Sidechains offer a very important ability to Bitcoin: the ability to absorb the abilities of altchains, and hereby retain its dominance in the cryptocurrency space. With sidechains, Bitcoin can not only acquire innovations from alternative chains, but also bring to bear its important first-mover advantage and network effect.
The key problem with all side-to-main pegs is that the strength of the peg is dependent on the "healthiness" of the sidechain. But arguably, the peg must be strong, at precisely the point where the sidechain is unhealthy, and people are leaving the sidechain.
SPV Proof Sidechains
The original sidechains paper introduced the use of SPV proofs to prove ownership of sidecoin. An SPV proof is, at its heart, simply a sequence of connected header blocks (a compact SPV proof is a way of expressing an SPV proof in a shorter form, such as a Proof of Proof of Work). In addition, the same mechanism (SPV proof) is used as a fraud proof to deny a withdrawal attempt (an SPV proof used in this manner is called a "reorg proof").
In the original formulation, sidechains would be mined "traditionally", using some proof-of-work algorithm, and the sidechain would have its own set of miners. The Bitcoin chain would simply accept an SPV proof that bitcoins were locked on the sidechain in order to unlock coins on the Bitcoin chain. The sidechain would also accept an SPV proof that bitcoins were locked on the Bitcoin chain in order to unlock coins on the sidechain.
Sidechain Miner Incentives Under SPV Proof Sidechains
On the sidechain, an amount B of bitcoins is in use, and are locked on the mainchain (it is backing the coins on the sidechain). On each sidechain block, an amount F of bitcoins per block is paid as fees to sidechain miners.
On the mainchain, an SPV proof of N sidechain block headers will be accepted to authorize a withdrawal. On the mainchain, sidechain withdrawals are delayed by D blocks to allow reorg proofs to gainsay the withdrawal. Let us assume for now that sidechain blocks and mainchain blocks are discovered at the same rate, 10 minutes per block.
For a sidechain miner with >50% hashpower on the sidechain, if B > F * (N + D), the sidechain miner should steal the sidechain's entire backing fund. Theft is done by creating an invalid sidechain block with a withdrawal of the entire B to a mainchain address the thief control, and creating a sequence of block headers long enough to cause the mainchain Bitcoin to accept it as an SPV proof and too long for a honest miners to provide a reorg proof.
In (N + D) amount of time, the >50% sidechain miner can build a longer chain than the rest of the sidechain miners. The sidechain miner can earn B bitcoin in (N + D) blocks running an invalid sidechain fork, but only earn F * (N + D) in the same amount of blocks running a valid sidechain fork. If B > F * (N + D), then the sidechain miner should steal.
Now it can be argued that even a sidechain miner seeking long-term earnings would prefer to keep the sidechain alive and healthy, and not steal the backing bitcoin fund B.
But consider the end-of-life scenario for a sidechain. When a sidechain approaches its end-of-life, then the sidechain miners know, for certain, that the future sidechain fees F will, from now on, be a fraction of the total remaining backing fund B. This is because sidechain users will start processing withdrawals from the sidechain, eventually reducing B, and only a fraction of the bitcoins in B will ever be paid as fees to the sidechain.
We may counter that end-of-life is an unlikely scenario. But consider the reasons why a sidechain may reach end-of-life:
- The sidechain has succeeded. It has proven that its features are desired by many users, that the new features do not break Bitcoin's security, and so on. Because of this, the sidechain features are then added to mainchain. But, since the mainchain now contains the sidechain features while having the full security of mainchain, there will be little to no future use for the sidechain, and any sidechain miners can definitely predict that future F will approach 0 very quickly, compared to the current backing fund B. It would be sadly ironic for the users of a sidechain to show its success and desirability, and get rewarded by having their bitcoins stolen when the sidechain features are added directly to mainchain.
- The sidechain attempts to implement a difficult feature and fails. Perhaps an unexpected security bug is found, or some other unforeseen catastrophe. It may be possible that not all sidechain users may be vulnerable to the sidechain's vulnerability, so at least their orderly exit from the sidechain should be supported. Alternatively the developers may have overestimated the overall benefit the sidechain provides. Mistakes may have been made, but for some kinds of speculative functionality, it may be reasonable to allow the developers to change their mind and recommend the cessation of their sidechain. As large a pool of users of the sidechain should be able to safely exit even in this situation, if it can be arranged.
- The end-of-life is made into a self-fulfilling prophecy. An attack is started by a sidechain miner with just below 50% hashpower. This sidechain miner then offers bribes to other sidechain miners to steal the money. Theft success increases the relative expected utility of the bribe versus future fees F, so rational sidechain miners may consider instead joining the thief to kill the sidechain rather than fight off the thief to retain future fees F. This may be assisted by planting false information about a vulnerability.
It is precisely at end-of-life that the side-to-main peg should be most secure, but it is at end-of-life that an SPV proof side-to-main peg is most vulnerable.
The other primary alternative is drivechains, where sidechains are merge-mined with Bitcoin, and withdrawals are validated by mainchain miner voting.
A proponent of drivechains, Paul Sztorc, claims that the miner voting in drivechain accomplishes the same tasks as SPV proofs of any kind. If so, then drivechains should be vulnerable to the same issues that plague SPV Proof sidechains at end-of-life.
Merge mining sidechains on the mainchain is desirable, as in the end it is the same token that is being protected.
In particular, if the same proof-of-work function would be used by a separately-mined sidechain, then different disjoint sets of coins will have separate disjoint sets of miners protecting them, weakening the token security overall. Merge-mining means that a single set of miners protects the entire set of coins.
The drawback of merge mining is that, to a merge miner, sidechains are not optional but rather mandatory. As sidechains have their own blocks, this effectiely increases the bandwidth and latency requirements on mainchain miners.
The increase in cost of operating a mine limits membership to the "caste" of miners.
"Blind" Merge Mining
"Blind" merge mining attempts to reduce the cost of starting a
new mine by allowing sidechain miners to be separate from mainchain
It is based on an opcode,
It is called "blind" in the sense that the mainchain miner is
unaware of the content of the sidechain block being mined.
OP_BRIBEVERIFY takes a single argument, the hash
of the sidechain block concatenated with an identifier of the
As it replaces an
OP_NOP, it leaves the same
argument on the stack.
The opcode then checks if the sidechain block specified was
merge-mined on the coinbase of the mainchain block it is in.
In further discussion below, I will talk to you as if you are a sidechain miner who does not have any mainchain hashpower yourself.
The intended use of
OP_BRIBEVERIFY appears to be
in this manner:
- Have a working relationship with a particular mainchain miner.
- Request a public key from the miner.
- Generate a sidechain block, then pay for the block to be
published by sending a transaction to your mainchain
miner paying to:
<sidechainBlockHash> OP_BRIBEVERIFY OP_DROP <minerPubKey> OP_CHECKSIG.
- The mainchain miner includes your sidechain block hash in the coinbase, then publishes your transaction and an additional transaction that spends it to an address the mainchain miner controls.
The above technique has the disadvantages below:
- You need to have working relationships with all mainchain miners. If a miner who you don't have a relationship with got a mainchain block, you have no chance of publishing your sidechain block.
- Mainchain miners get paid immediately. This is in contrast with normal mainchain fees, which require 100 blocks of maturity to ensure that mainchain miners want to keep the mainchain alive at least until maturation of the fees.
- Another transaction is needed for the miner to claim the fees.
The technique below is an alternative:
- Put your funds into a P2SH to:
OP_IF OP_BRIBEVERIFY OP_DROP OP_ENDIF <yourPubKey> OP_CHECKSIG.
- Generate a sidechain block, then redeem your funds using
the input stack
<yourSignature> <sidechainBlockHash> 1. Send your funds to another P2SH with similar script as before. The output should be less than the input: the mainchain miner gets paid by the mining fee of this transaction.
- Broadcast your transaction to all miners, possibly using normal Bitcoin transaction broadcast.
- The mainchain miner that wants to get your fee will have to publish the given sidechain block hash in the coinbase.
This technique has the advantage that it gets broadcast to all miners, and the mainchain miner gets paid in the coinbase, which requires maturation, and does not require another transaction to claim the bribe.
However the disadvantage is that the mempool rules are to your disadvantage: if your transaction is not published because somebody else bribed higher, your transaction remains in the mempool with the same sidechain block hash (which will probably be a past sidechain block later and will be orphaned). Replacing that transaction with an updated sidechain block hash requires a higher fee if used with RBF, which may not be feasible if the next sidechain block fees are lower.
In addition, one reason why the first technique is preferred is that it gives you some control over the voting. If a miner is misvoting (voting for an invalid withdrawal, abstaining, or voting against a valid withdrawal) you can simply stop offering sidechain block hashes to that miner.
Without this control, a mainchain miner can take your offered bribe and vote incorrectly. Without this control, the incentives for a mainchain miner to steal funds at end-of-life change: it can separately receive the fees F from the sidechain (via the fees paid for "blind" merge mining) and steal the backing funds B of the sidechain at the same time. But even with this control, sidechain end-of-life still requires trust in the miners of the sidechain, and the miners in drivechain will actually be the mainchain miners even under "blind" merge mining, since you do not have the vote.
Ultimately, to my mind, if blind merge mining truly incentivizes a separation of sidechain and mainchain miners, then it would be trivial for a thief to offer the voters — mainchain miners — an out-of-band incentive to vote for an invalid withdrawal of the entire backing fund of the sidechain.
Mining and SPV
Proof-of-work mining will centralize inevitably..
Currently, the major cost of mining operations is electricity costs. Here is a table of electric power prices around the world. The major takeaway from this table is that the electricity costs of a mine can vary by as much as a factor of 33 depending on what country it is built in.
This fact implies that there may be economically-significant populations whose hashpower representation is disproportionately small, simply because of high electricity charges locally.
Electricity prices vary significantly due to the difficulty of transporting and storing electricity. Storing electricity in electrolytic batteries is energy-inefficient, and the batteries slowly discharge over time even when unused. Even transporting electricity by fixed wires will dissipate some energy over distance. These factors weaken the arbitraging of electrical power.
(I neglect here the fact that there are other issues involved in mining: Internet bandwidth and latency, as well as local climate — in some climates the heat emitted by mining devices is a desirable alternative to heaters, while in others the heat is an additional liability requiring even more electrical power to dissipate.)
Indeed, even if mining devices become commodities — shirt ironing devices use a miner instead of heating element, for example — mining will still be higher in places where electrical prices are low.
There are arguments that increases in mining in places with low electricity prices will increase to the point that the electricity prices there will rise, making it economically feasible to start mines elsewhere and thus ensuring decentralization. However, price is determined by supply and demand, and presumably locations currently with low electricity prices have high supply relative to current demand. In order for the electricity price to equalize, demand for electricity would have to rise in proportion to the local supply, implying that the concentration of miners would still follow available electrical supply, and would still fail to be distributed according to economic significance. In short, mining will still be centralized in locations with high electrical supply.
Indeed, the fact that mining ASICs are developed and fabricated in China or nearby countries is misleading: even if ASICs were developed all over the world, there will be larger mines in places with cheaper electricity.
Why Does Bitcoin Still Work?
If Bitcoin mining is so centralized, why does Bitcoin still work?
We should consider that mining is constrained by the rules imposed by fullnodes. Thus, in case of miner centralization, in general the attacks below are what remain feasible:
- Level-crossing attacks (i.e. war, terrorist attack, government coercion, or other physical attack on collocated mining hardware).
Importantly, the first two attacks impose an economic cost on the attacker, and their economic benefit to the attacker may not outweigh the costs.
- Censorship means turning down fee-paying transactions. If users respond by increasing fees on censored transactions, censoring miners are turning down those fees and losing potential earnings. (The increase in fees may effectively censor certain transactions, however)
- Double-spending attempts are not costless to the miner: work needs to be re-done in order to rewrite recent history. The cost of rewriting history becomes higher as the number of confirmations required increases. Finally, the benefit to the attacker of double-spending is limited by the amount of coin the attacker controls.
In fact, specialized producers of a specific good are economically bound to adhere to the desires of the consumers; that is, miners will follow the desires of the hodlers of coins, regardless of centralization.
However, we must take note that specialization leads to fragility to level-crossing physical attacks on the network.
Centralization and SPV
The analysis above assumes that every user directly or indirectly runs a mainchain fullnode.
Under SPV, however, another attack may be performed by a miner; specifically, a miner may create an invalid block where it is invalidly paid a large amount of fees, generate a small chain on top of that, and use that chain to fool an SPV client into thinking it has been paid. Such an "inflation attack" would be much stronger in the case of centralization and prevalent SPV. It also has a higher incentive than double-spend attacks, as the purported amount does not need to be actually controlled by the attacker.
(It is important to note that the fees received by a miner have no consensus limit and miners have received very high fees before. This is important as transaction-tracing proofs like Peter Todd's Proofchains terminate at a coinbase transaction, whose value validity can only be judged by looking at all transactions in the block it is in.)
For a "normal" SPV client that is controlled directly by a human user, this can be mitigated by the human user manually verifying the blocks being received by the SPV client using some kind of block explorer. Automated SPV clients, however, will either be under permanent risk of inflation attack, or will require constant human supervision (and hence, trust that the human supervisors are paying attention, and not, for example, forgetting to turn on their alarm clocks and oversleeping).
Unfortunately, SPV proof sidechains and drivechains both turn the mainchain into an automated SPV client of the sidechain. In particular, under drivechains, mainchain miners are forced to pay attention to the sidechain in order to determine which way to vote. In effect, it requires that mainchain miners run sidechain fullnodes for all existing sidechains in order to prevent inflation attacks on any sidechain. This also means that sidechains translate directly into softforked block size increases, with the same results as other block size increases: increased pressure for mainchain miners to collocate in order to improve transmission of both mainchain and sidechain block data.
Sidechain End-of-life and Permissionless Innovation
The issue of sidechain end-of-life interacts badly with the stated intent of permissionless innovation.
Consider for example a situation, where a reasonably-popular sidechain already exists, that has many similarities to the mainchain. Let us also consider the situation, that development of this sidechain is centralized, in comparison with the Core mainchain.
Suppose a bright mind develops some idea for a mainchain feature, and creates a sidechain that is little more than mainchain in addition with this useful new feature. In a few months, it becomes obvious that the feature is useful, desirable, and has little or no negative effect.
However, the developers of the pre-existing sidechain notice this feature, and implement it also on their own sidechain. This is reasonably easy as the sidechain developers are more centralized than Core mainchain is.
From then on, the sidechain with a new feature is at end-of-life: the pre-existing sidechain not only has the new feature, it also has (by virtue of being older) better network effect, and possibly other features as well. Users then desire to leave the sidechain. Again, as I pointed out earlier, at end-of-life, expected future fees are expected to drop, and present backing funds become a target for theft. In addition, the new sidechain is likely to be a relatively small sidechain, and the rest of the Bitcoin community may be unwilling to economically sacrifice the Bitcoin network to punish those who steal from the small sidechain using "nuclear options".
This suggests that permissionless innovation for existing chains already pegged to the mainchain is risky. One would have to create sidechains that are incompatible with mainchain and pre-existing sidechains (such as a MimbleWimble sidechain, or other chain with drastically different transaction format), or risk end-of-life.