Pegged Sidechains [PDF Whitepaper]

[HeliKopterBen]

What are the chances that a side chain becomes the dominant chain?  To answer this, we need to determine at what point miners will likely point more processing power at the side chain than at the main chain.  At this point, the side chain will be more highly secured by processing power than the main chain and the side chain can be considered dominant over the main chain.  So at what point will the reward for mining the side chain be higher than the reward for mining the main chain?

Currently, the average tx fee per transaction is roughly 0.0002 and the average tx fee reward per block is roughly 0.1 btc (I can show how I calculated this and/or show sources if needed).  The current block reward for newly created coins is 25 btc.  The side chain will have to achieve a reward of greater than 25 btc per block to overtake the main chain (I did not include the tx fee reward because this is currently negligible and will likely be negligible if a side chain has many more txs.  Also, this is a conservative estimate).  To achieve a reward of greater than 25 btc per block, the side chain will have to generate 125,000 txs per block (25/0.0002) assuming tx fees on the side chain are equal to tx fees on the main chain (these fees will likely be lower but this is a conservative estimate).  Therefore, the rate at which the side chain overtakes the main chain is 208 txs per second.

This estimate also does not take into account the possibility that the side chain can issue a secondary coin as a block reward, which can further reduce the number of transactions needed to overtake the main chain.  Also, halving of the bitcoin block reward over time will reduce the number of transactions needed to overtake the main chain.  With discussion of side chains being used for everyday transactions and bitcoin being used for long-term storage, I can see this overtaking as a real possibility.

There are a few assumptions about future conditions in this analysis.  However, at current rates and with the only assumption being that side chain tx fee rates = bitcoin tx fee rates, then the side chain will need to achieve a tx rate of roughly 200 txs per second to overtake bitcoin in terms of processing power through miner arbitrage. 

Also,
when side chain tx fee rates  = 50% (0.0001) of bitcoin tx fee rates:  bitcoin overtaken @ 400 txs per second
when side chain tx fee rates  = 10% (0.00002) of bitcoin tx fee rates:  bitcoin overtaken @2000 txs per second (roughly that of visa and mastercard)

When the block reward eventually drops to 0, then the side chain will only have to generate more tx fees than bitcoin to become the dominant chain. 

Please point out the flaw in my logic.


tl;dr
Roughly, the point at which a side chain can overtake bitcoin as the dominant chain at current rates is 200 tx/sec.

the problem i see with your analysis is that it leaves out the relative fiat exchange prices for BTC and scBTC which play a large psychological factor.

I assume these prices will be equal because of the peg, making fiat exchange prices irrelevant.  If they are not equal or nearly equal then the peg is not working and the system is broken anyway. 

[1713421758]

1713421758

[cypherdoc]

What are the chances that a side chain becomes the dominant chain?  To answer this, we need to determine at what point miners will likely point more processing power at the side chain than at the main chain.  At this point, the side chain will be more highly secured by processing power than the main chain and the side chain can be considered dominant over the main chain.  So at what point will the reward for mining the side chain be higher than the reward for mining the main chain?

Currently, the average tx fee per transaction is roughly 0.0002 and the average tx fee reward per block is roughly 0.1 btc (I can show how I calculated this and/or show sources if needed).  The current block reward for newly created coins is 25 btc.  The side chain will have to achieve a reward of greater than 25 btc per block to overtake the main chain (I did not include the tx fee reward because this is currently negligible and will likely be negligible if a side chain has many more txs.  Also, this is a conservative estimate).  To achieve a reward of greater than 25 btc per block, the side chain will have to generate 125,000 txs per block (25/0.0002) assuming tx fees on the side chain are equal to tx fees on the main chain (these fees will likely be lower but this is a conservative estimate).  Therefore, the rate at which the side chain overtakes the main chain is 208 txs per second.

This estimate also does not take into account the possibility that the side chain can issue a secondary coin as a block reward, which can further reduce the number of transactions needed to overtake the main chain.  Also, halving of the bitcoin block reward over time will reduce the number of transactions needed to overtake the main chain.  With discussion of side chains being used for everyday transactions and bitcoin being used for long-term storage, I can see this overtaking as a real possibility.

There are a few assumptions about future conditions in this analysis.  However, at current rates and with the only assumption being that side chain tx fee rates = bitcoin tx fee rates, then the side chain will need to achieve a tx rate of roughly 200 txs per second to overtake bitcoin in terms of processing power through miner arbitrage.  

Also,
when side chain tx fee rates  = 50% (0.0001) of bitcoin tx fee rates:  bitcoin overtaken @ 400 txs per second
when side chain tx fee rates  = 10% (0.00002) of bitcoin tx fee rates:  bitcoin overtaken @2000 txs per second (roughly that of visa and mastercard)

When the block reward eventually drops to 0, then the side chain will only have to generate more tx fees than bitcoin to become the dominant chain.  

Please point out the flaw in my logic.


tl;dr
Roughly, the point at which a side chain can overtake bitcoin as the dominant chain at current rates is 200 tx/sec.

the problem i see with your analysis is that it leaves out the relative fiat exchange prices for BTC and scBTC which play a large psychological factor.

I assume these prices will be equal because of the peg, making fiat exchange prices irrelevant.  If they are not equal or nearly equal then the peg is not working and the system is broken anyway.  

to assume they are always equal i don't think represents reality.  there will be an ebb and flow of the relative price relationships as the chains are purposely designed to be different from a tech standpoint.  price movements also never move linearly in one direction.  i would expect that there would be times when one or the other price will be higher.

and all that is to ignore volatility induced by a speculative attack attempting to move markets.  see here:

https://bitcointalk.org/index.php?topic=68655.msg9372075#msg9372075

[HeliKopterBen]

What are the chances that a side chain becomes the dominant chain?  To answer this, we need to determine at what point miners will likely point more processing power at the side chain than at the main chain.  At this point, the side chain will be more highly secured by processing power than the main chain and the side chain can be considered dominant over the main chain.  So at what point will the reward for mining the side chain be higher than the reward for mining the main chain?

Currently, the average tx fee per transaction is roughly 0.0002 and the average tx fee reward per block is roughly 0.1 btc (I can show how I calculated this and/or show sources if needed).  The current block reward for newly created coins is 25 btc.  The side chain will have to achieve a reward of greater than 25 btc per block to overtake the main chain (I did not include the tx fee reward because this is currently negligible and will likely be negligible if a side chain has many more txs.  Also, this is a conservative estimate).  To achieve a reward of greater than 25 btc per block, the side chain will have to generate 125,000 txs per block (25/0.0002) assuming tx fees on the side chain are equal to tx fees on the main chain (these fees will likely be lower but this is a conservative estimate).  Therefore, the rate at which the side chain overtakes the main chain is 208 txs per second.

This estimate also does not take into account the possibility that the side chain can issue a secondary coin as a block reward, which can further reduce the number of transactions needed to overtake the main chain.  Also, halving of the bitcoin block reward over time will reduce the number of transactions needed to overtake the main chain.  With discussion of side chains being used for everyday transactions and bitcoin being used for long-term storage, I can see this overtaking as a real possibility.

There are a few assumptions about future conditions in this analysis.  However, at current rates and with the only assumption being that side chain tx fee rates = bitcoin tx fee rates, then the side chain will need to achieve a tx rate of roughly 200 txs per second to overtake bitcoin in terms of processing power through miner arbitrage.  

Also,
when side chain tx fee rates  = 50% (0.0001) of bitcoin tx fee rates:  bitcoin overtaken @ 400 txs per second
when side chain tx fee rates  = 10% (0.00002) of bitcoin tx fee rates:  bitcoin overtaken @2000 txs per second (roughly that of visa and mastercard)

When the block reward eventually drops to 0, then the side chain will only have to generate more tx fees than bitcoin to become the dominant chain.  

Please point out the flaw in my logic.


tl;dr
Roughly, the point at which a side chain can overtake bitcoin as the dominant chain at current rates is 200 tx/sec.

the problem i see with your analysis is that it leaves out the relative fiat exchange prices for BTC and scBTC which play a large psychological factor.

I assume these prices will be equal because of the peg, making fiat exchange prices irrelevant.  If they are not equal or nearly equal then the peg is not working and the system is broken anyway.  

to assume they are always equal i don't think represents reality.  there will be an ebb and flow of the relative price relationships as the chains are purposely designed to be different from a tech standpoint.  price movements also never move linearly in one direction.  i would expect that there would be times when one or the other price will be higher.

and all that is to ignore volatility induced by a speculative attack attempting to move markets.  see here:

https://bitcointalk.org/index.php?topic=68655.msg9372075#msg9372075

My scenario assumes a working peg through arbitrage.  You are correct that if fiat prices diverge, then it no longer applies.  However if fiat prices diverge, then the side chain itself is a failure anyway. 

[cypherdoc]

What are the chances that a side chain becomes the dominant chain?  To answer this, we need to determine at what point miners will likely point more processing power at the side chain than at the main chain.  At this point, the side chain will be more highly secured by processing power than the main chain and the side chain can be considered dominant over the main chain.  So at what point will the reward for mining the side chain be higher than the reward for mining the main chain?

Currently, the average tx fee per transaction is roughly 0.0002 and the average tx fee reward per block is roughly 0.1 btc (I can show how I calculated this and/or show sources if needed).  The current block reward for newly created coins is 25 btc.  The side chain will have to achieve a reward of greater than 25 btc per block to overtake the main chain (I did not include the tx fee reward because this is currently negligible and will likely be negligible if a side chain has many more txs.  Also, this is a conservative estimate).  To achieve a reward of greater than 25 btc per block, the side chain will have to generate 125,000 txs per block (25/0.0002) assuming tx fees on the side chain are equal to tx fees on the main chain (these fees will likely be lower but this is a conservative estimate).  Therefore, the rate at which the side chain overtakes the main chain is 208 txs per second.

This estimate also does not take into account the possibility that the side chain can issue a secondary coin as a block reward, which can further reduce the number of transactions needed to overtake the main chain.  Also, halving of the bitcoin block reward over time will reduce the number of transactions needed to overtake the main chain.  With discussion of side chains being used for everyday transactions and bitcoin being used for long-term storage, I can see this overtaking as a real possibility.

There are a few assumptions about future conditions in this analysis.  However, at current rates and with the only assumption being that side chain tx fee rates = bitcoin tx fee rates, then the side chain will need to achieve a tx rate of roughly 200 txs per second to overtake bitcoin in terms of processing power through miner arbitrage.  

Also,
when side chain tx fee rates  = 50% (0.0001) of bitcoin tx fee rates:  bitcoin overtaken @ 400 txs per second
when side chain tx fee rates  = 10% (0.00002) of bitcoin tx fee rates:  bitcoin overtaken @2000 txs per second (roughly that of visa and mastercard)

When the block reward eventually drops to 0, then the side chain will only have to generate more tx fees than bitcoin to become the dominant chain.  

Please point out the flaw in my logic.


tl;dr
Roughly, the point at which a side chain can overtake bitcoin as the dominant chain at current rates is 200 tx/sec.

the problem i see with your analysis is that it leaves out the relative fiat exchange prices for BTC and scBTC which play a large psychological factor.

I assume these prices will be equal because of the peg, making fiat exchange prices irrelevant.  If they are not equal or nearly equal then the peg is not working and the system is broken anyway.  

to assume they are always equal i don't think represents reality.  there will be an ebb and flow of the relative price relationships as the chains are purposely designed to be different from a tech standpoint.  price movements also never move linearly in one direction.  i would expect that there would be times when one or the other price will be higher.

and all that is to ignore volatility induced by a speculative attack attempting to move markets.  see here:

https://bitcointalk.org/index.php?topic=68655.msg9372075#msg9372075

My scenario assumes a working peg through arbitrage.  You are correct that if fiat prices diverge, then it no longer applies.  However if fiat prices diverge, then the side chain itself is a failure anyway.  

but a scBTC could diverge to a higher price vs BTC.  or it can be manipulated to rise at a faster pace than BTC.  both could be a result of a speculative pump by a whale thru the peg.  and why not?  the 2 way peg in a 1:1 scenario acts like a risk free put.  remember, it's all upside and no downside being on the SC.  both scenarios would result in volatility and doubt about whether the SC is taking over.  

i would be really interested to hear some of your responses to my posts in my thread.

[tvbcof]

but a scBTC could diverge to a higher price vs BTC.  or it can be manipulated to rise at a faster pace than BTC.  both could be a result of a speculative pump by a whale thru the peg.  and why not?  the 2 way peg in a 1:1 scenario acts like a risk free put.  remember, it's all upside and no downside being on the SC.  both scenarios would result in volatility and doubt about whether the SC is taking over.  

i would be really interested to hear some of your responses to my posts in my thread.

Being the guy who first (to my knowledge) proposed this nature of attack, I'll just say that the first thing which comes to mind would be some sort of progressive use fee on the sidechain itself somehow.  I anticipate using primarily sidechains that impose some sort of a use cost (even if there are options) mostly because they they can be used in a variety of healthy ways.  As always, if the sidechain is not a transparent box I'm not playing.

Actually, the attack I was thinking of was your simplistic form applied in such a way as to produce a resonance.  The normal engineering method of dealing with such issues is to introduce some method of dampening.

[cbeast]

but a scBTC could diverge to a higher price vs BTC.  or it can be manipulated to rise at a faster pace than BTC.  both could be a result of a speculative pump by a whale thru the peg.  and why not?  the 2 way peg in a 1:1 scenario acts like a risk free put.  remember, it's all upside and no downside being on the SC.  both scenarios would result in volatility and doubt about whether the SC is taking over.  

i would be really interested to hear some of your responses to my posts in my thread.

Being the guy who first (to my knowledge) proposed this nature of attack, I'll just say that the first thing which comes to mind would be some sort of progressive use fee on the sidechain itself somehow.  I anticipate using primarily sidechains that impose some sort of a use cost (even if there are options) mostly because they they can be used in a variety of healthy ways.  As always, if the sidechain is not a transparent box I'm not playing.

Actually, the attack I was thinking of was your simplistic form applied in such a way as to produce a resonance.  The normal engineering method of dealing with such issues is to introduce some method of dampening.

Good idea. The "use fee" could be reversible, like a deposit. That way, normal users are not penalized.

[cypherdoc]

but a scBTC could diverge to a higher price vs BTC.  or it can be manipulated to rise at a faster pace than BTC.  both could be a result of a speculative pump by a whale thru the peg.  and why not?  the 2 way peg in a 1:1 scenario acts like a risk free put.  remember, it's all upside and no downside being on the SC.  both scenarios would result in volatility and doubt about whether the SC is taking over.  

i would be really interested to hear some of your responses to my posts in my thread.

Being the guy who first (to my knowledge) proposed this nature of attack, I'll just say that the first thing which comes to mind would be some sort of progressive use fee on the sidechain itself somehow.  I anticipate using primarily sidechains that impose some sort of a use cost (even if there are options) mostly because they they can be used in a variety of healthy ways.  As always, if the sidechain is not a transparent box I'm not playing.

Actually, the attack I was thinking of was your simplistic form applied in such a way as to produce a resonance.  The normal engineering method of dealing with such issues is to introduce some method of dampening.

actually, i had a whole new thread post describing this attack written and prepared to put up on Sunday but decided to have Melbustus look at for review.  we had been discussing it back and forth when i saw your post mentioning a whale on the plane coming home Monday.  i didn't respond to you at the time b/c i've been thinking about it alot and changing it up (as you can see from the detail described in my thread and the concept of a risk free put).

not that it matters.

[adam3us]

There seems to be some confusion about floating rates, sidechains are algorithmically pegged not floating.

Lets try a thought experiment.  Say you can directly move a bitcoin to a sidechain or move it back to the mainchain with either direction taking 10minutes and normal bitcoin fees.

Clearly given that this is the best case confirmation time for bitcoins, and the peg protocol is algorithmic there will be effectively ZERO spread, because the algorithmic peg is an unlimited standing offer at parity (plus per KB fees) and is in direct competition to any market offer, and rational actors take the lowest offer.

Now we introduce the concept of time-preference.  For security reasons (rather similar to coinbase maturity which sees you unable to spend freshly mined coins for 100 blocks) the algorithmic peg has a time-delay.

Now if you planned to hold anyway for that period or longer, then you dont care and the situation is unchanged.

But if you want to do a sidechain BTC transaction faster, you swap it for a small premium with someone who already has BTC on the sidechain and is planning to long term hold, or swap with someone trying to go the other direction.  What you pay them will be small due to the mechanics of arbitrage.  They'll just look for some small fee because to them if they're already long term BTC holders its basically free money, like interest on BTC to move funds back and forth and provide liquidity service for sidechains.  The $ exchange rate is immaterial, the best candidate for sidechain liquidity provider is someone who is anyway holding their own or other peoples BTC for long term storage.

Anyone who tried to sell  BTC on one chain for a lower than time-preference cost on another chain would just lose money.

I think the above logic and economic concept & precedent is extremely simple.  It seems like some people misunderstood Konrad Graf's comments, he's just talking about the mechanics of the low arbitrage spread.

One can look to other bitcoin arbitrage scenarios for a hint at how it works.  Look at the spread between btc-e & bitstamp now that multiple people are systematically arbitraging it.  That is a far riskier arbitrage because you are relying on governance and security management of bitstamp & btc-e in the face of 50% failure rate of bitcoin exchanges.  Ok these ones are survivors and better than full history average no doubt but still there is non zero risk there and yet the spread is basically 0, this is because of competition amongst arbitrators.  Compare to a 2wp, where there is an algorithmic arbitrage.  A bot can take that all-day long at zero risk (using smart-contracts).

The remaining non-imaginary risk is side-chain implementation defect, but the point of side-chains is to allow experimentation on new features to occur outside of bitcoin core.  This is actually a good thing for bitcoin core's risk because it doesnt have to take as much new development risk itself.  Sidechain development will also be rigorous like bitcoin, and you should look at the reputation of the authors of the sidechain you are considering using and have others review it or certify it before you dump your lifesavings into it.  You can still do long term holding on bitcoin if you prefer, and benefit from the even lower than current mainchain risk.

The current pattern in bitcoin infrastructure is most transactions are offchain (in exchanges and other offchain accounting).  Much of that code is not open, or inexpertly written or relying on firewalls and host security and hot wallet ratios plus you're vulnerable to governance failures, operator theft and or blackmail.  Most bitcoin lost to date has been for these reasons.  If, using sidechains, we get more innovation and more onchain transactions, its better to be onchain in a sidechain than offchain from bitcoin.  You dont even own bitcoins offchain, you have an IOU for a bitcoin from a human who typically has no banking governance nor operational security experience, though with better capitalization and management things are improving.

I would think more transactions, more transaction types and more uses for bitcoin, and faster innovation on bitcoin and more onchain transactions and zerotrust/smart-contract based infrastructure are all positive things for bitcoin, and it seems to be that most people with a technical understanding hold the same view.

Its not that a sidechain displaces bitcoin hypothetically and that this is bad; a sidechain is bitcoin, its the mechanism to internetwork bitcoin, to build on it.  Sidechains no more displace bitcoin than HTTP displaces the TCP and IP protocol it is transported on.  Alt-coins and alt-shares are in nominal competition with bitcoin, though it seems highly unlikely they would catchup with bitcoin's network effect nor reach an appreciable real-life usage; but sidechains are not in competition.

Bitcoin has one advantage over sidechains - it has the subsidy, and full node security, so I'm sure it'll be able to defend itself against abandonment or insecurity, and sidechains depend on bitcoin anyway so all bitcoin users on which ever chains have a meta-incentive to see bitcoin main remain secure.   We have decades of subsidy ahead to deal with fee-only security for bitcoin, and sidechains may move forward the ways to do that because the sidechain by default has only fee security from the start.

Anyway one potential use for a sidechain is to host a beta for a major new bitcoin version.  If that version after say $1b value running in it for a year, gets upgraded into bitcoin, that hasnt displaced bitcoin, its facilitated its feature and performance upgrade, which is a good thing for everyone.

The exciting thing about the internet wasnt just the ability to send IP packets, but all the applications and permissionless innovation that could be built using that transport.  Same for bitcoin.

Adam

[waxwing]

but a scBTC could diverge to a higher price vs BTC.  or it can be manipulated to rise at a faster pace than BTC.  both could be a result of a speculative pump by a whale thru the peg.  and why not?  the 2 way peg in a 1:1 scenario acts like a risk free put.  remember, it's all upside and no downside being on the SC.  both scenarios would result in volatility and doubt about whether the SC is taking over.  

i would be really interested to hear some of your responses to my posts in my thread.

If, on a normally functioning sidechain, a 'whale' decides to arbitrarily inflate the price of sidechaincoin (SCC) by buying up the order book on some exchange platform, so that let's say SCC are temporarily trading at 1.3 BTC / SCC on said exchange, any existing holder of SCC will simply sell their SCC for BTC, realising the 30% risk free profit (arbitrage), and then if desired, transferring those 1.3 BTC back to 1.3 SCC (because there is an algorithmic peg enforced at the cryptographic level that allows you to make this transfer - you do understand that this is the concept, right?). There is no put or call here, there is just arbitrage.

The principle of no arbitrage gives you the approximate stable price - 1 to 1. Any delta from that is due to second order effects of the type that Back refers to in the above post. Only in cases of catastrophic failure would there be a large divergence (and that's OK too, because "joining" a sidechain is entirely voluntary), and such an eventuality can only be temporary (either the sidechain 'crashes' entirely, or it comes back into quasi-equilibrium).

[laurentmt]

Is it possible to get this kind of architecture ?

[Luke-Jr]

Is it possible to get this kind of architecture ?

Yes, but BTC-via-SC1 and BTC-via-SC2 would be different assets on SC3.
Although you can treat them identical if you want to (ie, if you trust SC1 and SC2 equally).

[andytoshi]

laurentmt: definitely. This is sorta "allowed by default" by a sidechain design which lets you move coins from any chain to any other chain, but note that it does bring some complexity.

Let me expand on Luke-Jr's point a bit.

There is a blurb in the whitepaper around line 260 about sidechains "treating assets from different parent chains as different assets". This means that in your diamond picture, there are two ways for coins to move from Bitcoin to SC3 --- however, even though both are "Bitcoins", they are distinct. Ones that came through SC1 can only be moved back through SC1 and those that came through SC2 can only be moved back through SC2.

Of course, you can atomic-swap anything for anything (provided you can find a counterparty) so this might seem like an artificial distinction. And if both SC1 and SC2 are well-known, secure chains, maybe your wallet even treats the two types of Bitcoins as identical (from a UI point of view). However, there is a good reason that they are distinct on a low level: suppose this weren't the case, and SC3 just saw a bunch of Bitcoins with no idea where they came from. If SC2, say, were insecure (maybe it is totally a sham chain created by an attacker) such that it contained Bitcoins not backed by anything, then an attacker can create some unbacked Bitcoins on SC2, move them to SC3, redeem them on SC1 (all Bitcoins on SC1 are actually backed), then redeem them for Bitcoins.

[laurentmt]

Thanks Luke & Andy !

Indeed, I was wondering what are the consequences of this type of architecture (combined with security rules) on the fungibility in the deepest sidechain (SC3). I think that Luke's comment answers my question : with this kind of architecture, fungibility in deepest SC is not "given", it depends on the "homogeneity" of parents.

I was thinking to this kind of scenario
------------------------------------
SC1 and SC3 are well established sidechain with a good level of security.
SC1 provides some features for anonymity and SC3 some features for fast micropayments (or whatever).
Then SC2 comes up as a concurrent of SC1. It seems a promising tech, thus SC3 takes it as a new parent. But SC2 is young and its security is lower than SC1.
At last, I'm a retailer and a frequent user of SC2. Sometimes, I transfer SC2 "coins" to bitcoin for my "savings" (in two steps using pegs or atomic swaps).

Security associated to SC1 and SC2 is not equal and the risk is not equivalent.
Thus, as a user of SC3, can I consider the coins coming from SC1 and SC2 as really fungible ?
I guess that point is really related to this kind of architecture and doesn't apply to simpler models (chains of SC, "star" model, ...).
------------------------------------

[cbeast]

Now we introduce the concept of time-preference.  For security reasons (rather similar to coinbase maturity which sees you unable to spend freshly mined coins for 100 blocks) the algorithmic peg has a time-delay.

Now if you planned to hold anyway for that period or longer, then you dont care and the situation is unchanged.

But if you want to do a sidechain BTC transaction faster, you swap it for a small premium with someone who already has BTC on the sidechain and is planning to long term hold, or swap with someone trying to go the other direction.  What you pay them will be small due to the mechanics of arbitrage.  They'll just look for some small fee because to them if they're already long term BTC holders its basically free money, like interest on BTC to move funds back and forth and provide liquidity service for sidechains.  The $ exchange rate is immaterial, the best candidate for sidechain liquidity provider is someone who is anyway holding their own or other peoples BTC for long term storage.

Anyone who tried to sell  BTC on one chain for a lower than time-preference cost on another chain would just lose money.

The longer the time-preference, the bigger the possible spread because of the increased risk of volatility over time. Your SC can offer varied time-preference risk for fee rates desired by different trading strategies. Like Certificates of Deposit offering different interest rates depending on deposit length.

[CIYAM]

I think this sidechain concept is very exciting and I hope that at least one dev might consider adopting AT (http://ciyam.org/at) to test Turing complete processing on a sidechain (there is already a 10 BTC bounty for a successful atomic cross-chain transfer between Qora and a Bitcoin clone on offer here: https://bitcointalk.org/index.php?topic=826263.0).

An AT for a *lottery* has already been developed so perhaps one idea might be to have a specific "lottery" side chain.

[cypherdoc]

but a scBTC could diverge to a higher price vs BTC.  or it can be manipulated to rise at a faster pace than BTC.  both could be a result of a speculative pump by a whale thru the peg.  and why not?  the 2 way peg in a 1:1 scenario acts like a risk free put.  remember, it's all upside and no downside being on the SC.  both scenarios would result in volatility and doubt about whether the SC is taking over.  

i would be really interested to hear some of your responses to my posts in my thread.

If, on a normally functioning sidechain, a 'whale' decides to arbitrarily inflate the price of sidechaincoin (SCC) by buying up the order book on some exchange platform, so that let's say SCC are temporarily trading at 1.3 BTC / SCC on said exchange, any existing holder of SCC will simply sell their SCC for BTC, realising the 30% risk free profit (arbitrage), and then if desired, transferring those 1.3 BTC back to 1.3 SCC (because there is an algorithmic peg enforced at the cryptographic level that allows you to make this transfer - you do understand that this is the concept, right?). There is no put or call here, there is just arbitrage.

The principle of no arbitrage gives you the approximate stable price - 1 to 1. Any delta from that is due to second order effects of the type that Back refers to in the above post. Only in cases of catastrophic failure would there be a large divergence (and that's OK too, because "joining" a sidechain is entirely voluntary), and such an eventuality can only be temporary (either the sidechain 'crashes' entirely, or it comes back into quasi-equilibrium).

are you saying that it's not possible for a rising scBTC price in fiat terms to drag upwards the BTC price in a pump and dump?  what might cause this is if a whale is persistent enough to transfer a signif number of BTC thru the peg into scBTC causing other speculators to follow thinking the SC may take over.  as more scBTC appear on the SC steadily over time, wouldn't/couldn't that drag up the price of both scBTC and BTC despite the fact that the relationship of the two remain close to 1:1?  what could drive this is the "illusion" that the SC is taking off in usage and utility.

[adam3us]

But if you want to do a sidechain BTC transaction faster, you swap it for a small premium with someone who already has BTC on the sidechain and is planning to long term hold, or swap with someone trying to go the other direction.  What you pay them will be small due to the mechanics of arbitrage.  They'll just look for some small fee because to them if they're already long term BTC holders its basically free money, like interest on BTC to move funds back and forth and provide liquidity service for sidechains.  The $ exchange rate is immaterial, the best candidate for sidechain liquidity provider is someone who is anyway holding their own or other peoples BTC for long term storage.

The longer the time-preference, the bigger the possible spread because of the increased risk of volatility over time. Your SC can offer varied time-preference risk for fee rates desired by different trading strategies. Like Certificates of Deposit offering different interest rates depending on deposit length.

There isnt BTC denominated volatility because you're comparing BTC to BTC, unless the arbitrageur is not anyway a long term BTC holder, and so looking at BTCUSD volatility, in which case you would be right; however BTCUSD volatility is sufficiently high that holders of BTC could undercut non-holders taking BTCUSD exposure solely to gain the arbitrage profit.  As I said the best candidate for sidechain liquidity provider is someone who is anyway holding their own or other peoples BTC for long term storage.

Note also re your CoD rate comparison, you can buy forex forward contracts for below the interest cost of borrowing the money to exchange now.  This is because the market maker can discount by using interest to move in the other direction.  

The same thing would take place in a mature arbitrage environment between sidechain and bitcoin, the arbitrageur can do it below the amortised 2wp fee cost, because he can hold positions in both chains and cancel out the flows in opposite directions, just as the forex forward contracts.  If you're willing to wait for p2p trade you may even do it at bitcoin tx fee cost only using cross-chain atomic swaps (faster than 2wp but slower than via arbitrage agent).

Or do the 2wp yourself direct if you're willing to wait.  

The interesting thing is the arbitrage can be both faster and cheaper than the 2wp, and trustless via smart-contracts.  And because its a p2p blockchain on a technical* level anyone can do arbitrage without permission from anyone.  

(*Technical because there is also regulation: regulations may apply to arbitrage service; though I do think an interesting future potential is that regulators in more forward-looking jurisdictions will exempt zero-trust operations from regulation.)

Adam

[waxwing]

are you saying that it's not possible for a rising scBTC price in fiat terms to drag upwards the BTC price in a pump and dump?  what might cause this is if a whale is persistent enough to transfer a signif number of BTC thru the peg into scBTC causing other speculators to follow thinking the SC may take over.  as more scBTC appear on the SC steadily over time, wouldn't/couldn't that drag up the price of both scBTC and BTC despite the fact that the relationship of the two remain close to 1:1?  what could drive this is the "illusion" that the SC is taking off in usage and utility.

It seems to me you're talking about two possibilities. 1, a whale drags BTC (both sc and not, since they're the same asset) upwards to try to effect a pump and dump. That's no different from today. Whether he buys one or another doesn't really matter, since they're fungible with each other. 2, the possibility of large amounts of BTC being sent over to a sc. This latter possibility is certainly interesting, and possible, but since bitcoin creation is still only possible on the main chain, mining would still be incented to stick there. So this doesn't create a 'bitcoin main chain dies out' scenario; although of course it could reduce transaction volume there.

An example is that people switch a lot of their coin onto a 'lightweight' sidechain that's better in some way for fast transactions, but the "backbone" main blockchain is preferred for big, industrial scale money transfer (i.e. it takes the role of SWIFT). Also, if in some distant future where block rewards were insignificant and people decided to store most of their coins on the sidechain, then yes, the bitcoin mainchain would start to die out, but it wouldn't matter, because people would have voted with their feet and digital scarcity would have been preserved. But this is all very sci fi in 2014.

There are also interesting speculations to be had about how a sidechain might factor into a future scenario where there was some critical flaw or failure in Bitcoin. Those are interesting, but what I don't see is how a new sidechain is going to *create* a failure scenario, because Bitcoin seignorage is never going to be removed from the main chain in this proposal. If you print things on these new chains, that's business for that new chain. That's not Bitcoin.

[Boussac]

I've just reread the whitepaper and I wonder what is the impact of SPV on fungibility in sidechains.

Since pegged sidechains may carry assets from many chains, and cannot make assumptions about the security of these chains, it is important that different assets are not interchangeable (except by an explicit trade). Otherwise a malicious user may execute a theft by creating a worthless chain with a worthless asset, move such an asset to a sidechain, and exchange it for something else. To combat this, sidechains must effectively treat assets from separate parent chains as separate asset types.

I am wondering also about sidecoins fungibility and redemption:
let's say I have locked one bitcoin to release one sidecoin. To release the locked bitcoin, does my sidechain-enabled wallet simply collect one sidecoin (plus tx fee) worth of sidechain unspent outputs or  are there other constraints on my sidechain transaction transferring the coin back to the bitcoin blockchain ?

[cypherdoc]

are you saying that it's not possible for a rising scBTC price in fiat terms to drag upwards the BTC price in a pump and dump?  what might cause this is if a whale is persistent enough to transfer a signif number of BTC thru the peg into scBTC causing other speculators to follow thinking the SC may take over.  as more scBTC appear on the SC steadily over time, wouldn't/couldn't that drag up the price of both scBTC and BTC despite the fact that the relationship of the two remain close to 1:1?  what could drive this is the "illusion" that the SC is taking off in usage and utility.

It seems to me you're talking about two possibilities. 1, a whale drags BTC (both sc and not, since they're the same asset) upwards to try to effect a pump and dump. That's no different from today. Whether he buys one or another doesn't really matter, since they're fungible with each other.

yeah, sorry i'm not so clear.  but in the scenario where a SC advertises a bogus innovation, the whale can pump BTC thru the 2wp, which is acting like a risk free put (if the SC fails, he can get this BTC back as advertised).  the mere appearance of large #scBTC on the SC may cause a price rise originating on the SC which then drags up the price of BTC as well in arb.  if he can sustain this then he could sell off scBTC on an exchange for profit (the dump).

2, the possibility of large amounts of BTC being sent over to a sc. This latter possibility is certainly interesting, and possible, but since bitcoin creation is still only possible on the main chain, mining would still be incented to stick there. So this doesn't create a 'bitcoin main chain dies out' scenario; although of course it could reduce transaction volume there.

in the case of a SC with a true innovation, like faster tx times, it seems to me with time, all tx's would be incented to move to the SC as the block rewards diminish on the MC, depriving BTC miners of badly needed revenue.  yes, MM is a possiblity to harvest those SC fees but lots of miners nowadays are losing money.  they might be more than willing to primarily direct mine a SC if they can scoop up large tx fees (assuming of course MM is only a % of the BTC hashrate).

An example is that people switch a lot of their coin onto a 'lightweight' sidechain that's better in some way for fast transactions, but the "backbone" main blockchain is preferred for big, industrial scale money transfer (i.e. it takes the role of SWIFT). Also, if in some distant future where block rewards were insignificant and people decided to store most of their coins on the sidechain, then yes, the bitcoin mainchain would start to die out, but it wouldn't matter, because people would have voted with their feet and digital scarcity would have been preserved. But this is all very sci fi in 2014.

There are also interesting speculations to be had about how a sidechain might factor into a future scenario where there was some critical flaw or failure in Bitcoin. Those are interesting, but what I don't see is how a new sidechain is going to *create* a failure scenario, because Bitcoin seignorage is never going to be removed from the main chain in this proposal. If you print things on these new chains, that's business for that new chain. That's not Bitcoin.

in 2140 when all block rewards are gone and the MC and SC (with its innovation) only mine tx fees, which chain would you rather be on?  if you say that MC core dev will upgrade Bitcoin before that, what metrics will they use before they feel pressure or panic by a SC beginning to take over?