19 Feb 2021

We’ve reached a crucial impasse with Bitcoin. It’s now quite possibly the world’s most valued asset, having recently topped $50,000 in price and garnered the attention of the largest investment firm as well as the world’s wealthiest human. Yet eleven years after Bitcoin’s emergence, we’re still not using it for its intended purpose - as an uncensorable, decentralized, peer-to-peer payment system for the masses.

While Bitcoin’s reputation as a store of wealth is growing exponentially, its use case as a payment system seems unable to evolve. Now we’re at the point where spending Bitcoin on everyday expenses, bills and commerce seems outlandish. Shouldn’t we all be HODLing our valuable Bitcons and not spending them? Not only that, it doesn’t even seem possible to use Bitcoin as a workable payment system when you factor in price volatility.

The stagnation of Bitcoin’s evolution as a bankless payment system can be answered with sidechain technologies. Sidechains represent a 2nd layer that rest on top of mammoth blockchains like Bitcoin. In the case of Bitcoin, sidechains are an integral part of ushering in the realization of Satoshi’s concept of a “…purely peer-to-peer version of electronic cash.”

This article takes a look at how sidechains work, how they initiate Bitcoin’s evolutionary steps toward limitless transactions, and how they advance the Bitcoin Network in the process.

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What is a Sidechain?

A sidechain is a secondary (layer-2) blockchain that connects to a main blockchain; in our example we use Bitcoin as the main or “parent” blockchain. The sidechain or the “child” enables users to move their secured Bitcoin to the secondary blockchain to perform transactions - all while maintaining full ownership of their Bitcoin and enjoying the security derived from Bitcoin’s Proof of Work (PoW) verification system.

This is generally accomplished through a 2-way peg, which reserves and immobilizes a user’s Bitcoin 1:1 with a token issued by the sidechain (or as in the case of the BTC/SOV peg, 1:1.5). Transactions for trading, spending, earning, staking, lending and borrowing can take place on the sidechain. At any time, the user may move their tokens back through the 2-way peg, which immobilizes their sidechain tokens and remobilizes their Bitcoin. All of this can be accomplished without the user having to give up the private keys to their digital assets, which can be seen in action with the Sovryn layer-2 protocol.

Bitcoin sidechains that are in use today include:

Sidechains enable Bitcoin to evolve towards a global payment network by taking transactions off the network while still securing them in a decentralized and uncensorable way.

Bitcoin’s habitat must improve for it to continue its course in the survival of the fittest.

Peer-to-peer Payments at Scale

The Bitcoin Network currently handles 3.7 tx/s (transactions per second).

Visa averages 1700 tx/s.

You read that right, 3.7 transactions per second. In the last 30 days, there were 9,520,191 Bitcoin transactions, averaging 317,339 each day. That breaks down to 3.67 tx/s. There’s virtually no room to grow for transactions on the Bitcoin Network, which demonstrates the need for sidechain solutions.

Sidechains that operate under varying consensus rules (such as “Federations”) do not experience the delay that a Bitcoin user must face when making trades and transactions. They are able to freely move about at scale, all while interacting with other blockchains for “atomic swaps” or blockchain-to-blockchain exchanges.

As the Bitcoin Network continues to grow in strength and reputation and as the number of transactions increases, it becomes slower, more expensive to transact and not sustainable for global scaling. it will be sidechains that advance Bitcoin’s use in payments by:

Uncensored, secure, peer-to-peer payments will be able to scale with the use of sidechains, but that’s not all they can do. Sidechain technologies have the ability to accelerate innovation on the Bitcoin Network, increase its security, and elevate the value of Bitcoin.

Supercharging Bitcoin innovation

The world’s second most popular blockchain, Ethereum, has enabled a massive level of innovation with its automated smart contract platform, which allows developers to create tokens and decentralized applications (dapps). Because of this level of buildability, both the ICO and the DeFi industries have been able to flourish.

But scaling is another issue altogether. Today we’re seeing the Ethereum Network being reigned in by a congested, slowing blockchain with rising fees - fees that make using smart contracts out of reach for most people, negating the decentralization effects of open public blockchains. Changing Ethereum’s core technologies as with ETH 2.0 is a slow and methodical process,where no one ever really knows how it will play out.

Bitcoin has grown tremendously as a store of value asset DESPITE having slow transactions and related scaling issues. However, as with Ethereum, making changes to the Bitcoin core is a long term, tedious process, slowed down by caution and strict consensus rules. No one wants to implement anything that would damage the Bitcoin protocol and finding consensus to make changes now means finding agreement among over 10,000 nodes.

Imagine if Bitcoin innovators had platforms that would enable them to build on top of Bitcoin without having to change Bitcoin code. That is exactly what sidechains can do. They not only allow for a new level of innovation, but they also do so while maintaining Bitcoin’s value, decentralization, scarcity, security, and overall appeal.

Innovation in Bitcoin is happening at a much greater velocity on sidechains as opposed to upgrading Bitcoin code itself. Projects like Liquid, RSK, Lightning Network and Sovryn are able to break free of the binds that slow Bitcoin’s evolution. In the process, they add great value to the Bitcoin Network, in many forms.

Sidechains Elevate the Value of Bitcoin

While sidechains make Bitcoin transactions of all kinds scalable, some interesting things will happen alongside, first and foremost the mitigation of volatility.

Everyone who has heard of Bitcoin, and especially those who OWN Bitcoin, understand the volatility of Bitcoin’s price. Most people in western nations are simply not accustomed to their money (be it for spending or investing) jumping or crashing 30% on any given day. Even Bill Gates, who evidently knows very little about Bitcoin technology, is well aware of the price volatility. It is one of the main reasons merchants don’t want to accept Bitcoin (and one of the big reasons why savvy day traders love to trade it!).

While Bitcoin’s supply is programmed to become more scarce over time (and stay scarce), it is the demand that is volatile. Will Elon tweet about it today? Then everybody wants in and we’ll see some nice gains. Are American politicians posturing about Bitcoin as a dark art again? Look for a dump. Will JPMorgan issue its umpteenth warning on the risks of Bitcoin? No one cares, the market does nothing. Did the Wall Street Journal just put Bitcoin on the front page? Up we go. The cycle continues.

What sidechains are able to achieve, cumulatively and positively affects Bitcoin’s volatility:

All of this contributes to the mitigation of Bitcoin’s price volatility, bringing a heap of value to Bitcoin owners, who can make use of their Bitcoin on sidechains, while always having the option to convert back anytime they want. These useful implementations that add to Bitcoin’s value also promote increased security on the Bitcoin Network.

Expanding the Security Features of the Bitcoin Blockchain

To give a strong example of how sidechains enhance Bitcoin’s security features, let’s look to Rootstock (RSK), the Bitcoin sidechain that is also a smart contract platform. The RSK (child) blockchain is merge-mined with Bitcoin, meaning Bitcoin miners also mine for RSK. The hashpower of the RSK blockchain (in general terms signifying the strength of the network) is second only to Bitcoin. That means that transactions on RSK are nearly as decentralized (and thus secure) as Bitcoin core transactions.

Security in cryptocurrencies does not just mean the blockchain itself - it means securing the assets of its users. With RSK, users convert their Bitcoin to RBTC at a 1:1 ratio, locking up their Bitcoin while allowing them to freely use RBTC in quicker, cheaper transactions. The more transactions connected with Bitcoin, even through a sidechain, the more decentralized the Bitcoin Network becomes.

Because of the increase in decentralization that sidechains contribute to the Bitcoin Network, the dependence on 3rd parties and centralized entities is reduced. Meaning sidechains enable scaled transactions while maintaining the level of decentralization offered by the parent chain.

Sovyn Takes the Next Step in Bitcoin’s Evolution

Evolution requires adaptation. This is where the Sovryn protocol comes in. By bringing sidechain technology, decentralization and peer-to-peer banking to an unprecedented level, Sovryn enhances not only the success of the Bitcoin Network, but of each user worldwide.

Sovryn is creating a full stack operating system for Bitcoin layer-2, so that with the help of sidechain technology, we can offer a complete suite of DeFi services that enable Bitcoiners to USE their Bitcoin without letting go of their ownership and without forgoing the supreme security of the Bitcoin Network. Earn, save, trade, lend, borrow, leverage - it can all be done 100% without banks, governments and 3rd parties.

Complete financial freedom and privacy is at our doorsteps - one only needs to open the door.

Find out more:

Sources:

https://hal.archives-ouvertes.fr/hal-02348406/document

https://gendal.me/2014/10/26/a-simple-explanation-of-bitcoin-sidechains/

https://www.youtube.com/watch?v=mHLgpX4VYBQ

https://www.rsk.co/faqs

https://bitcoin.clarkmoody.com/dashboard/