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Is LTBcoin Jumping the Gun with Counterparty?

Published on April 14th, 2014 by Visiting Author

By rotalumis

LTB Episode 99 was a most fascinating listen! In a nutshell, while some of the Bitcoin core developers had spoken of sidechains and merged mining when all the fuss about Counterparty and its use of the bitcoin blockchain broke out a few weeks ago, it is now clear that others were keeping one or two cards very close to their chest.

As Adam Back, creator of the Hashcash algorithm that Bitcoin is based on, and entrepreneur and angel investor Austin Hill explained on the show, they envision a future where extra features can be added to Bitcoin in the form of two-way-pegged, merge-mined sidechains that can have their own specific features, such as faster block times or larger data fields.  They argue that this would allow Bitcoin to scale and adopt new features while isolating the blockchain from the risks that go along with innovation.

One interesting revelation is that the sidechains they describe would actually use Bitcoin as their currency, and that any of the famous 21 million bitcoins that will ever exist would be able to flow on and off sidechains from the main Bitcoin blockchain. Most exciting is the claim that some of the core developers are already actively working with a company founded by Austin Hill and Adam Back to lay the groundwork for this, even though the project is still in its very early stages.

If you're still catching up, listen to LTB 99, or read through Tim Swanson's summary.

The question that popped up on the LTBcoin forum in the wake of all this is a very valid one that surely echoed the thoughts of many, as LTBcoin gets ready for its planned soft, feature-lite launch on Counterparty on April 25, 2014:

Is Counterparty the right choice for LTBcoin, or is it too early to tell?

The answer is that it doesn't matter right now, for two main reasons.

First, because an asset like LTBcoin can start out on one system, in this case Counterparty, and then be migrated at a later stage to a different system if necessary, when the technology becomes available. I'm grossly simplifying here, but it's a bit like moving your old digital photos from CDs, to DVDs, to SSD media and so on. You change the underlying storage and the protocol you use to access and handle your data, but your photos are independent of all that. In the same way, a  cryptographically-secure public ledger that keeps track of which addresses hold how many assets is ultimately data and independent of how it is stored.

The second reason is that services like Counterparty, Mastercoin and so on could also choose to migrate to merge-mined interoperable sidechains, as described in Episode 99, if it became feasible and advantageous for them to do so. Again, this is possible because these systems are really just data and protocols to handle that data. In such a case, they would probably be able to retain their native currencies if necessary, coexisting with bitcoins on their sidechains. While this would be less efficient than using only bitcoins, there could be a good reason for going down this route, which I will cover in a minute.

Should protocols such as Counterparty or Mastercoin adopt Bitcoin on their own sidechains as their only currency, their native currencies (like XCP or MSC) could be converted into shares in the respective systems.  Holders of XCP, MSC and so on would then receive dividends in bitcoin from  transaction fees on these sidechains, as well as from any fees levied on bitcoins moving in and out of the sidechains from the main Bitcoin blockchain. This means that we could even see an exchange rate emerge between, say, Counterparty sidechain bitcoins and Bitcoin blockchain bitcoins, which will depend on the relative supply and demand of each and on the cost of converting one to the other.

The most obvious downside to this second scenario is the added cost that arises from the sidechain transaction fees, which is why I said before that it could make good sense for sidechain protocols to keep their own internal currencies that get their value from pure supply and demand. It is likely that we will see both kinds of solutions and that market forces will play a part in deciding which ones prevail.

Of course, there is also the possibility of sidechain protocols that decide to neither have their own native currency, nor impose any fees of their own on top of the standard Bitcoin transaction fees. However, that would be the same as someone forking Counterparty or Mastercoin and choosing to make their version of XCP or MSC unlimited in supply, freely available from a faucet and essentially worthless. In other words, it's highly unlikely to happen.

With all that said, and despite the excitement with which Adam Back and Austin Hill's announcement has been received, there is one big issue that still stands out as the elephant in the room. This is the problem of the security of sidechains and the risks of shifting even more power to a small number of mining pools. I wish this had been discussed in some detail in Episode 99, and it would make a great topic for a future LTB episode.

The problem is that with the proposed merged-mining solution, all sidechains will forever be at the mercy of the largest mining pool operators, who are likely to have their own vested interests in specific sidechains or other competing solutions. Not only will pool operators get to decide which sidechains they mine and thus which ones actually exist, but even a pool expressing hostility or preference for particular sidechains is bound to cause waves in the Blockchain 2.0 ecosystem. That kind of centralization is definitely far from ideal and needs to be addressed.

It also emerges, in the second half of this article where some of the bitcoin developers weigh in on the matter, that there isn't yet anything like a consensus that this interoperable sidechain proposal is the best way forward for Bitcoin.

In the meantime, just as you listened to music on your cassette tapes or CDs before MP3s and the iPod came out, asset innovation will continue to happen using the technologies that exist and work right now.

LTBcoin is set to soft launch on Counterparty, using the newly-released Counterwallet, in a feature-lite release on April 25, the 1st anniversary of Let's Talk Bitcoin. Until then, visit the LTBcoin forum to join the community and to learn more about the LTBcoin project and how to get your first coins in the initial disbursement.

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