Is a layer 2 coin/mining possible?

[jackg]

I don't know if this would achieve anything or be useful but is it possible to make pow and pos tokens on layer 2 of the bitcoin blockchain (in a way they'd have their own mining and compressed/hashed versions of the blocks and certain transactions could be entered into bitcoin's blockchain but most could be stored elsewhere). I was thinking of this as being more of an "adopt the security of a long lived blockchain while offering other incentives like cheaper fees, multi or cross chain validation, or additional functionality bitcoin.apps won't offer because it detracts from the protocol's security". I know layer 2 has applications and tokens but I thought mining was fully reliant on bitcoin's chain and consensus was determined by the software rather than having support/opposition flags like normal blocks for coins do.

Every time I try to search for something like this I'm normally directed to eth and while eth can have clients that enforce its own consensus rules, surely separate nodes on bitcoin's blockchain that were capable of determining their own concensus mechanism and matching the flags of a block would still be possible to implement? Are there any functioning examples of this?

[d5000]

Do you mean something like the Drivechain project, started by Paul Sztorc?

It's currently not live on the Bitcoin blockchain, afaik it's still in alpha and working with altcoin chains, probably testnets (they write something about Zcash at their website). It would enable what you write here:

"adopt the security of a long lived blockchain while offering other incentives like cheaper fees, multi or cross chain validation, or additional functionality bitcoin.apps won't offer because it detracts from the protocol's security".

I know layer 2 has applications and tokens but I thought mining was fully reliant on bitcoin's chain and consensus was determined by the software rather than having support/opposition flags like normal blocks for coins do.

Drivechain would use merged mining, like Namecoin. This means that it uses Bitcoin's security, but also is able to set some own rules as long as the 2-way-peg with the Bitcoin chain is not affected.

Another possibility which would be even more independent from the Bitcoin chain would be an algorithmic bitcoin-based stablecoin on a chain with smart contract functionality (doesn't have to be Ethereum-based). Such a chain could however not directly interact with the Bitcoin chain (only via atomic swaps).

[NotATether]

Do you mean something like the Drivechain project, started by Paul Sztorc?

It's currently not live on the Bitcoin blockchain, afaik it's still in alpha and working with altcoin chains, probably testnets (they write something about Zcash at their website).

Merged mining is not the only way to can make what is called a "side chain". I'm not sure why its called that anyway, because it implies it's something that you use side-by-side with the base Layer 1. Even Layer 2 solutions can make use of side chains by storing extra data on nodes' disks if they need to.

Another possibility which would be even more independent from the Bitcoin chain would be an algorithmic bitcoin-based stablecoin on a chain with smart contract functionality (doesn't have to be Ethereum-based). Such a chain could however not directly interact with the Bitcoin chain (only via atomic swaps).

I think those of us who saw Luna's implosion know what would happen if such a thing was repeated here.

[dkbit98]

I don't know if this would achieve anything or be useful but is it possible to make pow and pos tokens on layer 2 of the bitcoin blockchain (in a way they'd have their own mining and compressed/hashed versions of the blocks and certain transactions could be entered into bitcoin's blockchain but most could be stored elsewhere).

I think that something like this already exists on layer two sidechains like Liquid that is made by Blockstream, and maybe some other chains like RSK.
They have tokens built on top and option for more privacy with Liquid Confidential Transactions, but I think that additional mining would not be very popular of profitable.
One problem I see with this is less decentralization because Liquid is federated network, so you would have to trust them and have less decentralization.

Do you mean something like the Drivechain project, started by Paul Sztorc?

I heard about Drivechain but it never received much attention from Bitcoin community.

Another possibility which would be even more independent from the Bitcoin chain would be an algorithmic bitcoin-based stablecoin on a chain with smart contract functionality (doesn't have to be Ethereum-based). Such a chain could however not directly interact with the Bitcoin chain (only via atomic swaps).

Stable coins are also starting to show up in Lightning Network and they are totally backed by Bitcoin, so there is no connection with ethereum.
I am not a fan of any stable coins, but they can be useful for temporary use case, and Lightning Network could be used for improving privacy, if done correctly.

[DaveF]

So what you are looking for a L2, but instead of transactions just moving they would need to be 'mined'.

I think consensus would be a disaster. Although not 100% the same, look at what happens to any coin that has a small amount of miners. Going the other way if it's merged mined, then you might as well just skip it and set it up like LN and use BTC in the L2.

I could be totally wrong, or just not seeing something. But I think keeping the L1 as the 'mined' chain and L2 as non mined would be better.

-Dave

[BlackHatCoiner]

The currency (BTC) is strictly related with the mining economics of Layer 1. Therefore, you can't just mine in another layer and earn BTC. You can mine in Layer 1 and get paid in Layer 1, mine in Layer 1 and get paid in Layer 2 solutions (such as mining, and getting paid in LN-BTC), or mine in Layer 2 and get paid in something different.

[d5000]

Merged mining is not the only way to can make what is called a "side chain".

Of course. I'm however not aware of any other project (for any blockchain) with existing software at alpha status or more which achieved a 2-way peg without resorting to centralized mechanisms like a "Federation" (e.g. Elements, Liquid, RSK). "Proofs of Proof of Work" (e.g. NiPoPoW) is the other "school" which seems promising but there seem to be some technical hurdles still to overcome. (If I'm wrong and there is a working-ish project of this kind, I'd love to see a link ... there seem to be a few small altcoins - namely ERGO, Nimiq, and WebDollar - supporting NiPoPoW but have they achieved to test any sidechain?).

I think those of us who saw Luna's implosion know what would happen if such a thing was repeated here.

Depends on the working of the stablecoin algorithm. Simple CfD-based coins (Bitshares style) combined with atomic swaps would be perhaps enough to create a "mini-Bitcoin-value-ecosystem" inside of the alt chain, and they would generate less "systemic" risk.

@BlackHatCoiner is of course right that such a sidechain, if it uses its own consensus rules, would need another token to be distributed via mining, never Bitcoin. It would be an altcoin/sidechain hybrid.

[PrimeNumber7]

Another possibility which would be even more independent from the Bitcoin chain would be an algorithmic bitcoin-based stablecoin on a chain with smart contract functionality (doesn't have to be Ethereum-based). Such a chain could however not directly interact with the Bitcoin chain (only via atomic swaps).

I think those of us who saw Luna's implosion know what would happen if such a thing was repeated here.

I understand that Luna did not have actual assets to back up its value. As long as the smart contract has access to the same number (or greater than) of assets, and the assets are valued similarly, I don't see a reason for a potential implosion.

For example, if a smart contract were to issue 1 sideBTC in exchange for 1.001 BTC, and were to redeem 1 sideBTC in exchange for 0.009 BTC, the value of 1 sideBTC would always remain at approximately 1 BTC, and market transactions would most often make it so redemptions/issuances would be unnecessary.

In theory, it would be possible to create some layer 2 PoW (or PoS) chain on top of bitcoin's PoW. Transactions on the layer 2 chain would only be as secure as the PoW securing the L2 chain, and transactions between the L1 and L2 chain would be as secure as bitcoin's PoW.

[NotATether]

Another possibility which would be even more independent from the Bitcoin chain would be an algorithmic bitcoin-based stablecoin on a chain with smart contract functionality (doesn't have to be Ethereum-based). Such a chain could however not directly interact with the Bitcoin chain (only via atomic swaps).

I think those of us who saw Luna's implosion know what would happen if such a thing was repeated here.

I understand that Luna did not have actual assets to back up its value. As long as the smart contract has access to the same number (or greater than) of assets, and the assets are valued similarly, I don't see a reason for a potential implosion.

For example, if a smart contract were to issue 1 sideBTC in exchange for 1.001 BTC, and were to redeem 1 sideBTC in exchange for 0.009 BTC, the value of 1 sideBTC would always remain at approximately 1 BTC, and market transactions would most often make it so redemptions/issuances would be unnecessary.

The problem here is that you shouldn't need an algorithm to regulate the price of the sidechain BTC.

See, 1 LN-BTC = 1 BTC not because Lightning Network is regulating the price but because it bulletproofed the network implementation from hacks and flaws - the only way you'd be able to change the price of LN-BTC anyway (which is down to zero) - you don't need an algorithm when you have two layers of a coin that ultimately use the same network*.

*I did not say "tokens" because these have algorithms that actively try to make the price different from the main coin.**

**Coinbase has a wrong definition for "token" here: https://www.coinbase.com/learn/crypto-basics/what-is-a-token (the first one) which everyone should disregard to avoid muddying the waters further.