 Welcome to the Daily Decrypt, where currency competition is always in style. I am your host, Amanda B. Johnson, and today's episode is brought to you by BitShares. The Visa payment network alone is said to process thousands of transactions per second, with the capacity to process tens of thousands per second. So let's be real, could any peer-to-peer, blockchain-based payment network actually compete with that? To dig deeper into this question, I've asked writer and technologist Eric Sammons back on to the Daily Decrypt. What we're talking about today is your piece entitled Unchained, Altcoins as Free Market Bitcoin Sidechains. And so just to lay a sort of primer, tell us what is a sidechain to begin with? Where did they come from and what are they for? Okay, so sidechains are trying to solve a problem which I think everybody in the Bitcoin system acknowledges. And that is the scalability problem. The fact is, is that we see it very clearly right now, that Bitcoin desires to be this global payment system. But right now it can only handle about seven transactions per second. To put it in context, at peak times Visa will handle about 40 to 50 thousand transactions per second. So it's very obvious that there's no chance that Bitcoin, as it's currently designed and set up, could handle that. In fact, I think some might calculate it, you need to have block sizes of eight gigabytes. Not eight megabytes, but eight gigabytes to handle that type of load. And of course if you do that though, then now all of a sudden you have lots of other problems because eight gigabyte block sizes would just be ridiculous for nodes to handle without supercomputers. And of course Moore's law could eventually make that work out. But how do we try to solve it now? So one idea is sidechains. And the idea of a sidechain, it's really like a, I mean it's kind of like it sounds, it's another blockchain. So it's off the Bitcoin blockchain. But what's different about it is it's pegged to Bitcoin. Meaning the value of the coins, the currency that's involved in that chain are pegged directly to the value of Bitcoin. So for example, it might be where you have a sidechain, you know, Amanda coin and it is a thousand Amanda coins equal one Bitcoin. And so what happens is you have to set that rate when I create the Amanda coin sidechain. I have to lock in that rate forever. That's right. That's right. And so what happens is you lock the Bitcoins on the blockchain so that they're now free to be used in your sidechain. I am simplifying this a great deal, but that's the essential point of it is. So now you have this whole blockchain where you can do whatever you want. You can have different rules, for example, for transactions, how quickly they confirm. You can do interesting things over there. But the whole time it's pegged to Bitcoin. So somebody can be confident. Okay, the value of these Amanda coins are going to be pegged to the value of Bitcoin. So you don't have that volatility or anything like that. That's the basic argument for and they can get even more complex. But that's really what it is trying to relieve the congestion on the Bitcoin blockchain. I mean, are there any sidechains in action now? And if so, what are you doing? No, not really. And also I do want to take one step back and say, I've heard people use the term sidechain a little more broadly than I just did. Like I'm going based on the white paper that was written about sidechains. That was written by Adam Back and Gregory Maxwell and some others. That, you know, it's called enabling blockchain innovations. I have it right here. Enabling blockchain innovations with peg sidechains. But I've heard, like when I've heard other interviews, people talking, they talk about sidechains in a more broad way of anything that somehow is a network that interacts with Bitcoin. So there's different ways people define it. But as of right now, there's no real sidechain that's up and running. Now Blockstream, they're the company, they're the main ones who are advocating for sidechains. They're developing some cool technology to use sidechains. And a lot of it's in testing right now. There's some ability to develop things. But as far as a real use case out there sidechain, it doesn't really exist yet. Sponsored shout out from Change Tip, the popular social tipping service, which is currently getting an upgrade to allow its users to have control of their own Bitcoin private keys. In other words, Change Tip will soon be a hot wallet. You can open your own Change Tip account and or request an invite to test the new hot wallet while it's in beta at changetip.com slash wallet. In your piece, you go on to say that you don't think that the sidechain for scaling is the best solution. And now why is that? Yeah, if you look at what if you know about sidechains, one thing when you understand you start to tell yourself, wait a second. This is an altcoin. We're talking about altcoins. But what they've done is they're trying to take away what they think are some of the bad things about altcoins. And one is the fact that as we know, there's hundreds of altcoins of which the vast majority are crap. I mean, they're just somebody a pump and dump scheme, somebody who's incompetent trying to set something up. And so things like that. So yeah, I mean, and I acknowledge I think anybody involved with cryptocurrency knows that that's a fact. And so sidechains, they're trying to get around that by saying, OK, but it's always pegged to Bitcoin. But what I see that as is it's somewhat of a like a control freak type of mentality like, OK, we want to keep things safe for you people out there. We don't want you to have to deal with the potential that an altcoin could fail, that an altcoin might have a volatile price range. It might change in value over time. I say, though, that's what's called the free market, that things like that happen. Yes, there will be altcoins that will develop that they are pump and dump schemes. They are altcoins that are frauds and things like that. However, the fact that the great thing about the great thing about altcoins is that anybody can start them up and the market will decide. If you really think about it, I know it doesn't really the name doesn't work, but Bitcoin itself is an altcoin. It when Satoshi came up with it, it was an idea by some nobody who just was like, hey, this is an idea. And he was basing it upon previous ideas, you know, hash cash or digit cash and things like that. So he's in a sense forking those things, those different projects and creating his own coin. So the greatest Bitcoin maximalist who thinks Bitcoin solves everything and that it should be the only coin out there, they're really endorsing an altcoin as well. So what I would say is the reason I like the idea of just altcoins is they allow for a free market to be created where the best solutions win. And so my example I use in the article, which I think is a good one, is that let's say you have two sidechains. And one is at, you know, you have Amanda coin, which is at a thousand Amanda coins per Bitcoin and you have an Eric coin, which is, you know, 10,000. Well, let's say though, and so at that point, that means for every 10, that means 10 Eric coins are worth one Amanda coin, because you know, you just connect them like that. Well, let's say Amanda coin, though, is like this super awesome coin that comes up with some innovative feature that becomes like what everybody loves to use out there. Well, and my coin stinks. You know, Eric coin is just like, you know, it's kind of crappy. I mean, it's useful, but not really used that much. Well, my coin, there's 10 of mine stills worth one of yours. And I think that's a problem, because I think if yours is the innovative one and yours is great, the value of it should go up. Because then what will happen is the market will then adjust and come into your coin. You'll get more miners. You'll get more powerful miners to secure your network better. You'll get more developers in the space. You'll get more merchants who are interested in using it, more users. All these things that should happen will happen in a free market. But if your value is fixed completely, then what happens is there's no real incentive to mine your coin, to develop anything that over my coin. And so I think that's where we see the free market would allow for the best coins win. And so I see this as a long game. Yes, there are short term problems to that. To altcoins just being the side change, because you have fraudulent ones, you have pump and dump schemes. But I think the long term, those things all work themselves out. And in fact, the fact that altcoins have such a bad reputation helps in a sense because only the best coins kind of rise to the top level of being the ones that are useful. And you see that now. You see that in the market cap now that what happens is the best coins kind of stay there and the market adjusts to it. So I would say that I have a problem. I mean, side coins, side chains aren't, you know, I think it's a good idea in a lot of ways. But I think a more natural way that you develop over time a free market solution is just to let these altcoins to develop and become separate blockchains that are all related to Bitcoin. That's the thing is Bitcoin is the big brother right now, and it probably will be for a long time. So they all would be interrelated in a sense with Bitcoin. So now why do you think, I guess firstly, why do you think that Bitcoin will be the big brother for a long time? Because even using the word altcoins right insinuates by the word itself that there is a main coin. And so why do you think that Bitcoin should be called the main coin? And why do you believe that it will remain the main coin? Well, first of all, when we say long time, long time in this space means two years. I mean, it's not exactly, you know, really. So I would say Bitcoin does have the first mover advantage, the network effect. And I do think that does help it go along for a while. But what I get frustrated by is this sense of entitlement you see with some Bitcoin enthusiast that Bitcoin, because it's first, because it has a network effect, it therefore is just guaranteed to be the main coin forever. And I think that's ludicrous because you see that in no other technology has that ever happened. I mean, you got IBM, you have Microsoft, you have all these examples where the first big one does establish a very established position, but then eventually they get too big for their britches and some young upstart comes in and takes over as the big one. And so I think that the exact same thing could happen with Bitcoin. I don't really want it to happen necessarily. I mean, I want the best one to succeed. And so I do think though what I could see very easily happening is where Bitcoin starts to change a little bit in becoming, I think all of us who got involved with Bitcoin over the years, we saw it as a global payment network that I can send you value very quickly, very cheaply and without a centralized, trusted system. I mean, that's the selling point of Bitcoin. But as you saw with your experience yesterday of trying to send Bitcoin to purse.io to make a purchase, now you're still waiting for that. That's not an easy, that's not a fast way to send value anymore. And so maybe some of those things will get worked out and I know there's a lot of things happening. Segregated witness, maybe the block size limit will be increased someday. But the point is that there's no guarantees. The free market's not going to just let Bitcoin be the elder brother, the big boy forever. If they don't adapt, they will die. And that would be a good thing because that means they're not serving the needs of the market. Whoever serves the needs of the market best, I think is the one... And by the way, that's not always necessarily the best technology. I mean, what that means is it serves the needs of the market through technology, through user friendliness, through marketing, all those things. That's the reality that if you and I as technologists, we might like one the best, but our moms may not because what they think is important is different. And so I don't necessarily... So when I say I think Bitcoin's going to be the big boy for a while, for another couple years, maybe longer, but maybe not. Maybe somebody else will up and come and take their place in a few years. I found it interesting when you pointed out the issue of pegging side chains with the value of one token to another. Another term for that is price fixing. And price fixing, as you said, does always actually skew incentives and generally causes shortages like in the world of commodities like food, like water. Like when there's a hurricane or something and some people declare that there should be a price fixing of food and water and emergency supplies. Well then, there are always shortages because price fixing makes it so that people get confused about how to trade and capital cannot be allocated correctly. So I found that interesting in your article because... That's really essentially my issue. I don't have any issues with the technology. The technology could be wonderful, it could be great. I have some issues with the economics behind it because it's exactly what I'm seeing. It's like a price fixing thing where you're setting the price and you're not laying the market aside. Now yes, a side chain that does very well will change the price of Bitcoin because it's helping the Bitcoin ecosystem. But it's only a percentage change that's not really reflecting the value that one side change because what it's really doing is by increasing the value of Bitcoin, it's not increasing the value of all those other side chains which may or may not be useful at all. Whereas a full free market does that. I don't want to be too harsh but I think it comes out a little bit condescending like we don't want the plebs to have to worry about all the prices might change or something like that. It's like, you know, I mean we're big boys and we should be at least. I think we should have a market that is. I mean we can handle Amazon changing their prices of items every day. I think we can handle this. And I do think over time the prices become stable naturally. Not through a fixed method of a centralized method but very naturally. That over time you see that if an altcoin continues to grow and develop and provides a very good service, has a good development team behind it, has a strong mining community behind it, it will stabilize. Because you've seen that price of Bitcoin. The price of Bitcoin has over time begun to stabilize. So when we look at the long view of years, not just months or something like that, I think what we'll see is the altcoins that really provide a value to the service, their price will stabilize and so it will become more useful as a currency. Because I admit a price that changes wildly every day is not useful as a currency. But I think over time it would become a much more stable price range. Can you think of any use case in which the use of a sidechain would be useful and the price fixing that it involves would not actually be detrimental? I mean I think if it's doing something that's just directly, just trying to relieve congestion from the Bitcoin blockchain. Because in that sense what it's becoming is a smaller denomination of Bitcoin. Because it's maybe going to be lower than a satoshi or something like that. And so it's relieving it and it's really just, it's almost like comparing pennies to dollars. It's just a subset of the bigger one. So I think that could be an example of where it could potentially work out. And I do think like short term a sidechain could be useful over an altcoin. But it still has the same issues of having to really prove itself in the market. Just because you create a sidechain and you peg it to Bitcoin doesn't necessarily mean the tech behind it's any good. The tech still has to be proven just like an altcoin would. And so really just because maybe some really smart people develop it, it might have some fundamental flaws that have to be worked out. And if you look at the sidechains proponents and the people who are advocating it, they admit that they say it's a great testbed. It's a great place that you can develop things on and decide whether or not they work without having to touch the billions of dollars Bitcoin network. And I'm like, well, that's exactly what altcoins are. They're the ability to test these things out, see if they work, let the market decide without touching the Bitcoin blockchain. So I don't really see how that's a big advantage over altcoins. I've asked this question before and not been clear about the answer. But I can see use case for testing things in a sidechain if one did not have to run infrastructure for it because then it would just lower the barrier to entry of the capital of getting people to run nodes and mining hardware for you and all of that. And I think the answer I've received was that some sidechains could be run on their own hardware, meaning you got to convince others to run your nodes and miners. And others could be run without any new infrastructure at all. So I think that I'm not sure if that's just like up in the air or if maybe I'm not informed enough. But I can see, like you said, like a testing use case if a sidechain can be run with no new hardware and no new infrastructure because then it substantially lowers the cost of testing things before you, hey, maybe you figure out something and you say, hey, this is an idea that ought to be deployed in its own infrastructure, its own blockchain. And now that I've gone through the testing phase, well now I'll try to convince others of the merit of my ideas so that they will run my miners and my nodes and we can build a totally separate network. Yeah, and I can see that. My first thought is I would be very concerned about the security of such a situation because the reason Bitcoin is so secure is because over time it's developed a very strong infrastructure behind it. You have all the nodes, you have all the miners, you have powerful miners that are securing the network. And so if you have this, and in fact that's one of the criticisms, if you notice of altcoins by a lot of sidechain proponents is that they don't necessarily have the security of the Bitcoin network. Okay, let's grant that. Well, neither does a sidechain. And I could see an attack vector where you go in and you could take over a sidechain network and then convert it to this Bitcoin, to Bitcoin at the pegged value, whereas with an altcoin it becomes worthless very quickly and there is no pegged value because it should be worthless because it's been attacked and it's become worthless. Whereas if you have a pegged value where the sidechain is a definitive value of Bitcoin, somebody attacks it, takes over the network, able to generate coins, or whatever the case may be, it depends on what they're trying to do, then they could then transfer that to Bitcoin, which has value I think relatively a lot easier. So I don't really see that, I mean I see there are some benefits to it, but I think my main point is I don't necessarily see any great advantages that sidechains have over, that altcoins don't already have. And I think other than the fixed pricing, which I don't think long term is an advantage, I think it's a disadvantage. And I think because exactly what you said, it becomes price fixing at that point. Alright, so then let's just move to the natural question that that leads to, which current altcoins, I don't really like that word, but I'll keep using your terminology, Eric, which altcoin or altcoins do you think are doing the best job right now? Basically which ones do you believe if, you know, say Bitcoin does not become a global payment system within two years, which say three coins do you think have the best shot at doing so? Well one thing I think I've seen, I believe has happened in the market is Bitcoin has been accepted as the payment network. And so what you see is most of the altcoins that have the most traction, have the most excitement are not trying to be payment networks like Ethereum or things like that, they're trying to be for smart contracts and other things that are very important I think is exciting, but they're not necessarily trying to be currencies. So I think that's because there's been the assumption that Bitcoin is the default payment network, so why would I create a new payment network myself? I'm going to try to create new things like smart contracts or things of that nature. Okay and so that's why we see all that excitement with those. So there's not many, I think honestly the only altcoin that I see that is trying to be a currency that is doing a lot of good stuff is Dash. I think you know, formerly Darkcoin. I think it has a lot of good things going for it as a currency because it's actually, I mean the reason they change it from Darkcoin to Dash is it's digital cash. They're actually trying to be a payment network. So they're going directly in competition if you will with Bitcoin as a payment network. Now you know, the two can actually work side by side. That's the thing is you could have Bitcoin successful for years and have Dash be successful as well. It's not one or the other. But I think what will happen is if we continue to see what's happening in Bitcoin in recent times which is the fact that the network is being congested. I mean Eric Voorhees just had a great thing he put up on Reddit today where he's saying this is an emergency situation that the blocks are getting full. We only have a few months left before it becomes unusable basically. And I think you know, if anybody understands the market in my opinion it's Eric and I think he's right. And I think what will happen is if Bitcoin refuses if the core developers or the community whatever you know if they refuse to address that and they just let things just be the status quo what I think will happen is other altcoins will be created that will fill the void because that's the great thing about the free market is the void gets filled. Dash has been doing it for a couple years now but I could very easily see somebody else saying you know something Bitcoin is a payment network. Yeah, it works great as a settlement network but as a payment network maybe not so much. I'm going to create one. And there we have the free market where something that doesn't exist today is in just some guy's head or some gal's head all of a sudden a year is the one we're all talking about and we're like wow this is the exciting one. So I think, so really I don't, Dash is the only one I think that exists right now that I'm excited about as a currency. Well let me ask you about Dash's potential as a global currency. So as you had mentioned about Bitcoin it would require I believe you said eight gigabyte blocks to reach the transactional capacity of say Visa. So do you see Dash as having the potential of picking up eight gigabyte blocks? Are these things that can and will be done with time? Or is imagining that a global payment network could all be transacted on one ledger perhaps not even conceivable right now? Well I think it's, I think it is conceivable. I just think we don't know the time frame for it to really be conceivable because you know Moore's Law says about how far hardware will go and so we have a few years before eight gigabyte block sizes would really be I think feasible. And please, I actually asked you this earlier please describe Moore's Law for anyone who's unfamiliar with that. Well Moore's Law basically means that the, that the, I'm trying to remember exactly what it is. I think the point is that hardware and network capacity always increases at a certain rate and I, you know, I knew you'd ask me and I forgot the exact rate it is but the idea is that over time, excuse me, over time, you know, everything gets bigger and faster in technology. And it's the guy who founded Intel and he said this back in the early 70s and it's been true ever since he said it. The rate he said has basically been true. So what seems like a huge block size, you know, eight gigabyte sounds huge for block size for us today. In 2030 it might be like, ah, it's no big deal. I can do that on my little, you know, flash drive or something like that. So that's the basic point of that. I think the, I think if it was today, I don't think Dash or anybody could handle it and that's just a reality. I do think Dash does have their master node network which pays people to be nodes. So if you have a master node and I, just for full disclosure, I have a few master nodes myself. If you have a master node, then you're paid to have that part of the block reward pays you to have that master node. And because of that, the network can kind of force you to be better than just some guy where I have a Bitcoin node as well. I don't get paid for it and it's running on a crappy little computer and it's up and down based on my internet home connection. Whereas my master nodes are run on a 24-7 dedicated IP, better server, and they can increase the requirements. In other words, you don't get paid unless you have at least this size of a network capacity, this size of a hard drive. And so I think they have a better ability to scale without getting centralized in a forced way by having the master nodes just continue to be forced to upgrade. So I think that's one thing, but I do think even Dash, it's not overnight that that could happen. It would take some time. I don't think any cryptocurrency could handle it today. It's interesting that you bring up the hardware incentives and requirements for Dash's master nodes, because when I interviewed Dash lead developer Evan Duffield a few weeks ago, one of the questions that was coming about was since the collateral requirements for master nodes, which is currently 1,000 Dash per master node, were set when Dash was like half the value that it is now, one of the questions going around was will the collateral requirement of being a Dash master node be cut? Basically to increase the number of master nodes by lowering the barrier to entry. And I was I was impressed with Evan's answer because he, what he said was, well, so if the collateral is cut in half, then we could assume that maybe the number of master nodes would double. So it would go from what, like 3,500, what it currently is to like 7,000. And he said, the problem with that is that it would cut the pay going into these incentivized nodes also in half, which means their profitability naturally would decrease. And what he said was, I don't want that to happen because I want these master nodes to be making enough money that they can begin to afford like seriously specialized hardware, like dedicated specialized hardware to be the people who run the second tier of Dash's network because they are responsible for coin mixing via Privacy Protect and they are responsible for instant confirmations possible. And so, yeah, that just kind of like ties in to, you know, if it's possible that say the Dash blockchain could be processing 8 gigabytes per block at some point, like you say like using Moore's law and time it may be possible as hardware gets better if the people who are running that hardware have enough of an incentive to buy that stuff. Right, exactly, because right now the Bitcoin nodes are 100% altruism. You just are doing it to help the network. Yes, I know having a Bitcoin node makes your wallet more secure and things like that and I get all that. But the real truth is it's altruism you just are trying to help out the network because you can just have bread wallet on your iPhone or my ceiling or something like that if you want a wallet. But with Dash you're getting paid and it's like, you know 10 or 15% return on your collateral and the collateral never leaves you so you're always owning that so you're not like investing 1000 Dash that you could then lose you keep that in your possession at all times it's just locked up. And so yeah, you're getting paid for that and because you're getting paid for that the network then can demand things from you I would never, you know I would not do a master node for free if I have to pay for if I have to pay for good hardware better hardware, better network connection I'm only doing that if I'm getting paid that's economic incentives 101 and so yes I think it has the capacity to kind of leapfrog Moore's law a little bit to say okay, yeah it's true Well you might do it for free you run your bitcoin known for free but you don't keep it online all the time so maybe it's a quality thing here Exactly, I care very little about it in a sense of like I'm going to be there so you're right, I might have a Dash node up and just be like whatever it's up it's down I don't care. But the second tier network doesn't work if people are doing if master nodes are doing that they have to be up 24-7 right now the requirements are actually very low I just saw them recently but they're not like any I think some people run master nodes on a Raspberry Pi right now but the idea is going forward at some point you're going to be told if you're a master node owner you have to be at this capacity so it kind of leapfrogs Moore's law a little bit to say okay, yes this more than the average person can have but you're not the average person, you're a master node owner you're getting paid to do this so you need to put a little investment in there as well so I think that gives it the capacity at some point to scale potentially better than bitcoin as it's currently designed Interesting times, well well as you said so we have this Eon in front of us of two years in the crypto sphere and I can only imagine what it might bring well actually I can't imagine No, I don't think anybody can really I can't, sometimes I kid you not I lie in bed like trying to imagine what will happen next like what the implications are of just like all of this open source money and I just find myself stumped Yeah I mean it really is mind blowing if you think about it just think about you remember like 2008 and think about okay just eight years in the future we have this whole cryptocurrency environment we're not talking about whether or not cryptocurrency is you know viable we're talking about which is the best one how is it going to be viable I mean that's very exciting, we're no longer saying okay will this work, oh it's going to work it's working it's working exactly it's just now we're working out the kinks things like you having a problem with a long delay in your bitcoin transaction right now okay that's working out the kinks the fundamental issues work and now it's just okay let's make it the best so it can truly be a global payment network because right now it's not we have to be honest it's not a global payment network but we all want it to be because we know it would be awesome if it is so let's work out those kinks and if it's bitcoin that solves it, yay that's great, if it's not bitcoin cryptocurrency good for them I say good for when it solves the problem I want you to be very rich if you solve the problems that we have right now very good alright well Eric Sammons of ericsammons.com as always it has been a pleasure and thank you for your time thanks Amanda today's episode is brought to you by BitShares a currency which recently hard forked to allow a private mode for transactions in its next software version and BitShares has also converted its code base to an MIT license and maintains a fiat on ramp to its currency via the exchange ccedk you can learn more at bithares.org and now it falls upon me to tell you that we have dropped our podcast which has been a pain in my ass and if you tried to use it likely a pain in your ass since day one but don't fear there is good news for you if you prefer audio the daily decrypts audio is now being available every day at 9.30 am and 4.30 pm eastern standard time at bitcointalkradio.com so you can just put that in your earbuds and listen to it have a good day