset.

I've been thinking about this awhile. It's the whole dynamic functioning of a peg versus a one shot static relationship with Bitcoin that has me so intrigued. I hope the altcoin folks are flexible enough to adapt their coins to take advantage of Bitcoin's additional security. I'm sure if there were any premined altcoins that used proof of burn, they realize they were a little ahead of the game as long as they can sell them. Perhaps even Proof of Stake is adequate security for a destructive chain.

Bitcoin will have legacy support for old addresses due to people using cold storage. Destructive chains are not pegged with bitcoins but are bootstrapped with bitcoins at their genesis. I'm not a fan of the Destructive chain concept, but I believe they are inevitable because parasites serve the purpose of keeping a system strong and that greed will always motivate some people to be parasites.

Destructive chains are very esoteric. They are the bastard children of altcoins and Bitcoin. There is a trend happening called Proof of Burn that made no sense to me until I realised their resemblance to parasites. In every other sense they are new or premined shitcoins. The advantage over other altcoins is the instant karma from it's initial value. Only the most innovative and secure assets will dare ask people to burn their bitcoin or spend them with potential scammers. A really innovative asset will destroy a lot of bitcoins and make my bitcoins worth more. Just like pegged chains, if they are successful, then perhaps some of their attributes they can be imitated by Bitcoin. If only other altcoins copy them, then they are not as good as Bitcoin.

That's a good point. That would preclude just spending the investment like an IPO. Proof of Burn is essentially like being tasked to find a block with a difficulty many many orders of magnitude higher than will ever be possible.