Bitcoin slavechain: redefining the concept of a sidechain

In this article, we introduce the “slavechain” as an innovative model that disrupts the concept of a Bitcoin sidechain, which was until now defined as a blockchain with a pegged-in Bitcoin derivative as its native asset. The article explains this powerful and much more market-oriented new concept in nine steps:

1. Innovation without speculation

Adam Back is among the fathers of the concept of sidechains, and co-author of the first paper presenting the idea of a sidechain to the world.

He conceived the sidechain as a blockchain that doesn’t introduce a wholly separate new native token for transaction fees (to prevent spam or bloat of the blockchain), but instead imposes a specific Bitcoin derivative. What is the intention of this design? “Innovation without speculation”.

During a panel at Bitcoin Amsterdam, Paul Sztorc, ideator of BIP300 drivechains, agreed with Adam that the core idea behind sidechains is precisely experimenting with new technologies without inflating the 21 million supply cap of BTC coins, or generating alternatives to Bitcoin.

While it is difficult, or sometimes impossible, to experiment with or deploy innovations directly on the Bitcoin blockchain, with sidechains it is possible to innovate without having to launch another coin on the market.

2. Tokens are useful, coins are bad

Tokens of all kinds can have valid reasons to exist on a blockchain, and tokenization is the most commonly supported functionality on any sidechain currently operating in the market. However, these are “tokens”, as distinct from “coins”. They have some particular use-case; they do not intend to represent a monetary alternative to Bitcoin.

The first reason for the claim that “tokens are useful, coins are bad” is that altcoins are perceived as competition to the (only) money. Money is a market standard. In a digitalized global free market there can ultimately only be one, and it should have a known and scarce supply. Issuing altcoins introduces only friction, unpredictability, and risk in exchanges and increases the effective inflation of p2p digital cash, which should instead remain capped at 21 million coins (the max supply of BTC).

A second reason is that issuing altcoins may also introduce perverse incentives that are detrimental to the correct development of a given technology, like teams or entities centralizing the blockchain governance in their hands, neglecting the proper timing of development in favor of “corporate” goals such as profit maximization, undertaking misleading marketing initiatives that could be counter-instructive and harmful for the community, or succumbing to the temptations of corruption, easy-money, and speculation.

3. What’s wrong with sidechains

Any new blockchain, whether it employs a Proof of Stake block creation mechanism, or instead tries merged mining, entails a higher degree of centralization than Bitcoin. All have their trade-offs, although we are not going to tackle them here. But of all of the centralizing elements, the necessity of using a pegged BTC as a native asset to “fuel” (as gas or fee) each transaction is in most cases the most centralizing factor, and this applies intrinsically whether the issuance is made through Coinswitch, a PowPeg node or a functionary of a federation.

However, this is not even perceived as an issue. In fact, until the raison d’etre of a sidechain is made clear from a business perspective there is no basis to fund its technical conception. Actually, this might be the fundamental reason why Bitcoin sidechains have not yet achieved diffuse adoption in the market: there’s a lack of definition of their business scope and the market needs they are supposed to fulfill.

4. The purpose of a sidechain

Sidechains are not for experimenting with technologies that might be brought, in an undefined future, on Bitcoin, although they might also help in this regard. If that was the only purpose, no strict economic constraints like the necessity of BTC derivatives would be needed, nor any actual launch on the market.

If we think in terms of the business perspective and market demand, the ultimate purpose of a new blockchain with a Bitcoin derivative can only be asset tokenization, such as the creation of tokens like utilities and securities. Besides our hopes and dreams for the future, starting from Volcano bonds in El Salvador and spreading to the entire world of finance, right now we already have a huge existing market in the blockchain industry for financial applications, peer-to-peer trading (DEX), and tokenized assets, in particular stablecoins.

The entire point of having an asset be tokenized over a blockchain is the decentralization of transfer, settlement, and custody of such assets. However, existing sidechain architecture is not optimized for that purpose, either because of the use of a pegged derivative as a native fee asset or due to blockchain governance (e.g. Strong federations requiring a set of functionaries to create blocks).

5. A change of perspective: interoperability

If we put together the notions we have so far gathered, we can say that a sidechain should have the following features:

It allows asset tokenization
It doesn’t introduce a new alternative form of money that is not Bitcoin
It is as decentralized as possible, which also implies that, when possible, the use of derivatives as native fee tokens should be avoided

To these, a fourth characteristic is now introduced. Although it’s often already advertised as a desirable feature (for example in Liquid), so far it’s probably never been considered as a design priority of a Bitcoin sidechain.

it maximizes the possibility to use Bitcoin or interact with Bitcoin directly (as money)

We can call this last characteristic “interoperability” with the Bitcoin blockchain. More specifically, it should allow the direct exchange of BTC for assets minted on the sidechain through cross-chain operations like atomic swap or other hashed timelock contracts.

For this last purpose, an architecture that is closer to Bitcoin, with a UTXO structure and making use of Bitcoin script, is favorable compared to alternatives (e.g. the Ethereum-like architecture of Rootstock). But we want to go further into and strengthen this concept.

Currently, a simple atomic swap would require a long time interval due to inconsistencies in the state of a cross-chain operation in the two blockchains involved, but this might not always be the case.

6. The Bitcoin slavechain

We introduce the concept of a sidechain that follows the Bitcoin blockchain in a purely master-slave fashion.

The slavechain fullnode is also a Bitcoin fullnode, it only considers valid those slavechain blocks that incorporate the hash of a Bitcoin block at an equal or higher height than that incorporated in the previous slavechain block. If the Bitcoin blockchain orphans a block or follows a chain reorganization, the slavechain is also affected and discards all blocks created “on top” of the orphaned Bitcoin block(s). We called this mechanism “anchoring”.

This removes the possibility that a cross-chain operation disappears from the Bitcoin blockchain due to a reorganization while remaining on the sidechain. However, it doesn’t guarantee the contrary. What if the operation disappears from the sidechain?

To solve this issue, we rely on a concept called “immediate transaction finality”. Basically, the sidechain must have a forkless architecture. A Proof of Authority or a semi-centralized alternative (like the Liquid federation) could provide this framework, for example in Blockstream Liquid every block is pre-approved with a quorum of 11 out of 15 members of the federation.

The problem with those approaches is that they are too centralized. Luckily, there is an alternative. The Proof-of-Stake-like Tendermint and Algorand protocols are also based on immediate finality with a quorum of co-signers. Although presenting the typical trade-offs of PoS, this kind of design is far more decentralized than PoA or closed federations. Effectively, they can be conceived as “open federations”.

However, there is a big “ideological” issue that may arise at this point: Proof-of-Stake requires a coin, you can’t do it with a peg-in. And even if you could, it would in any case be at the expense of decentralization. Does introducing a coin contradict the principles we stated above, regarding the alternative form of money?

7. Open federation with a governance token

To ensure maximum interoperability with Bitcoin we either give up with decentralization (PoA or “closed” federation) or introduce an altcoin for PoS. At first sight, it looks like there are no other options. However, we can mitigate this problem by changing the concept of a “coin” in a PoS mechanism into a “token”, by removing all of its monetary functions and therefore its role as a competitor to Bitcoin.

First of all, the slavechain must have no native token to pay for transaction fees. This means that all tokens minted on the slavechain can tentatively be offered as fees to block creators (indeed, replace by fee is a must-have for wallets in such a framework).

This free market for transaction fees would be a new experiment that could be truly groundbreaking in the blockchain industry. It is likely that tokens with higher liquidity (e.g. most reputable stablecoins) will be accepted as a standard, while the price and quality (such as volatility and liquidity) of other assets will be retrieved in real-time by block creators from CEXs, DEXs, or oracles to decide on their desirability as fee tokens.

Secondly, there is no coinbase generation (no inflation). The “governance” tokens underlying the staking mechanism only represent a share of the potential block-creating capacity on the network. Therefore, the PoS system is in this case nothing more than an attempt to create a more inclusive Consensus for a Bitcoin sidechain, that is also more transparent and open to the market than a PoA or “closed federation”.

8. Dealing with speculation

Even if we work around the presence of a “coin”, there is still a token, possibly even with an ICO for the launch on the market. This obviously comes with all the risks described above like a corporate approach towards profits or the possibility of corruption. However, there are three considerations we can make in this regard.

First of all, the fact that development is not funded through an ICO doesn’t necessarily mean there is no speculation at all. Although not impossible, it is very rare that a technology of any kind is developed without any economic incentive (among which there are often corporate profits). Of course, this also applies to many sidechains as well. It would be naive to think otherwise.

Second, even if the problem of the filthy lucre can’t be removed “in theory”, in practice a lot of actions can be put in place to mitigate the risks and transform the corporate approach into a community-driven environment. This article, for example, explains the approach we are taking at Sequentia.

And third, we have to consider also “the other side of the coin”: speculation may bring more money for development, more users, a broader network effect, and – as a matter of fact – more services and exchange platforms in the industry will install the node. This would imply that any project issuing assets on the sidechain will automatically have access to all markets. If a sidechain project ever has the possibility to dethrone Ethereum or Binance Smart Chain (just to name a couple that are currently in vogue), the amount of firepower required is massive. Is it possible to achieve that without speculation?

9. Building a slavechain

Sequentia (sequentia.io) is the name of the slavechain project we are building. To maximize Bitcoin interoperability, it’s a UTXO chain with Bitcoin script and implements both anchoring and immediate finality with a hybrid between some elements of PoS (Algorand style) and PoW (leveraging the Bitcoin protocol to determine the participants in block creation rounds). Part of the codebase is being built on Elements (capital E, the same platform used to build Blockstream Liquid) to benefit from the precious work already produced in the community.

Thanks to its peculiar forkless architecture with anchors to Bitcoin, it allows fast and reliable atomic swaps as well as lightning swaps.

It doesn’t rely on any specific peg-in mechanism (taking to heart the idea that “multisignatures are not a sidechain”) used as a native fee token, nor any new OP_CODE or changes to Bitcoin like BIP300 Drivechains.

Any token can be used to pay for transaction fee (open fee market) and there’s no inflation, to avoid the labeling of the governance token as an “altcoin”.

The full node must remain accessible and verifiable to the average user, maintaining a relatively low throughput.

Finally, the management of the funds raised in any potential public and private sales of the SEQ token will be subject to community-driven governance, with a non-profit entity controlling these proceeds, while tokens are distributed with a transparent approach and long vesting.

More information can be found at docs.sequentia.io, including a more technical Theoretical Paper.

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