Does Bitcoin Need Sidechains? An Exploration of Bitcoin's DeFi Future

Original Author: Jagdeep Sidhu

Original Compilation: Luffy, Foresight News

Does Bitcoin need sidechains in the future? With a proposal from six years ago resurfacing in the public eye, the current DeFi community has differing opinions on this question. As the controversy surrounding sidechains involves advanced cryptographic language, we will first introduce the basics before delving deeper into the pros and cons of the proposal and potential solutions.

Before we explore the details of BIP-300, it is important to note that there are alternative methods to expand Bitcoin's utility that do not involve sidechains. One such method is merged mining, which allows Bitcoin's proof of work (PoW) to be shared with more chains without additional costs. This is not only economically viable but also establishes a symbiotic relationship with Bitcoin rather than competing with it. For example, one way to achieve this is by adopting economic schemes like EIP-1559 on the merged mining chain, which makes transactions more efficient.

The Bitcoin Improvement Proposal discussed in this article is BIP-300, commonly referred to as Drivechain. It was initially proposed in 2017 and suggests adding a specially designed sidechain called "Drivechain" on top of the Bitcoin blockchain. The Bitcoin Drivechain would operate as a blockchain connected to the Bitcoin mainnet, using BTC as the internal token.

Another point to consider is miner incentives. Merged mining essentially allows miners to earn "free money" by doing what they are already engaged in. This benefits not only the miners but also adds extra security for new chains merged mining with Bitcoin.

Supporters argue that this proposal is a revolutionary step, while opponents believe it could open the door to scams on the Bitcoin network and lead to increased scrutiny from regulators.

While the debate surrounding BIP-300 continues, it is necessary to examine existing solutions that can serve as proof of concept for the values we advocate. After all, for DeFi reasons, Drivechain is certainly not the only way to utilize Bitcoin's PoW security. Other Layer 2 systems can expand Bitcoin's use cases through direct, secure, and scalable paths.

But then, why is the community concerned about adding more sidechains to Bitcoin? Isn't this something the Ethereum ecosystem does every week?

Limitations of BIP-300

The main issue is that BIP-300 allows BTC to be transferred in a trustless manner between the mainnet and these Drivechains via a two-way peg (2WP). The truth about Bitcoin is that BTC on the mainnet can never truly leave the blockchain. Instead, the 2WP method creates the illusion of a transfer by locking the exact amount of BTC "transferred" from the mainnet to the sidechain and then unlocking an equivalent amount of tokens on the target chain. The same process occurs when BTC is "transferred" from the sidechain back to the Bitcoin blockchain.

At this point, it becomes easy to see the limitations of BIP-300 and understand the concerns of the Bitcoin community. First, achieving a two-way peg between the Bitcoin mainnet and sidechains could completely undermine Bitcoin's economics and assumptions.

Critics also argue that Drivechain could lead to a surge in Bitcoin-based scams, as each sidechain would have its own version of BTC. Moreover, as seen in recent years, the increase in fraudulent activities directly drives regulatory crackdowns. From a technical standpoint, BIP-300 also requires a soft fork on the Bitcoin blockchain, adding another layer of complexity and potential failure points.

Bitcoin Needs More Use Cases

While these concerns are valid, it is also a reality that Satoshi Nakamoto created Bitcoin as an electronic currency, not merely as a store of value. This is why we need to find ways to leverage BTC within the larger DeFi ecosystem, or it will ultimately become too deflationary to be used for anything beyond value storage.

Thus, the Bitcoin community needs a system that complements Bitcoin rather than competes with it by trying to create new alternatives. One solution is to build a blockchain that engages in merged mining with the Bitcoin network. Merged mining allows miners to work on multiple blockchains simultaneously without incurring additional energy costs. The merged mining blockchain can take advantage of this, inheriting a significant portion of Bitcoin's steadily growing hash power.

For BTC holders, transferring BTC on the network can become costly due to Gas fees. Through Bitcoin's merged mining blockchain, part of the fees required for transactions or executing contracts can be burned using EIP-1559-based economic strategies. Since EIP-1559 eliminates the high-priority fee market mechanism, the chain has the potential to achieve cheaper Gas fees.

It is important to remember that the base layer is just the beginning: to use Bitcoin in more use cases, any L1 blockchain needs an additional layer to "interact" with users: a second layer containing various decentralized applications and services. By building an L2 ecosystem that allows Bitcoin-driven DApps to thrive without the current sidechain limitations, we can open the door to expanding the user base in a secure and scalable manner. Ultimately, this is not just about adding functionality to Bitcoin; it is about enhancing the entire blockchain ecosystem to improve global society.