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):

[1715192531]

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[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

[crazy_rabbit]

Very nice idea! Although- isn't this somewhat what mastercoin is trying to do? You should check them out.

[infinitybo]

Amincd, I am not certain if your hypothesis is true, nevertheless I like the basic concept of a BTC-Backed.

[amincd]

Make a bip

Don't know the protocol well enough, and there are still a couple details I need to work out anyway, like how to prevent a dishonest mining party from trivially robbing the POW address of the BTC stored at it.

Very nice idea! Although- isn't this somewhat what mastercoin is trying to do? You should check them out.

Thanks! I think Mastercoin is trying to do something similar to colored coins, in using the Bitcoin blockchain to store transaction data for its protocol.

I like Mastercoin for the same reason I like colored coins: it's using BTC as an underlying protocol and network so that it can focus only on the added features, rather than trying to recreate everything from scratch like other altcoins. It has a different goal from this proposal however, in that it's not trying to minimize blockchain bloat and network bandwidth requirements (in fact, it will greatly increase them), while the point of the POW transaction is to be able to use other blockchains to store transaction data, while still having the coins in those blockchains backed by BTC.

[spartacusrex]

Like it.

Been thinking about a similar system ever since I read TierNolan's post

https://bitcointalk.org/index.php?topic=145380.0

In your system, why not just keep all the TXN's to Bitcoins.

When you put the money on an altchain - it just stores the amount of BTC you send. Not some other alt coin. There would be no rewards for mining except fees.

Then you can use your btc with anyone on the sub-chain, and check out to the Main Chain, one level up.

This system could be cascadeable. Altchain off an altchain off Bitcoin..

The only bit I am unsure about is the Trust levels required.

You would need TO TRUST the owner of the sub chain. Since he could post an invalid Merkle-Root hash that assigned him all the btc. And cash out. You can't really have the main chain check the TXNS, as that defeats the object of it being off-chain! lol..

This is not so bad quite frankly, since their treachery would be visible. They could not do it without being busted. And destroying what was probably a very profitable enterprise.

But is there a way of doing it without ANY TRUST ?

[amincd]

Like it.

Been thinking about a similar system ever since I read TierNolan's post

https://bitcointalk.org/index.php?topic=145380.0

That's very interesting, thanks for pointing it out to me.

In your system, why not just keep all the TXN's to Bitcoins.

When you put the money on an altchain - it just stores the amount of BTC you send. Not some other alt coin. There would be no rewards for mining except fees.

I would like it to be used to back sub-chains that get all of their value from the BTC-backing them, for example bitcoin substitutes intended to be used within specific geographic regions, but I think technically these bitcoin-substitute coins are still 'alternate cryptocurrencies', since they are not residing on the Bitcoin blockchain.

I think there's also value in making the proof of work transaction protocol flexible, and allowing people to design the sub-chains in any way they want, whether that means chains intended to be substitutes of bitcoin, or chains that are only partially backed by bitcoin, and are intended to be fully separate cryptocurrencies. Flexibility increases the space for innovation.

This system could be cascadeable. Altchain off an altchain off Bitcoin..

Well the sub-chains can have any rules they want, including having their own sub-chains. There are no constraints on how the sub-chains are designed, since the proposed proof of work transaction is validated only by the sub-chain block header.

The only bit I am unsure about is the Trust levels required.

You would need TO TRUST the owner of the sub chain. Since he could post an invalid Merkle-Root hash that assigned him all the btc. And cash out.

The owners are the miners, and yes you would have to trust them. If the Bitcoin nodes are going to validate the authenticity of the Bitcoin transaction the sub-chain miners are offering, then Bitcoin nodes would need to store all transactions in the sub-chain too, defeating the purpose of the sub-chains.

[amincd]

The proposal needs some work done on it. Ideally, all of the information needed to calculate the target difficulty of the transaction that spends BTC at a POW UTXO would be encoded in the POW address. I believe this could be done if the 'time since start of new difficulty period' (sum_time), the 'number of blocks in difficulty period' (block_number), and the timestamps of each of the previous 11 blocks are included in the POW address. That way, Bitcoin nodes could validate that a POW tx meets the target difficulty and has accurately updated the 'sum_time' and 'block_number' counters, and timestamp register, only by looking at the prev_out.

[johnytelevision]

Aren't all altcoins are backed up by bitcoin in one way or another...

I'm not sure if it good idea to enforce it.

[amincd]

No, altcoins are not backed up by Bitcoin. They have independent coin issuance and coin supplies.

[amincd]

Given the recent sidechain publication, I thought now would be a good time to expand on how sidechains can allow for much more efficient resource usage, and can increase decentralization, with this diagram representing the data structure of the Bitcoin blockchain and hypothetical regional sidechains:



People in each region do the vast majority of their transactions with parties in the same region, and therefore rarely do they need to have knowledge of the transaction data of other regions. A regional blockchain would therefore give a person living in the region access to almost all of the information they need to validate the transactions they will be doing, while containing significantly less data than the global aggregate of transaction data that would be contained if everyone shared the same blockchain.

We can imagine scenarios where ordinary people store two blockchains: a sidechain for their region, and the main Bitcoin blockchain, while professional users (e.g. international businesses) who do significant international business store all of the regional sidechains as well as the Bitcoin blockchain, so that they can easily transact in any sidechain coin.

Moving to this sort of architecture can allow for ordinary people to help validate the transaction data, instead of using SPV clients and relying on full nodes to do the validation. Miners can even source their sidechain transaction data from ordinary people running the full-sidechain nodes of their respective region using the getblocktemplate protocol, putting almost the power of transaction validation in the hands of small users.

[DhaniBoy]

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