Idea for enabling BTC-backed alternate cryptocurrencies

[amincd]

I've been thinking about whether it would be possible to have alternate cryptocurrencies that are 'backed' by BTC, stored in a special address on the Bitcoin blockchain that can only be moved by transactions containing proof of work, instead of a digital signature.

Converting bitcoins into the BTC-backed altcoins would be easy. A party would just send a certain amount of bitcoin to the alternate cryptocurrency's special Bitcoin address, along with information indicating which address in the altchain they want their new altcoins deposited to. Since the alternate cryptocurrency nodes would also store the Bitcoin blockchain, they would see the deposit to the special Bitcoin address and know to credit the bitcoin depositer with the right amount of altcoins.

When someone wants to convert their BTC-backed alt-coins to bitcoins, they would create a special transaction from their alt-address to a Bitcoin address, which the altchain's miners would then use as a reference to create a 'payout' of bitcoins from the special address on the Bitcoin blockchain to the Bitcoin address the alt-coin holder indicated as the destination of the bitcoin withdrawal.

It would be miners that create these special transactions because the proof of work they use to authorize new blocks in the alternate blockchain would also be what's used to authorize the transfer of bitcoins from the special Bitcoin addresses.

The special addresses could use a P prefix, and encode all of the blockchain rules of the sidechain, and information needed to validate txs that spend its UTXO, including:

• Rules:
  
  • Version no.
  • Difficulty period
  • Block time
  • Security features, e.g.:
    
    • Maximum reanimation ratio
    • Maturation period, n, for reanimations
• Version Number
• Current difficulty
• Previous block hash
• Sum_time (time from start of difficulty period)
• Sum_block (number of blocks from start of difficulty period)
• Timestamp registry for previous 11 blocks
• Validation of previous n blocks

In order for a transaction with TxIn from one of these addresses to be valid, the following conditions would need to be met:

• the hash of the block header fields found in the transaction (timestamp of last block in timestamp registry, nonce, difficulty value, merkle root (which is a hash of the altchain merkle root and transaction hash)) and the POW address of the UTXO it's spending (version number, previous block hash) would need to meet the difficulty target
• the timestamp registry of the previous 11 blocks, contained in the transaction, is checked against that of the UTXO it's spending, to validate that the first ten timestamps of the new registry correspond with the last ten timestamps of the previous registry, and that the latest timestamp isn't more than 2 hours ahead of the previous timestamp
• the difficulty value is validated by checking if it matches the difficulty target calculated from the timestamp registry of the previous 11 blocks, the Sum_time value (time from start of difficulty period), the Sum_block value (number of blocks from start of difficulty period), and the difficulty target value found in the UXTO being spent.
• the Sum_time value is validated by checking if it is the sum of the previous Sum_time value and the time difference between the last and current timestamp
• the Sum_block value is validated by checking if it increments the previous Sum_block value by one

The transactions can include additional security features like a 'Validation of previous n blocks' value, that validates whether each of the previous n blocks is valid. If a block is found invalid by one of its successors transactions, then all reanimation transactions in that block are cancelled. This would prevent bitcoin at a POW address from being trivially stolen.

Having these special addresses would allow numerous smaller, decentralized blockchains to be setup with bitcoin backing their value. These could be regional currencies, or used in closed online communities. The Bitcoin blockchain could therefore be much smaller, while still providing the basis for a fungible decentralized currency used by the whole world.

Here are some diagrams visualizing the POW transaction concept:

Basic concept (click for very large version):



A close up of the blockchain - POW transaction relationship (click for large image of a POW transaction):

[Bill Bisco]

I love the idea!

[amincd]

I love the idea!

Great to hear it!

[laowai80]

Why would alt-currencies need to be backed by BTC in the first place?

[amincd]

They don't need to be, and this isn't meant to implemented by all alt-coins. The purpose of creating BTC-backed alt-currencies is to allow people to run nodes that store smaller blockchains and have lower bandwidth requirements, while still having all of the benefits of a global BTC currency: liquidity, global acceptance, more price stability, and more proof of work securing it.

[laowai80]

They don't need to be, and this isn't meant to implemented by all alt-coins. The purpose of creating BTC-backed alt-currencies is to allow people to run nodes that store smaller blockchains and have lower bandwidth requirements, while still having all of the benefits of a global BTC currency: liquidity, global acceptance, more price stability, and more proof of work securing it.

There is no point creating such an artificial structure to support alt-coins. It will not survive in the free market.

Alt-coins already more or less do what you're trying to achieve here, and the most important thing, it's a natural evolution. Some of them are more successful at that, others less successful.

Bitcoin and alt-coins are all backed by the same things: their properties and network of each coin. Backing one coin with another coin is like bankers writing securities on debt obligations sort of thing. It's crashing down before our eyes right now, because it was DOA. Same would happen with your system of BTC-backed alt-coins. Too artificial, won't work, sorry to say this.

[amincd]

Altcoins are not interchangeable with bitcoins. They do not have fixed values in relation to bitcoin, and are not accepted everywhere bitcoin is. They have more volatility and less network security. All technological currencies are 'artificial structures', so I don't see the difference in creating this type of backing capability from creating any other Bitcoin feature.

Backing one coin with another coin is like bankers writing securities on debt obligations sort of thing. It's crashing down before our eyes right now, because it was DOA.

There's nothing wrong with bankers writing securities backed by debt obligations. It's just another financial tool to achieve a desired outcome. The ability to do it is progress.

[porc]

LOL. Why would you want that? ALT cryptos backed by Bitcoin that is backed by NOTHING?

HAHA.

Reality: what is your alt coin backed by?
Delusion: its backed by bitcoin.
Reality: what is bitcoin backed by?
Delusion: nothing.
Reality: so alt coin is backed by nothing.

[amincd]

Bitcoin is the most liquid asset in the world that can be used as a backing without introducing a trusted third party.

[laowai80]

Bitcoin is the most liquid asset in the world that can be used as a backing without introducing a trusted third party.

It's probably the most liquid asset on this forum, that's true. But it'll be years or decades before it becomes what you just said

So, it's all about trust and the network now. More people trust bitcoin and bitcoin has the strongest mining network of all cryptos. But it doesn't mean some other crypto can't come close or have strong enough trust and network that it's detached from bitcoin.

Oh, and why do alt-coins need a fixed relation to bitcoin in the first place? It's like fixing a price of one car brand to another.

[amincd]

The point of fixing an alt-currency to bitcoin's value is to make it interchangeable with bitcoin. This allows a bitcoin substitute to be used with a very small blockchain that only stores the transaction data of one region. With a smaller blockchain, more people can run full nodes, increasing decentralization and security.

[laowai80]

The point of fixing an alt-currency to bitcoin's value is to make it interchangeable with bitcoin. This allows a bitcoin substitute to be used with a very small blockchain that only stores the transaction data of one region.

Bitcoins and alt-coins are already interchangeable, have you checked out the exchanges?

Or do you want to peg alt-coins to bitcoin at a fixed rate? Who would use this kind of system? Why would anybody want to use a blockchain with the transaction data of one region? If you can't download the whole blockchain, just use a lightweight client like MultiBit. It's so artificial a system you're trying to devise here, that it just doesn't have any applications in the real world. I mean what are the benefits compared to lightweight clients?

[amincd]

They're not interchangeable. Bitcoin has a much more liquid market, more acceptance, more price stability and more network security than any of the alts. With BTC backing, and Bitcoin's network security, businesses would be willing to accept an alt in place of bitcoin.

If you can't download the whole blockchain, just use a lightweight client like MultiBit.

Lightweight clients are less secure than full nodes and reduce privacy, since they need leak their addresses to other nodes. Fewer full nodes also means a more centralized network.

[laowai80]

They're not interchangeable. Bitcoin has a much more liquid market, more acceptance, more price stability and more network security than any of the alts. With BTC backing, and Bitcoin's network security, businesses would be willing to accept an alt in place of bitcoin.

If you can't download the whole blockchain, just use a lightweight client like MultiBit.

Lightweight clients are less secure than full nodes and reduce privacy, since they need leak their addresses to other nodes. Fewer full nodes also means a more centralized network.

Just exchange altcoin to bitcoin and pay to merchants if they don't accept your particular brand of altcoin.
Not many merchants accept bitcoin, fewer accept altcoins, but I wouldn't say bitcoin has an established merchant network already, maybe just in some big cities. By the time bitcoin is accepted by a wide variety of merchants, altcoins will already be quite popular too, and will be more liquid and/or directly accepted by merchants. Or processing services will make it easy for merchants to accept any coin, just like some of them do already, like this processing service: https://coinpayments.net/ for example.

[amincd]

Having regional alt-currencies backed by BTC would be more convenient for people than having to store the entire Bitcoin blockchain on their hard drive, or use a lightweight client that increases centralization and reduces privacy. It's also more convenient than having to hold other currencies, like dollars or alternate Bitcoin-like currencies, and use an exchange every time they want to make a payment.

By the time bitcoin is accepted by a wide variety of merchants, altcoins will already be quite popular too, and will be more liquid and/or directly accepted by merchants.

You're ignoring the fact that there will most likely be one technological currency that will be the largest and most widely used, and that will probably be Bitcoin, and that there are numerous advantages to holding and using the largest one. A currency having more liquidity and a larger market mean less price volatility, lower exchange fees (which translates into lower payment processing fees), wider acceptance (even with multi-currency processors available), etc.

My argument is this: if you want to hold the largest and most widely used BTC-based currency (which has so far been Bitcoin), it would better if there were regional currencies backed by BTC, where most of the transactions take place, and a smaller Bitcoin blockchain, than for all transactions to take place on the Bitcoin blockchain, and every individual in the world to have to store all transaction data that is produced globally to be able to run a full node.

[bitpop]

Have you looked into colored coins?

[amincd]

Colored coins are great, but they're not decentralized. Their backing is totally centralized to the party that issues them. Proof of work transactions would allow a currency to get bitcoin backing in a decentralized manner, with the miners controlling the conversion of the alt-currency to bitcoin.

[bitpop]

Colored + p2sh?

[amincd]

I don't know if P2SH can impose proof of work conditions, since, from what I understand, the script supplied by the redeemer has to hash to a specific value, which is different than hashing to a value that meets a particular difficulty target.

Also, the point of this proposal is to move the transactions to other blockchains, to reduce the load of transactions on the main Bitcoin blockchain. Colored coins keep all the transaction data on the Bitcoin blockchain. I think colored coins are excellent, but have a different purpose than this proposal.

[bitpop]

Make a bip