In 2020, many of the discussions around how Bitcoin can be improved or enhanced in some way revolve around the use of secondary network layers built on top of the base blockchain. Examples of these upper-layer protocols include the Lightning Network, Liquid, and RSK. However, the growing popularity of decentralized finance (DeFi) applications on Ethereum, which include bitcoin-backed ERC-20 tokens like WBTC and TBTC, has led some to wonder whether alternative public blockchains with their own native tokens, such as Ethereum or Tron, may be able to act as quasi-sidechains for Bitcoin.
On day one of Magical Crypto Conference VR 2020 (MCCVR 2020), the topic of Ethereum as a Bitcoin sidechain was brought up during multiple panel discussions.
A sidechain is a blockchain separate from the main Bitcoin blockchain that also uses BTC as its underlying token. Basically, users are able to transfer their bitcoin from the Bitcoin network to a new cryptocurrency network that could have a variety of innovative features. For example, RSK is a Bitcoin sidechain that focuses on many of the same DeFi use cases found on Ethereum and is compatible with the Ethereum Virtual Machine (EVM).
Now, it should be noted that the pegging mechanism by which bitcoin moves back and forth between the base Bitcoin network and a sidechain is a key area of controversy in these systems. Different setups require varying degrees of trust in third parties, and the sidechain systems that exist today are not as censorship resistant as Bitcoin itself. Some have referred to WBTC as a token that effectively turns Ethereum into a Bitcoin sidechain, while others say the sidechain term should not be applied here.
“I’m going to have to object to [WBTC being a Bitcoin sidechain] because that means something specific where you actually have cryptography deciding if the coins that are not on Bitcoin anymore, but are on Ethereum, are valid or not,” said SideShift.ai founder Andreas Brekken on a panel regarding the future of Ethereum at MCCVR 2020.
WBTC is the major bitcoin-backed token on Ethereum; however, the custody of the bitcoin behind the token is held by one entity: BitGo. In this way, WBTC is not much different from a U.S. dollar-backed stablecoin like USDT or USDC. Whether the token is issued on a blockchain or not, the issuer behind the token is still a central point of failure that could become corrupted or be targeted by regulators. This was not exactly what Satoshi Nakamoto had in mind when he originally created Bitcoin, and it’s questionable if issuing these sorts of centralized tokens on a public blockchain makes sense in the long run.
“You could make an argument that we have Ethereum on Bitcoin and we have Bitcoin on Ethereum in the sense that there is a merged-mined chain now, RSK, which has the EVM and has the ability to peg bitcoin into it, although I believe that’s still a federated peg,” added Casa CTO Jameson Lopp during the same panel discussion. “So, Andreas will probably object to calling RSK a sidechain. I do believe they would like to eventually become a drivechain, which more people would probably consider a sidechain.”
Of course, WBTC could also eventually move the custodianship of their BTC to a more-federated, less-centralized model.
RSK and Liquid are both federated Bitcoin sidechains that are effectively backed by real bitcoin held by a federation of custodians via a multisignature Bitcoin address. While Liquid is mostly targeted at the users of various centralized exchanges, RSK is effectively a version of Ethereum with ETH replaced by a token pegged to BTC (rBTC).
“With the multisig federation, the truth is that the asset is actually contained within the multisig of the federation itself and not so much the actual blockchain it’s represented on,” explained Statechains author Ruben Somsen during a panel focused on layer-two Bitcoin technologies. “The representation is an IOU.”
Lopp added that TBTC has also relaunched on Ethereum, which could be an option for the hardcore folks who want to minimize trusted third parties as much as possible. TBTC is an attempt to create a bitcoin-backed token like WBTC on Ethereum with lower trust assumptions in the custodians of those funds. The entities holding onto the real BTC represented on Ethereum must also stake ETH or another token on Ethereum, which could then be seized by the smart contract in a situation where a custodian tries to steal the bitcoin backing the TBTC tokens. This means users negatively affected by a nefarious custodian could potentially be made whole via the ETH or ERC-20 token collateral.
According to Somsen, tokens like TBTC are effectively derivative assets.
“It is not an actual bitcoin, it is some kind of token that is backed by collateral, and the collateral can be ETH, USDT, or any kind of asset,” explained Somsen. “The collateral kind of virtually generates the bitcoin.”
To summarize, the panelists discussed three different ways in which BTC and Ethereum have been merged: the WBTC ERC-20 token, the TBTC ERC-20 token, and the RSK sidechain.
Another project worth mentioning here is RenBTC. Although it intends to eventually use a security model with lower trust requirements, the bitcoin backing RenBTC are currently held in a single-sig Bitcoin address controlled by the team behind the project.
There are also other projects working to bring Ethereum-esque use cases to Bitcoin via alternative methods. For example, RGB is an in-development smart contracts system on top of the Lightning Network, and a more expressive scripting language, known as Simplicity, is expected to be added to the Liquid federated sidechain in the next six months.
So, why has all this work been put into merging the bitcoin asset with Ethereum’s technology? For Brekken, Ethereum could be a fantastic companion to BTC.
“Bitcoin had been struggling for as long as I can remember to attract new developers because, you know, it’s not that exciting,” said Brekken.
According to Brekken, the 16-year old developers looking to change the world are attracted to all of the excitement around DeFi rather than simply being able to send bitcoin back and forth between friends.
“The EVM itself, I think, is an interesting system for, kind of, optimizing computations on a distributed system,” added Bitbank Chief Bitcoin Officer Jonathan Underwood. “It is, kind of, still not very mature, but I do think it is something that is very interesting.”
According to Underwood, projects like RGB and RSK could eventually use something like the EVM since it is all open source.
“We would be able to basically just piggyback off of all the Solidity contracts that have been written so far, and we would be able to use them on a system like [RGB and RSK],” said Underwood.
For ethereans, this all sounds like great news. After all, more activity on the Ethereum blockchain must also be bullish for the underlying ETH token, right? According to a variety of panelists at Magical Crypto Conference VR 2020, it’s not that simple.
“I think Ethereum is great for bitcoin,” said Brekken. “We’re getting in all these new developers, and even if Ethereum doesn’t work out to be too expensive, these guys are probably going to save their money in BTC and not in Ether. So, I would say everybody wins.”
For Underwood, a distinction needs to be made between ETH the digital asset and Ethereum as a technology platform.
“As far as [ETH] the currency goes, I am of the personal opinion that I think bitcoin is like gold and bitcoin is the cryptocurrency that I personally think is going to be like the leader of the space for pretty much the rest of all time,” said Underwood.
According to Blockstream Vice President of Product Management Allen Piscitello, the origins of the error in assuming a network’s token necessarily tracks the popularity or success of a cryptocurrency network go back to the origins of appcoins.
“You can think that betting on the token that is underneath the network corresponds to the success of that network, [but] we’ve seen things like the Omni layer on Bitcoin succeed for awhile with Tether and the token being worthless,” noted Piscitello.
Piscitello, in a somewhat joking manner, added that Tron may be useful for some applications but he wouldn’t necessarily want to own the network’s underlying TRX token. Reckless VR organizer and noted Ethereum influencer Udi Wertheimer took this joke to the extreme on day two of Magical Crypto Conference VR 2020 in a presentation titled Why Tron is the Best.
“Everybody is going to be desperate to have exposure to bitcoin on their network, and what they don’t realize is that’s going to really crush a lot of the demand for the native token as well,” Piscitello added.
While Lopp thinks Ethereum will have to deal with growing pains going forward, he also does not think this platform is going away anytime soon.
“There’s certainly demand and utility for this kind of stuff, and I guess the real interesting question will be whether or not it will be able to get to the point that it can actually handle mainstream demand and can handle more mainstream, day-to-day utility rather than rampant want and speculation.”
From Piscitello’s perspective, there will be many different ways in which new features are brought to Bitcoin through a wide variety of secondary layers with different threat models and security tradeoffs. Maybe something like Tron can be useful in some situations and the Lightning Network can be used when a particular use case necessitates a higher degree of decentralization.
“It’s all, in the end, good for bitcoin the token, regardless what happens on Bitcoin the network,” said Piscitello.