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Bitcoin Side Chains Could Replace Alt Coins

Nearly all of the 'alt coins' – the digital currency alternatives to Bitcoin – could one day be replaced by 'side chains' attached to the Bitcoin blockchain. These side-chains would offer developers the ability to innovate and create new features, just as they have been doing with the creation of so many alt coins, within the Bitcoin protocol.

The idea for implementing side chains has been put forward by the British cryptographer Adam Back, who was responsible for creating Bitcoin's proof of work system, and Austin Hill. It is still under consideration by other core developers, but is already gaining a significant amount of support.

Creating a side chain would be a little bit like creating a new coin. You could use it to add many of the features currently available from alt coins, such as faster transactions or enhanced privacy features. It could potentially be used to create the kind of 'Bitcoin 2.0' features being implemented in systems like as Ripple, Ethereum or Open Transactions, such as contracts or stocks and shares. But rather than existing as an entirely independent entity, the value of this new coin would be forever tied to Bitcoin. Rather than creating each new currency unit of an alternative coin through a separate mining algorithm and blockchain, they would be created when somebody chose to convert a Bitcoin into this new coin. The 1-1 value ratio between BTC and the new coin would always be maintained, so you could always convert your coins back to BTC at any time without them losing any of their value. Effectively 1 Bitcoin would be locked away for each 1 unit of each new coin that was created, and would remain locked away until somebody chose to 'cash out' the new coin and convert it back into 1 Bitcoin.

New features could then be created on a side-chain, without the risk of introducing a bug which could affect the entire network.

There are a few possible advantages to this approach. Firstly, it would enhance Bitcoin. The 'network effect' is very important for digital currencies, as the more people there are who own and use a coin, the more successful it is, the more people are likley to accept it and create services for it, and the more its value rises too. Bitcoin has seen its network effect substantially watered down by the emergence of a large number of alt coins, so anything which could encourage people wanting to innovate and to create or use new features to stay within Bitcoin would enhance its value and stability. Side chains would also enable Bitcoin to innovate in a way which is impossible now, due to the risk of introducing bugs, and the problems associated with winning the necessary consensus for new features given that BTC is an open source and community driven project.

Because coins created as a side chain would not have any kind of independent mining, there would also be potential cost and energy savings. But of course this also means that there could be no significant innovations regarding the way coins are mined or otherwise distributed using side-chains.

For users of alternative currencies the main advantage would be reduced risk. Because the price of the newly created coins would always be equal to the price of Bitcoins, it is likely that it would be less volatile than it would be if the newly created coin was completely independent. If a coin failed and users started to dessert it, the 'last man out' could always get all of their Bitcoins back, whereas an independent alt coin would see its value drop to zero if it failed and late movers would lose their money. Of course the flip-side of this is reduced potential for speculators to profit, as the early adopter advantage of being amongst the first to adopt a successful coin would no longer exists in this system, which could reduce entrepreneurial activity around side chains as compared to alt coins (because currently an entrepreneur can buy up a promising new coin, then add value with their new venture and profit from their holdings as well as the venture itself, whereas a single side chain related venture impacting the price of Bitcoin is probably impossible).

Categories: E-Currency | Cryptocurrency | Bitcoin


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