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Forgive me for resurrecting an old thread, but better late than never, right? The ideas in this paper are good, 95% of the way there, I'd say.
Section 3 describes the SPV proof method, essentially requiring us to trust miners not to collude to steal the funds mid-withdrawal, which they could very easily do. This solution, I think, flies a little too close to the sun; requiring this much trust in miners would, for me, break Bitcoin.
Appendix A describes a federated peg method. This requires us to trust federated servers. This would be fine for a laboratory experiment, but this solution is not trustless enough for actual use. No sale!
But it occurs to me, that there's a workable example of something that's not federated, but that resembles a federation enough to make collective decisions. You might even say it's already proven somewhat successful. I'm referring to the super node/master node concept, generically, collateralized nodes. The super nodes decide things in similar way to members of a federation, but membership is fluid. Anyone with enough collateral will be accepted into the federation as a matter of protocol. I'm more comfortable with this model; it makes the system open. Anyone materially invested in the chain can run a node and get a vote. Does the system have vulnerabilities? Having participated in working examples (Dash and others) myself gives me confidence that this system can be stable and robust against potential attack vectors. Bitcoin itself had to stand the test of time before people became confident that it was safe.
The next question: could collateralized "super nodes" on a side chain function to approve those critical Withdrawal Transactions? I think they could, and in a straightforward manner, too. Main chain coins could be held in safekeeping collectively in a multisig address, just as they are in the federated approach. (m of n) keys would be required to move coins out of that address. Each super node holds a key. As super nodes go offline and come online, the remaining nodes sign transactions to move all funds into new (m1 of n1) addresses and share them among all super nodes. It is not necessary to submit these to the blockchain immediately, as long as any single super node remains, the funds cannot be lost. It should be more than sufficient to submit the latest one every 10 minutes or once per Bitcoin block, or at least once per Withdrawal Transaction. The ratio of m to n should be as high as necessary to prevent a single actor or coalition from controlling m supernodes, but be low enough to be reasonably certain that (n-m) / n of the nodes will not go offline simultaneously. We can look at empirical data from Dash to debate and determine an ideal ratio.
In combination with SPV proofs, I would be confident enough in such a sidechain to actually put my bitcoin there.
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