How to use crypto: BIP300 and BIP301: Will drivechains really help everyone use Bitcoin?

BIP300 and BIP301: Will drivechains really help everyone use Bitcoin?

The quest to supercharge the Bitcoin network: How did it all start?

A company known as Layer 2 Labs was determined to achieve the objective of scaling and creating drivechains for the Bitcoin network. At its launch, it managed to raise $3 million in funding. 

Paul Sztorc, the Layer 2 Labs CEO and co-founder, stated that the company aims to make everyone in the world a Bitcoin user. Sztorc is the creator of BIP 300 and BIP 301. BIPs translate to Bitcoin Improvement Proposals. In simple words, they detail the technical specifications for drivechains.

This article assumes that you are already familiar with the Bitcoin network and how it works. Otherwise, check out one of our past articles to learn more: 'Crypto Basics: How Bitcoin works'.

In fact, Sztorc proposed BIPs way back in 2017. The two BIPs laid down the groundwork for a decentralised Bitcoin sidechain implementation to leverage Hashrate Escrow and Blind Merge Mining. Before BIPs, the Layer 2 Lab’s CEO presented drivechains in a 2015 blog post and presented them as a solution to Bitcoin’s fragmentation and other issues by enabling greater scalability, privacy, and flexibility.  

The world imagined by Paul Sztorc would be dominated by Bitcoin. At the moment the market consists of Bitcoin and approximately 22,000 altcoins. Sztorc wants to see a market dominated by Bitcoin entirely, while every other altcoin present on the market would have a unique use case or features existing on a sidechain in the form of a drivechain. 

This introduction includes a few technical terms that may be hard to comprehend. Let's break the technology down.

Drivechains explained

A drivechain can be illustrated as an approach that aims to leverage sidechain technology. In fact, drivechains can be defined as a special type of sidechain. The idea behind using sidechain technology as a Layer 2 framework is to have a totally separated blockchain with its own bridges, native sidechain coins, and validators.  

Drivechains are proposed to be implemented through a soft fork, which enables the creation of sidechains with particular features. To find out more about sidechains and other Layer 2 solutions, we suggest reading this article: ‘Crypto Basics: What is Layer 2 and how does it work?’  

When it comes to a drivechain, the whole explanation revolves around the notion that it is referred to as a child chain that doesn’t have all features of a sidechain yet borrows it from the parent chain. Therefore, the parent chain is the blockchain that gives security to the drivechain. 

Drivechains would be able to allow Bitcoin users to lock up their cryptocurrency in drivechains using a decentralised two-way peg which provides a cryptographic proof to mint coins that encompass features of any altcoin.  

By operating as independent blockchains and situated on their own blockchain, drivechains could increase Bitcoin security and hashrate, mining fees along with providing new characteristics and use cases to ensure a massive adoption. 

The technology may be confusing at first because it mixes up many terms with little differences. Whether it is a sidechain or drivechain, both technologies have a common goal – to enable more functionalities for the Bitcoin network. However, such approaches come with a few trade-offs. 

A. What is the Bitcoin Improvement proposal (BIP)?

As mentioned above, BIP stands for Bitcoin Improvement Proposal and is all about technical specifications on how to introduce changes to the Bitcoin protocol. 

When it comes to drivechains, Sztorc proposed two relevant BIPs- BIP 300 and BIP 301. BIP 300 refers to Hashrate escrows and BIP 301 lays down technical specifications for something called blind merged mining.  

The Hashrate Escrow is merely the drivechain’s concept of moving cryptocurrency from the Bitcoin blockchain to different drivechains and vice versa. Think of it as a multi-signature escrow that is under the control of a group of miners. The group is responsible for resolving disputes and directing hash power towards withdrawal transactions instead of signing them with a private key. 

To secure the pegging system, BIP 301 comes in handy. The blind merged mining means that miners don’t need to pay attention to drivechains since they don’t run sidechain nodes, but can still collect all the transaction fees. 

Both terms are quite technical and may seem complicated at first. We are going to explain the whole process and these terms in a more simple manner further in the text. 

B. How do drivechains work?

To allow Bitcoin users to send crypto via a sidechain, drivechains use the so-called Simplified Payment Verification (SPV) proofs. Using a two-way peg, the cryptocurrency is locked in an on-chain address which assumes the role of a vault or box. 

Further, the sidechain looks up these locked transactions. Once it detects one of them, the sidechain creates an appropriate number of native tokens. Such tokens can be created with features of any existing altcoin use cases which would otherwise be considered invalid under Bitcoin’s first layer rules. 

The third phase revolves around sidechain tokens converting back into Bitcoin (BTC). To do that, the sidechain has to validate the special withdrawal transaction making sure that it is also a valid transaction on Layer 1.  

Remember how we said that we are going to explain the technicalities of BIP 300 and BIP 301? Let's dive a bit into the validation process to find out more about them.

The validation process happens on the sidechain. Once it goes through, the funds are frozen on the sidechain and submitted to Bitcoin miners. The address that gets the withdrawal payment is a special address that must be accepted by all miners. The voting process is known as the Hashrate Escrow. 

 In the most basic form, the Hashrate Escrow allows miners as a group to collectively custody the coins in all sidechains. Secondly, there is something known as the blind merged mining scheme that aims to enable miners to become block producers at a consensus level without being required to validate the sidechain. Both of these components form a two-way peg mechanism. 

What is a soft fork and how does it work?

When you start researching BIPs and drivechains in general, there are good chances you'll bump into the soft fork term.

Associated with the blockchain protocol, a soft fork can be defined as a modification in the software protocol that causes previously valid blocks or transactions to become invalid. Due to old nodes being able to recognise the new blocks on the blockchain as valid, a soft fork is deemed backward compatible. 

Contrary to a hard fork, a soft fork requires only the majority of miners to upgrade to impose new rules on the blockchain. 

B. Why didn't Bitcoin welcome drivechains earlier?

Even though the drivechain technology was first mentioned in 2015, a number of debates are taking place on social media. A new wave of Bitcoin users has shown interest in reviving Sztorc’s idea.  

Drivechains bring to the table a lot of benefits; otherwise, we wouldn’t be even talking about them. However, they haven’t been incorporated yet because the benefits come along with trade-offs.  

From a technical point of view, for drivechains to become a reality, the Bitcoin protocol would need to implement a soft fork to Bitcoin. Simply put, a fork is a change in the blockchain’s protocol that has been agreed upon by its participants.

From a complexity standpoint, the sole implementation of drivechains might not be complicated as it sounds. The tricky part is Bitcoin's long-standing game theory and uncertainties following the idea of such a change.

There is never one reason behind the question of why a novelty hasn’t become a reality yet. Aside from the technical aspect, there is also a community aspect to look at. 

Changes are directed by the community

Bitcoin software changes rely on developer consensus. The Bitcoin community is important since it is not rare that the community rejects a decent proposal or accepts one that might be slightly controversial.

Despite drivechains showing great potential for the Bitcoin blockchain, there have been some controversies surrounding other novelties such as Ordinals and Inscriptions that added new capabilities, the Bitcoin community didn’t feel like rushing into a new approach. 

D. What do drivechains mean for Bitcoin miners?

A part of the crypto community views drivechains as an essential feature for transaction fees of Bitcoin miners. In other words, if drivechains and sidechains were not adopted, one day miners might find themselves in an unfavourable situation. Therefore, drivechains may be a useful technology for miners.

To understand this statement, it is essential to gain insight into how miners on the Bitcoin blockchain are paid currently. For now, most miner revenue stems from block rewards. Block rewards refer to the amount of new Bitcoin that is issued by the protocol in the subsidy form.  

The block subsidy is declining at a steady pace until approximately around 2140 when no more units will be released in the form of a subsidy by the protocol. Until then, Bitcoin miners shall fully depend on transaction fees as their main revenue source. With the declining subsidy, transaction fees will have to compensate for the revenue that miners receive as block rewards. 

 Why are miners' incentives deemed controversial?

A few concerns have been raised by the crypto community regarding the drivechains’ implementation. First, it has been noted that the drivechain’s proposal would modify Bitcoin’s game theory. In other words, miners are not assumed to be honest. 

Despite the technical possibility of a miner with a 51% hash rate to cheat, the incentive system works in a manner that makes it not profitable to cheat. An attack on Bitcoin would cause the price to crash and would mean only a pyrrhic victory to miners. 

When it comes to drivechains, no cryptographic proof is required, yet only a miner vote. However, Paul Sztorc provided counter-arguments. First, he noted that such an attack would not happen since miners would be collecting fees from the sidechain. However, the fees should be higher than the amount that could be withdrawn for the current incentive system to remain standing. 

The second claim provided by Sztorc relates to the fact that 13150 blocks would need to agree to accept the transaction and if an attack happened, there is still plenty of time to resolve the issue. 

The game theory is complex and hard to predict. As for drivechains, the truth is that there is no risk-free lunch. There are still many unknown matters regarding the drivechain proposal and until they are tried on the mainnet, there probably won’t be an accurate answer. Now let’s learn a bit more about Sztorc’s proposals. 

Can drivechains make everyone use Bitcoin?

While it is true that driechains can potentially provide new benefits and functionalities to Bitcoin core and other blockchain networks, they do not possess the capability to basically compel or enforce the widespread adoption of Bitcoin or any other specific cryptocurrency.

The widespread adoption and use of any cryptocurrency depend on various factors such as utility, regulatory environment, user preferences, market acceptance, and ease of use.

Drivechains can be a helping hand on the path of massive adoption. Still, in the end, it depends on a mixture of factors and the ability to obtain trust from users, solve real-world problems, provide more value, and sufficiently address the blockchain trilemma.

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