SideChains? Ethereum a SideChain? Liquid?

in LeoFinance6 months ago (edited)

Sidechains

Sidechains, a term that many talk about, many use, but most don't understand what a sidechain is... most think that because a chain is a sidechain to another chain it makes it automatically inferior to that other chain! It's not true...

Sidechains can be more decentralized, sidechains can have more use-cases, sidechains can come in many different forms, most sacrifice one thing for another, they can even have different consensus methods and allow smart contracts! The fact that a chain is a sidechain to another doesn't necessarily make it worse or better... so what is a sidechain?

A sidechain is a blockchain that has a peg-in and peg-out with a different chain! Let's look at the example of Liquid!

Liquid is a Bitcoin sidechain that allows you to transact what they call L-BTC with more privacy and faster, they do this by having different block times, and having a federation in place that are the miners of that sidechain. What makes it a sidechain of Bitcoin is the fact that to generate L-BTC one has to send BTC on the main chain to an address to lock it up, this is the peg-in mechanism that I was talking about... BTC gets locked in the main chain, and L-BTC is created on the sidechain Liquid. The peg-out works in the same way, but in reverse, someone sends L-BTC to an address to unlock the BTC on the main chain.

The fact that a sidechain is any chain that has a peg-in and peg-out mechanism with another chain makes it so Bitcoin can never be a sidechain to another chain. There is no way to create tokens on Bitcoin, no good ways to tokenize ETH on Bitcoin, thus, Bitcoin can never be a sidechain to another chain. This doesn't make Bitcoin superior or inferior... it just makes it not be able to be a sidechain.

Ethereum...

And this is where Ethereum comes in! Currently, I would say Ethereum is the best sidechain Bitcoin has even though Bitcoiners don't like to admit it.

Ethereum allows BTC peg-in and peg-out mechanisms through tokenization and smart contracts, wBTC is one of such mechanisms, it isn't trustless, but it allows BTC to be tokenized on Ethereum, wBTC actually has more BTC locked up than the Lightning Network has...

This tokenized wBTC can be used in many of the DeFi smart contracts and platforms, platforms like Aave, Compound or Uniswap!

When compared to Liquid, I would say Ethereum currently has the advantage. It has more developers, more use-cases, more platforms, more users, everyone is looking at Ethereum... while not everyone is looking at Liquid, and it still lacks a lot of the use-cases that Ethereum has.

There are a few bad things about Ethereum being a sidechain to Bitcoin!

Fees on Ethereum are paid in ETH, so it doesn't help the security or price of Bitcoin, although, fees on Liquid go to the federation, which also doesn't help the security of Bitcoin.

However, the fact that fees are paid in L-BTC which is tokenized BTC, creates this fee use-case for BTC, which increases demand and drives the price of BTC up, which means that the fees the Bitcoin miners get on the main-chain are valued at a higher USD value, which increases the security of BTC.

Also, asset creation on Liquid helps the price of BTC, this because these assets are minted through the use of L-BTC, while on Ethereum tokens are created with ETH, which doesn't help the price of BTC, thus, using Liquid to create assets uses L-BTC, which also helps out the security of BTC undirectly, this through increasing the number of use-cases and demand for BTC and thus increasing the USD value of fees on Bitcoin.

With all of this said, Ethereum as a sidechain locks up BTC and allows many use-cases for BTC, which decreases supply on the market and drives demand up, which makes it more likely for the price of BTC to go up, which also increases the USD value of fees the Bitcoin miners get.

Ethereum and Liquid are both great sidechains to Bitcoin, Liquid is better for Bitcoin's price and security than Ethereum, but Ethereum also has its advantages. In the end, having the choice on which sidechain to use is always the best solution, especially with projects like tBTC which try to create tokenized trustless BTC on Ethereum, an improvement on the current wBTC which isn't trustless...

Having multiple choices is freedom... and last time I checked, this whole space is based on freedom and liberty.

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Side chains are fascinating to me for a lot of different reasons. One being the rapid innovation that we see on sidechain projects that isn’t possible on a network like bitcoin. There’s a lot happening in the space but I think sidechains are leading the charge in many different respects. If nothing else, they are great for testing and improving the “main chain” - but like you said here, there’s plenty of actual use cases already in the mix

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