Bitcoin Beyond BIP-300: What Future Holds For ‘DeFi On BTC’

Does Bitcoin need any sidechains for its future? The DeFi community nowadays is split between “yes” and “no” as an answer to this question after the resurgence of a six-year-old proposal. Since the controversy around sidechains involves advanced crypto language, let’s cover the basics first and then take a deeper look into the pros and cons of the proposal as well as any potential solutions.

Before we delve into the specifics of BIP-300, it’s worth mentioning that there are alternative approaches to expanding Bitcoin’s utility that don’t involve sidechains. One such approach is merged mining, which allows Bitcoin’s Proof-of-Work (PoW) to be shared with more chains at no extra cost. This is not only economically viable but also creates a symbiotic relationship with Bitcoin rather than competing against it. For example, one manner of accomplishing this is to employ alternative economics like EIP-1559 on the merge-mined chains, which makes transactions more cost-effective.

The Bitcoin Improvement Proposal in question is the BIP-300, commonly known as Bitcoin Drivechains. Originally introduced in 2017, it basically proposes adding specifically designed sidechains, named “Drivechains,” on top of the Bitcoin blockchain. A Bitcoin Drivechain would operate as a blockchain connected to the main Bitcoin network and use BTC as the primary currency.

Another point to consider is miner incentivization. Merged mining offers essentially “free money” that miners can earn by doing something they are already engaged in. This not only benefits the miners but also adds an extra layer of security and viability to the new chains that are merge-mined with Bitcoin.

One side sees the proposal as a revolutionary step forward, while the other side argues it could open the gateway to scams on the Bitcoin network while leading to more scrutiny from regulators.

While the debate around BIP-300 continues, it’s essential to look at existing solutions that serve as a proof of concept for the values we’re promoting. After all, drivechains are surely not the only way to use Bitcoin’s PoW security for DeFi reasons. There are other layer-2 systems to expand Bitcoin’s use cases through immediate, secure, and scalable paths.

But then again, why is the community concerned about adding more sidechains to Bitcoin? Isn’t that what the Ethereum ecosystem does every Tuesday?

The Limitations Of BIP-300

The main issue lies with the BIP-300 allowing trustless movement of BTC between the main network and these Drivechains in a two-way peg (2WP). The hard truth of Bitcoin is that BTC on the main network can never truly leave the blockchain. The 2WP method instead creates an illusion of a transfer by locking the exact amount of BTC on the main network that’s “transferred” to a sidechain and then unlocks the equivalent token in the target chain. The same process works backward when BTC is “transferred” from a sidechain to the Bitcoin blockchain.

At this point, it becomes easier to see the limitations of the BIP-300 and understand the Bitcoin community’s concerns. For starters, implementing the two-way peg between the main blockchain and a sidechain could completely disrupt the economics and assumptions of Bitcoin.

Critics also argue that Drivechains could potentially cause a spike in Bitcoin-based scams as each sidechain would have its own version of BTC. And, as the last couple of years showed us, the increase in scam activity directly translates to regulatory crackdowns. Looking from the technical side, the BIP-300 would also require a soft fork on the Bitcoin blockchain, adding another layer of complexity along with potential points of failure to the equation.

Bitcoin Needs More Use Cases

While the concerns have valid points, it’s also a reality that Satoshi Nakamoto has created Bitcoin as electronic money, not as a store of value. This is why we need ways to utilize BTC within the larger DeFi ecosystem, or it would end up being too deflationary to really be used for anything more than a store of value.

So, the Bitcoin community needs a system that complements Bitcoin instead of competing with it by trying to create new alternatives. One such solution is building a blockchain merge-mined Bitcoin. Merged mining enables miners to mine multiple blockchains simultaneously without incurring additional energy costs. A merge-mined blockchain can take advantage of this by inheriting a significant portion of Bitcoin’s hashrate that is steadily growing without imposing extra energy costs on miners.

For BTC hodlers, moving BTC around the network can quickly become expensive in gas fees. With a Bitcoin merge-mined blockchain, the fee required to conduct transactions or execute contracts could be cut on the Ethereum network with EIP-1559-based economics. As EIP-1559 removes the fee market mechanism where the highest bidder comes first for processing transactions, native tokens of said chains have the potential to present gas fees incomparably cheaper for computation than spending BTC at each step.

It’s important to remember that the foundation layer is only the beginning: To utilize Bitcoin in more use cases, any L1 blockchain would require an additional layer to “interact” with the users —a layer-2 where a wide range of decentralized apps and services can be developed. By building a L2 ecosystem where dApps powered by Bitcoin can thrive without current limitations of sidechains would open the doors for a much bigger user base in a secure and scalable way. In the end, it’s not just about adding features to Bitcoin; it’s about enhancing the entire blockchain ecosystem for the betterment of global society.

This is a guest post by Jagdeep Sidhu. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.