Altcoin killers or troublemakers? How drivechains could affect Bitcoin

Against the backdrop of rapid growth in L2 networks on Ethereum, the Bitcoin community is increasingly discussing drivechains described in BIP-300/301. Last week Paolo Ardoino, CEO of Tether, and Jameson Lop, CTO of Casa, stated that drivechains could enhance privacy and transaction speed, and noted them among promising second‑level solutions.

Alongside the Bitcoin mixer Mixer.Money, we explain drivechains and why they have yet to be implemented on the Bitcoin mainnet.

Mixer.Money is a service for laundering Bitcoins and anonymising wallets, which uses major exchanges as a source of clean cryptocurrency.

What drivechains are

Drivechains are a technology for running sidechains in the Bitcoin network. They can be regarded as “apps” that developers modify at will. Users themselves decide whether they want to send coins into drivechains.

The concept was first presented by Paul Sztorc in the blog of the Truthcoin project (later renamed to Hivemind). He saw in drivechains a possibility to stop Bitcoin fragmentation by forks, as well as a way to embed into the primary cryptocurrency successful technical solutions from altcoins.

In 2017 Sztorc published BIP-300 with the mechanism for moving Bitcoins from a sidechain to the main chain, and in 2019 — BIP-301 with the concept of the Blind Merged Mining. The latter allows mining a sidechain without running a node, i.e., “blindly”.

Sztorc’s proposals elicited tepid interest from the community, but he remains convinced that Bitcoin’s success depends on adoption of drivechains.

«As I understand it, drivechains simply outpaced their time. After all, one or more of the following problems: altcoins, people’s desire for freedom and creativity, protocol metaconsensus/upgrade/ossification, a perpetually tight budget for security and/or expressiveness of Bitcoin’s smart contracts will force Bitcoiners to relearn drivechain theory and ultimately adopt something drivechain-like. And then I will appeal to the historians to grant me the credit. At least, that was my plan», Sztorc wrote in the Bitcoin developers’ mailing list in February 2022.

In December, his company LayerTwo Labs raised $3 million to bring drivechains to Bitcoin.

«We believe drivechains could kill altcoins, increase Bitcoin adoption and become a catalyst for hyper-bitcoinization», — LayerTwo Labs said.

Sztorc publishes information and news about drivechains on the portal drivechain.info. In addition, he regularly updates the list of drivechain proponents in the Bitcoin community on the LayerTwo Labs site.

What BIP-300/301 contain

A sidechain is a parallel network that can send and receive Bitcoins to the main blockchain thanks to a two-way peg. It tracks a specific address and issues coins deposited there as tokens (sidecoins) in a 1:1 ratio or other configuration.

It is important to note that on the Bitcoin side there is no sidechain or sidecoin: there are only regular BTC transactions. The fact that sidechain users reference it to issue a sidecoin does not matter for digital gold.

The main question is how to safely transfer funds from this transaction to another address, since the owner or owners of the private key can freely spend the coins.

Users must be assured that locked Bitcoins will remain so while used in the sidechain. In addition, these coins must be unlockable in the future without relying on a single point of failure, such as the owners of private keys.

BIP-300 enables safe spending by introducing new types of transactions:

• proposals for a new sidechain;
• peg-in — transferring Bitcoins into a sidechain with subsequent locking;
• peg-out — withdrawal from the sidechain with unlocking of coins.

Withdrawal is the most complex part, so BIP-300/301 describe it in the most detail. The sidechain, once every three months, initiates a withdrawal transaction with a hash that records the peg-out, and sends it to the miner.

If the miner supports the withdrawal, they add the transaction to the block. Other miners can decide on the proposal by setting a 1-byte flag in their blocks.

There is a possibility that a miner cheats and inserts a different hash — one that records a withdrawal. To reduce this risk, a voting process was designed: peg-out will be signed if at least half of blocks in the past six months (13,150 of 26,300 blocks) have the support flag set.

Example: Alice sends 1 BTC to the sidechain address to which no one has the keys. Alice’s Bitcoin effectively disappears forever — it is burned. The sidechain sees this transaction and issues the sidecoin.

After some time, Alice wants to get the Bitcoin back. To do this, she “recovers” the coin: creates a spending transaction of 1 BTC, sends it to a miner, and asks to initiate a vote.

The miner places Alice’s hash in the coinbase transaction of the mined block. After 3–6 months, peg-out receives 13,150 votes. After that, Alice can perform the withdrawal and spend 1 BTC.

How drivechains could affect Bitcoin

With drivechains in Bitcoin, there will be networks supporting cryptographic protocols such as Confidential Transactions and other technologies anonymous cryptocurrencies.

«Private sidechains will effectively break the link between transactions: a kind of chain-hopping, but within the Bitcoin ecosystem.

In addition, Bitcoin mixers are likely to develop new technologies for anonymising transactions based on drivechains. However, this technology may only attract most users after optimizing withdrawal times. Few clients are prepared to wait 3-6 months.

“We currently use our own proven anonymity algorithms, and we watch with interest the development of drivechains,” commented a Mixer.Money representative.

In addition, developers could run sidechains with support for DeFi protocols, NFTs, security-tokens and other technologies that exist in alternative currencies.

Why drivechains are not yet implemented on the mainnet

Despite support from a number of well-known industry figures, many community members remain skeptical of BIP-300/301.

The main target of criticism was the miners’ voting system: they could steal users’ funds from the sidechain, since no cryptographic proofs are required to initiate a withdrawal transaction.

According to Sztorc, theft makes little sense since miners will collect fees from users. However, most likely the amount won’t approach a potential $1 billion in peg-out transactions even after many years of using a major sidechain. The existing incentive structure will persist only if fees exceed the withdrawal amount.

Suppose a theft did occur. In that case there would be enough time to resolve the situation. If the victim can prove their case, miners and/or users would agree on a user-activated soft fork (UASF) that would block the withdrawal. In other words, the Bitcoin network would simply agree to censor the transaction.

At the same time, BIP-300 allows up to 256 active sidechains, meaning there could be several competing participants simultaneously pushing for a UASF.

In Bitcoin, every transaction is accompanied by cryptographic proof. Drivechains replace this model with a kind of competitive game, about which little is known.

BitMEX Research analysts highlight a number of other drawbacks:

• miners’ apathy. They may not participate sufficiently in the vote, which can leave funds trapped in the sidechain. Such uncertainty will deter users from new or smaller sidechains;
• withdrawal process duration. This could lead to price differences between Bitcoin on the mainnet and the sidechain;
• inability to withdraw on demand. Sidechain users must wait for a planned transaction that happens every three months;
• more complex network rules. Bitcoin nodes need to tally votes to assess peg-out validity.

Conclusions

At the Baltic Honeybadger 2022 Bitcoin conference, Adam Back, creator of Hashcash and CEO of Blockstream, suggested that drivechains could be a more important or useful upgrade than Taproot.

In August 2023, Bitcoin Magazine executive director and founder of the crypto hedge fund UTXO Management, David Bailey, said that BIP-300 could have a significant impact on Bitcoin developers.

«This would put an end to 90% of disagreements, and new Bitcoin improvement proposals could be tested in drivechains without altering the base layer. The number of developers and new ideas would increase a thousandfold,» he noted.

Nevertheless, BIP-300/301 have a number of drawbacks and introduce significant complexity to the Bitcoin protocol. At present they do not enable the community to reach the consensus level required for activation.