Sidechain Observer - Projects & current state of development

[d5000]

I thought that as we have a Lightning Network Observer, it could be nice to have a Sidechain Observer topic, too. The discussion is currently scattered among a lot of threads, most of them not really having sidechains as main topic (like Ordinals threads). So this should be a space to bundle the information a bit. And while the evolution of this technology was long stagnant, in 2023/24 there were some interesting developments in this area.

Basically this thread is to share all kinds of news & information regarding sidechains. Discussion about all sidechain types are allowed - while I prefer of course decentralized ones, there is currently none fully operational, so federated models like Liquid or RSK can also be talked about. Centralized "bridges" (like wBTC) however are OT.


What are sidechains?

Sidechains (often simply called "L2s" or "layer-2's", even if this term also includes Lightning) are blockchains with a token pegged 1:1 to the value of Bitcoin. This allows it to "scale up" the number of potential users and transactions. The ideal sidechain would be a totally decentralized "second layer" of the Bitcoin network, where users could "transfer" value to, and bring it back to the main chain, without having to trust new (centralized) parties. Currently such a network is still not operational, at least regarding Bitcoin; all operational sidechains have still centralized elements.

The big challenge is the two-way peg: It is easy to burn a BTC unit on mainchain and create a coin unit on a sidechain for it ("peg-in"). This is however only a "one way peg" (Spacechains do that exactly). But it is very difficult to design a system where this BTC unit could "return" to mainchain ("peg-out"). It can of course be "burnt" on the sidechain, but on Bitcoin no new units can be created due to the 21 million token limit. So what is needed is a way to temporarily retire the coin from circulation, and allow to transfer it to an address which can prove that it has burnt a sidechain token which can prove its "ancestry" goes back to a blocked Bitcoin and that it was never double spent.
 
Types of sidechains & Current projects

L2.watch is a website displaying the status of most of the known projects. There is also this overview about sidechains and related projects like Spacechains and Spiderchains. BitcoinLayers is doing risk analysis for some of the existing projects.

Drivechain: A merged mined sidechain, where the miners control peg-ins and peg-outs. The project was started by Paul Sztorc and is in beta state, only testnets are available. Would need new opcodes for Bitcoin Script.

Project website - Github repo - BIP 300

(Static) federated sidechains: A sidechain where a multisig "federation" controls the peg-ins and peg-outs. Such a federation is often composed of addresses controlled by several different publicly known entities, e.g. companies and "trustworthy" individuals. This makes this model relatively centralized.

Current projects:

- Rootstock (RSK) (operational). According to the project its model already incorporates some dynamic federation elements.
- Liquid Network (operational)

Dynamic Federations: Sidechains where the federation is not static, but instead is changed periodically. Normally the federation members are voted on the sidechain, and sidechain incentives ensure that they don't misbehave, for example via a security deposit which can be slashed if they double-spend funds.

Current projects:

- Nomic (partly operational, in an audit process, depends on PoS consensus via a partly premined token)
- Stacks (blockchain operational but the bridge is in beta, project announced that in 2024 it will become operational, depends on PoS consensus via a partly premined token)
- BEVM (seems operational) Claims to work with Taproot.

Rollups: A sidechain where some participants (normally the sidechain validators) store information about the sidechain state (transactions, owners etc.) on the mainchain, but in a compressed form. The idea is that there is always enough information on mainchain that the sidechain state can be proven, in some cases even the transactions can be "reconstructed". There are two main types: Optimistic rollups, where cheating/double-spending has to be proven, and ZK rollups, where a zero-knowledge proof can prove that the state is correct.

On Ethereum they are already quite widespread. However they have still often centralism problems. Examples are Optimism and Arbitrum.

There are proposals for Bitcoin rollups.

Extension blocks: This can also be described as a type of sidechain. Basically a sidechain block can be referenced by a miner in the mainchain block header. Thus, this kind of sidechain would need to be integrated into the protocol and thus, like Drivechain, it needs the approval of the developers of the reference implementation (Bitcoin Core). Only altcoins have implemented this model. The most famous example is probably Litecoins MimbleWimble extension block, operational since 2021.


Currently I'm following mainly the Nomic and Stacks projects, as all others seem either be evolving very slowly or are only papers/projects. Probably I will post news about them soon, because on both, in the next months a crucial event would take place.

[dkbit98]

I am interested in bitcoin sidechain projects for different reasons, but mostly because of privacy and reduction of transaction fees.
Jameson Lopp website is a nice resource for finding more information about sidechain and everything else related with Bitcoin:
https://www.lopp.net/bitcoin-information/other-layers.html#sidechains

[Wiwo]

I am interested in bitcoin sidechain projects for different reasons, but mostly because of privacy and reduction of transaction fees.
Jameson Lopp website is a nice resource for finding more information about sidechain and everything else related with Bitcoin:
https://www.lopp.net/bitcoin-information/other-layers.html#sidechains

Exactly achieving bitcoin privacy and low fees couple with faster transactions will indeed aids high bitcoin scalability and adoption among daily bitcoin holder's since achieving that won't be putting holes in bitcoin users pocket and at the same time supporting high privacy which is the original intention of having a decentralised asset and currency like bitcoin.

[d5000]

https://www.lopp.net/bitcoin-information/other-layers.html#sidechains

Thank you, very helpful website. Some of the projects described as "sidechains" would not meet my own definition (for example, they list Sequentia, which has no peg at all and for me is simply a "Bitcoin-anchored" altchain like Komodo) but others do and generally the site seems a good starting point too. So I've included it in the OP.

There is also L2.watch which lists a quite large list of projects and ideas (included it now in the OP) and the state of their development progress. They include "wrapped token" and other centralized mechanisms too, but there are also some interesting projects I didn't know about.

For example there is BEVM, which claims to work with Taproot contracts and according to L2 Watch is "operational". They claim also to be more decentralized than Stacks. I have however still not understood how their 2-way peg works; in their whitepaper they evade the term it seems and instead talk about "interactions". If someone knows BEVM better and can say if it could help with Bitcoin decentralization or it's just another vapourware/centralized project, more info about that project is welcome!

[d5000]

I'm currently examining the projects which already have a mainnet on L2.watch and are rollups or "traditional" sidechains (things like "wrapped tokens" aren't really interesting here). The big question is: Did they already solve the problem with the 2-way peg?

Ok, let's go through them one by one. Today I'll cover the first two rollups with active mainnet: Biop and BVM.


Biop is a rollup using the Optimistic Rollup technology we know from Ethereum projects like Optimism (they claim to be the first for Bitcoin). The mainnet was launched in Q1 2024.

There are two characteristics of this project I don't like that much: 1) they seem to come from the BRC-20/Ordinals space, and 2) they have a premined token where no less than 19% were allocated to the founders, and 20% to investors (3,x% in an "IDO), plus 10% which went to a "Foundation". Quite centralized even for the token space, as 49% of the tokens benefit the founders in some way, so I'm very skeptic that this rollup could really attract Bitcoiners.

The Whitepaper explains its inner workings. The chain uses Bitcoin's security and additionally has a PoS consensus. "Sequencers" create blocks on the sidechain, and "validators"' task is to provide fault proofs in the case a Sequencer includes an invalid transaction; so this Sequencer can be slashed. They have a virtual machine for turing-complete smart contracts called BVM (not to be confused with the other rollup!).

I haven't found anything in the whitepaper how their Bitcoin peg/bridge mechanism works and if it's already operative. Yes, I know, optimistic rollup, but how exactly are transactions written "back" to the Bitcoin blockchain and when? So it's a bit hard to take this project seriously. It's also not clear what the different versions of BIOP mean. To me it seems like an altcoin where only perhaps tokens like BRC-20 can be transferred to. Perhaps somebody can enlighten me ...


BVM (Bitcoin Virtual Machine) is another Optimistic Rollup, or it seems to be a set of different rollup chains: one dedicated to GameFi, one to AI, one to DeFi, and one to SocialFi. And again: they "use a technique akin to that of Ordinals to inscribe data". Good start  They have even a part of the whitepaper which sounds exactly like the Biop whitepaper: explaining that an Optimistic Rollup is "a fancy way of describing a blockchain that piggybacks off the security of another blockchain". Do they copy everything from the same source?

But at least they seem to have a Bitcoin bridge that works, even if it is quite convoluted - see whitepaper. To "deposit" Bitcoin to BVM, you first have to go through WBTC (WTF???), i.e. a centralized Bitcoin<->Ethereum bridge. The same is true for withdrawals: you first exchange your BTC on the sidechain to WBTC, and then to BTC via the centralized bridge.

So this is basically a WBTC sidechain, not a Bitcoin sidechain.


I'm quite disappointed from these two projects I must say. Let's hope for the better in the next edition(s) of this Observer. Next ones will be BEVM and Elastos.

Of course, everybody having something to share about an existing or future sidechain project, or has experiences with one of the projects in L2.watch, is invited to participate in this thread

[d5000]

Ok, let's continue with BEVM. It seems that this sidechain is a little bit more interesting than the two I covered in the last post, so I'll dedicate a whole post to it.

Like BVM (do not confuse both!) this project's goal is to provide an EVM-compatible environment for dApps which can use Bitcoin for smart contracts and as "gas". The consensus algorithm is based on PoS, with up to 1000 "consensus nodes". Addresses are Ethereum-style, and Ethereum tokens can be swapped to the chain. It's build with the Substrate blockchain framework. The Whitepaper can be found on Github.

Now to the most important part: how does the bridge (2-way-peg) work?

The PoS consensus nodes manage the bridge as custodians. When a peg-in is performed, the user transfers the Bitcoin to the custodians. All custodians run a Bitcoin light node which is part of the consensus, and thus they can prove that the transaction occured on the mainchain. A peg-out is performed by a BFT vote. Each peg-out intent is checked by the custodians and only if 2/3 of them vote that the peg-out is legitimate (i.e. the ancestry of the pegged-out coins goes back to a peg-in and there was no double spend) one of the custodians creates a transaction to the user who pegs out.

This looks very similar to Thorchain: The chain works purely by the incentives the PoS consensus on the sidechain generates. However, the docs are not as detailed as I would have liked. They don't answer the following questions: 1) to which node the peg-in is performed, 2) which kind of transaction is generated in the peg-in (multisig? with whom?), 3) how the node is selected which pegs-out the coins on the mainchain, and also 4) what happens if a node misbehaves?

So I'll continue to investigate about this one. I'm not totally convinced it's a serious project but it could be one - it claims to have got investments from ViaBTC, for example.

What does not look that good is the tokenomics. 50% of the coins are beneffitting the founder team (15% direct team allocation, 20% investors, 15% foundation). Validator incentives make up only 22%. This is thus also a project where I would propose to fork it with 100% validator incentives if it works



PS: I found this blogpost which explains the peg mechanism a bit:

- The PoS consensus nodes form a multisig federation with up to 1000 nodes thanks to Schnorr signatures. Instead of a traditional multisig structure a MAST (Merkelized Abstract Syntax Tree) is used.
- If an user pegs-in into the sidechain, he sends the BTC to this federation.
- For a peg-out, 66%+ of the federation members have to "vote" for this peg-out via multisig consensus.

Not exactly a very complex solution and basically the same what Liquid is, only with far more members and driven by PoS consensus.

About the slashing mechanism I didn't find anything. What if 66% of the PoS federation collide to cheat? Is there any mechanism including Bitcoin mainchain proofs?

PS2: This however is a quite dumb blog post, so I question the technical ability of the BEVM team a bit. WTF, "Before the explosion of BRC20 tokens, few could have believed that it was possible to issue tokens on Bitcoin." Who wrote that utter bullshit?

[d5000]

Elastos is the next project in my list to present here. It's a L2 project initially launched in 2017, now having archieved mainchain stage.

The consensus is based on merged mining with Bitcoin, with "standard" block rewards through the ELA token, including halvings and a capped total supply. A quite "traditional" altcoin up to this point.

For Bitcoin scaling, the BE-L2 technology is presented as a solution (the link leads to the whitepaper). However, it seems that the Bitcoin stay on the mainchain. They can be used, through zero-knowledge proofs, on the sidechain for smart contracts, for example for lending contracts and other DeFi apps.

So in general I think this is not a full-fledged sidechain but a project addressing some limited scaling use cases. In contrast to the category it was put in on l2.watch, it seems also not to be really a rollup, more a kind of atomic swap technology. The technical concept looks okay though. But again, we have tokenomics with a centralized character, with 50% of the tokens pre-allocated. Another more or less disappointing project, but regarding its market cap one of the bigger ones.


Edit: Decided to expand the post because there are various projects on l2.watch which do not really deserve an own post, as they aren't really Bitcoin sidechains. Just to mention them here so to help people which projects on that site aren't that interesting.

CoreDAO is one of these. It's basically a DPoW altcoin anchored on the Bitcoin blockchain. Again we have shameless namedropping ("Satoshi Plus Consensus") and a highly centralized distribution where only about 40% are available for miners and through other rewards. There was a substantial airdrop (25% of total supply) though, but this doesn't necessarily mean the founders didn't benefit from it.

The Bitcoin bridge called coreBTC. To "move" BTC to the Core blockchain, you can select a custodian (called "lockers") from a list which will have to provide a collateral and are incentived to return the Bitcoin if there is a peg-out. So if I interpret it correctly, it works a bit like Thorchain. But on a whole this doesn't look really interesting, it's a mechanism you could build on most blockchains.

[d5000]

Let's go for the next group on l2.watch.

ckBTC on the ICP altcoin network is supposedly a decentralized bridge, converting ICP in a Bitcoin sidechain. But there is no good technical explanation available, much less about the incentives. There seem to be smart contracts (called "canisters") which track the Bitcoin network, probably with a SPV client (see Bitcoin Integration). These so-called "ckBTC minters" track if BTC users spend Bitcoins to an address controlled by them, and create a ckBTC token on ICP. While if a ckBTC is burnt, the ckBTC minters redeem it on the BTC chain.

The most ridiculous thing here is that they claim to use "no middlemen" and "no custodians", but - somebody has to operate the ckBTC minter contract. This is the middleman, FFS!

For me that sounds too easy to be convincing - if this was that easy, it could have been implemented 10 years ago in any altcoin, at least on any offering turing-complete smart contracts. I distrust ICP in general for the high amount of technobabble they use, so this "sidechain technology" doesn't improve my impression here.

In addition, I found this (lol):

Issuing and redeeming ckBTC goes through Know Your Transaction (KYT) checks to ensure no bitcoin enters the Internet Computer that is associated with criminal activity.

Source

Oh. So it does KYT and is decentralized? How does this magic tech work, is there some SchellingCoin-based blacklist for example? Or simply the founders maintaining a centralized blacklist ...


Libre doesn't seem to be really a sidechain, even if they talk about "improving" scalability on their website. They instead use a bridge called pNetwork. Nothing more to expect from a "tech" coming from the Ordinals/Runes sector, despite the "beautiful" name .

Quote from the pNetwork whitepaper:

The pNetwork is currently based on a hybrid decentralized approach in which a limited group of permissioned nodes operate the bridges, and third parties may join the network albeit with limited functionalities

They seem to be transitioning from a completely centralized bridge to an optimistic rollup approach, but the whitepaper lacks a description how this would work with Bitcoin.


Nervos Network is a chain I have stumbled upon somewhen in the past (Ah I remember now, it's the guys with the RGB++ protocol). It's a relatively old (2018) PoW altcoin with smart contract functionality. But even if they are listed on L2.watch as a Bitcoin sidechain, this functionality seems not to have been implemented yet. It seems to be in an early state of development.


And finally Gelios, another EVM-compatible "sidechain" and "the first Runes-based blockchain" (looks good right?). Their "bridge" has one characteristic I haven't seen before: they encode some data via OP_RETURN when doing a peg-in (see here), for example the Ethereum address of the receiver. But again, no info is provided about how the incentives of the bridge work. It's probably a completely centralized bridge like wBTC.

Again I found nothing really interesting here, but if my conclusions are wrong I'm grateful for any feedback The purpose of this Sidechain Observer is "not" to denigrate projects as "shitcoins", but actually to find interesting approaches. But the success has been limited until now, so I can actually understand why most Bitcoiners are still not really interested in sidechain technology.

The following protocols with a working mainnet are still missing: Kadena, MVC, Map protocol, Rollyx, Sovryn, U Protocol and ZkSats (seems to be a scam, see article linked by dkbit98 in the post below).

[dkbit98]

I found one article claiming that most Bitcoin Layer solutions are just marketing scams.
We could argue if that is true or not, but there is one interesting screenshot in this article that shows all Bitcoin sidechains compared.
I am looking to find website origin of that screenshot, if someone knows about it please post link below


https://blockspace.media/insight/most-bitcoin-layer-2s-are-marketing-scams/

[d5000]

Thank you for that interesting screenshot and the Blockspace article! That's indeed the impression I'm getting too, that most "L2s" are more or less traditional shitcoins with some wBTC-style bridging, but few have really mechanisms qualifying them as a "sidechain" or "rollup" with a convincing, decentralized 2-way-peg.

I've done some googling and found BitcoinLayers.org, which seems to be the origin of the screenshot. It's a very interesting website, and they've done basically what I'm doing in this thread but with a much more systematic approach. They do a risk analysis of a couple of known layer-2's, their categories being Bridge custody, Data availability, network operators and settlement assurance (that seem to be these green, yellow and red icons).

It's really shocking that apart from Lightning all other projects have at least one point marked in red. This could of course mean that the site is run by "Lightning network fans", but I think in general the criticism they do on the existing projects is mostly valid. Have to dig a bit deeper though.

PS: Ah, interesting, so ZKsats already is known as a scam according to the Blockspace article? Then of course it won't be covered by my "Observer" posts. L2.watch should then also remove them ...

PS2: Didn't find really info about the ZKsats rugpull, but they went silent on X/Twitter two months ago, so this may be the red flag here. There are also some users complaining in this post.