Bitcoin is optimised for security and reliability. Its design, while robust, has inherent limitations when it comes to scalability. The blockchain, the underlying technology, can only process a finite number of transactions per second. This limitation, often referred to as the “scalability trilemma,” presents a significant challenge as the network’s popularity grows.
As Bitcoin’s user base expanded, the network began to experience congestion. Transaction fees soared, and confirmation times lengthened, making it less practical for everyday use.
These blockchain backstops are a reminder that for Bitcoin to reach billions of users, it needs a way to scale and perform more transactions per second.
The need for more throughput has led to a search for solutions that can enhance Bitcoin’s capacity without compromising its security or decentralisation on the base layer. It’s not an easy problem to solve, even when you rip out critical parts of the security model to increase throughput on the base layer, a trade-off many an altcoin has made, and the market value of altcoin L1s reflects the viability of their proposed solution.
If anyone tells you their altcoin project has all the qualities of Bitcoin and insane amounts of throughput with no trade-off, you can tell them to go poo in the zoo. It isn’t happening, and your chain will sooner meet the same fate as the legend of Harambe.
Instead of trying to juice up the base layer, the Bitcoin ecosystem has sided with scaling in layers, providing users with options that make different sets of trade-offs and allowing users and liquidity to flow into these layers as they prove their value.
Today, we have publicly available and working scaling solutions in side chains and the Lightning Network. But that hasn’t stopped developers from providing alternatives, as Federated eCash mints have thrown their solution into the mix with Fedi, which is launching this year. At the same time, the Mercury layer continues to make progress on its state chain implementation.
Sidechains, sidechains everywhere
Of the various scaling solutions that are market-ready, sidechains were the first out of the gate; since they borrow a lot of their setup from the base chain, most of the work is already done; it’s all about how you’re going to move liquidity in and out of the ecosystem.
A sidechain is a scaling solution that runs parallel to the mainchain; its security and operations run independently from the parent chain, and it will have a consensus mechanism. The sidechain model has no shortage of interpretations; there is the Rootstock chain, which uses merge mining and an EVM-based smart contract chain, and Liquid, which is a fork of the Bitcoin core client that later turned into the Elements project.
Other notable side chain proposals are the Anduro side chain, Spiderchains and the contentious Drivechains.
To add to the mix of sidechain chatter, we also have Sequentia, which is built using a fork of the Elements Project, which is used in the Liquid Network. Concatena Labs, Inc., a Delaware corporation, promotes the Sequentia Network’s initial development and launch.
How do sidechains work?
- One or two-way peg: This mechanism enables the transfer of assets (like Bitcoin) from the main chain to the sidechain and vice versa.
- Independent operations: Once on the sidechain, assets can be used for various purposes, such as creating new digital assets or implementing smart contracts.
- Security: While sidechains offer more flexibility, they inherit security from the main chain through the two-way peg.
Advantages of sidechains:
- Increased scalability: Sidechains can handle more transactions per second than the main Bitcoin blockchain, improving transaction speed and reducing fees.
- Innovation: Sidechains can experiment with new features and technologies without affecting the main Bitcoin network.
Limitations of Traditional Sidechains
While sidechains offer potential benefits, they also come with challenges:
- Security risks: The two-way peg, while essential, introduces potential security vulnerabilities. If the sidechain is compromised, it could impact the main chain.
- Complexity: Implementing and managing sidechains requires significant technical expertise and resources, especially as they have to link between different layers and not only the base chain.
- Liquidity: Ensuring sufficient liquidity on the sidechain can be difficult, especially for new and smaller sidechains.
- Adoption: When you start a new side chain, you’re effectively bootstrapping a sub-network. You will need to get buy-in from exchanges, wallets, node runners, and users, or your ecosystem will remain a ghost town.
What is Sequentia sidechain?
Sequentia is a blockchain focused on multi-asset tokenisation, DEX trading and script-based smart contracts. It borrows concepts from Bitcoin protocols like RGB, Taro, and Omni, as well as from Bitcoin sidechains like Rootstock Liquid, along with concepts like proof of stake from blockchains like Ethereum and other Turing complete smart contract-type blockchains.
- Sequentia is UTXO-based, with intentionally non-turing-complete smart contracts. The rigidity of the system encourages more reliable smart contracts and an efficient use of the block space.
- However, Sequentia uses op_codes to create Programmable Accounts that mimic the account-based model required for more flexible smart contracts.
- Any RAS token can pass to an account-based model in a PA. A token issuer may create tokens, switch all of them into a PA, and define all kinds of smart contracts or run specific ACLs.
- Sometimes, an Account system produces less network pollution than a UTXO, i.e. when moving small amounts that are not consolidated in a single account.
- PAs are in a detached space of the block, with a separate fee market and block size.
Open fee market
Instead of paying fees with the native asset like rBTC in Rootstock or L-BTC in Liquid Sequentia opts for open fee market system, that is to say, that any token issued on the sidechain can be used to pay for transfers of any (same or other) token, provided that a block creator accepts it.
The idea is that block producers will decide if they are willing to take the risk of accepting a token as payment based on its market price and liquidity, with block creators having the onus to try and extract the total value from those fees for a reliable amount of BTC on a DEX (or CEX).
While it’s unlikely every token will be accepted by a block creator, the most liquid coins, like major stablecoins, will likely provide the base for this multi-token fee market.
It is worth noting that Liquid also support paying block signers in L-USDT for transactions with the help of Liquid Taxi.
Anchoring into Sequentia
Each Sequentia block is anchored to a Bitcoin block for the sake of interoperability using hashed timelock contracts (HTLC), part of the same script used to anchor Lightning channels.
Several Sequentia blocks can be built referencing the same Bitcoin blockhash, since the frequency of Sequentia block generation is higher than Bitcoin’s base chain.
Sequentia’s Consensus mechanism
Sequentia replaces the model of the federation model Liquid employs with an open set of entities elected according to their stake of SEQ, the governance token of the sidechain.
Sequentia’s Consensus is a Proof of Stake mechanism. Sequentia aims to rewrite Algorand’s Consensus for the Elements codebase
- As a partial source of randomisation, for the selection of the Sequentia stakers that will participate in a round of block creation
- As a “master” chain to command the “slave” sidechain to follow a chain reorganisation through the anchoring mechanism
- As a reference to measure “time” and activate an “escaping stall” mechanism when the network stalls
- As a basis for the checkpointing system, snapshotting the status of the Sequentia network inside a Bitcoin transaction
Key features of Sequentia:
- Enhanced security: By eliminating the need for a separate consensus mechanism, Sequentia significantly reduces security risks.
- Scalability: Slavechains can achieve higher transaction throughput than the main chain, improving performance.
- Simplicity: The architecture of Sequentia is relatively straightforward compared to traditional sidechains.
- RAS tokens: Regular Assets on Sequentia are the standard for tokens issued on Sequentia, like ERC20 for Ethereum.
- Atomic swaps: Sequenia will allow users to peer-to-peer swap any RAS token for other RAS tokens or BTC, through atomic swaps and lightning swaps.
Sidechain or sidelined?
Bitcoin’s scalability remains a persistent issue, hindering its widespread adoption and driving a large cohort of the current user base to opt for custodial solutions instead, which isn’t in line with the Bitcoin ethos of self-custody and elimination of counterparty risk.
While sidechains have emerged as a potential solution, they only cater to a niche of users that isn’t large enough to warrant so many variations, in my opinion. If we look at the amount of activity on Bitcoin side chains and the total value locked in these ecosystems, adding another ecosystem isn’t additive but more of a distraction.
For side-chains to really make a go of it, a few issues need to be addressed.
- Lack of Interoperability: While the concept of sidechains is designed to improve interoperability, challenges remain in ensuring seamless communication and value transfer between the main chain and various sidechains. If I am a Rootstock user, I don’t want to have to deal with the friction of paying a Liquid user; I just want to pay them; if wallets cannot provide these sorts of experiences, side chains users will remain as ships sailing in the mist.
- Competition from Layer 2 Solutions: Layer 2 solutions, such as Lightning Network and Rollups, have gained significant traction in recent years. These solutions offer scalability and improved transaction speeds without the complexities of sidechains, making them a more attractive option for many users.
- Lack of Killer Applications: While sidechains could potentially enable innovative applications, killer applications have not been widely adopted, demonstrating their unique value proposition. If the only appeal is cheaper transactions, and users have to choose between setting up a new wallet and learning about a new ecosystem versus just waiting for fees to come down. In that case, you’re not likely to secure a loyal user base.
Sequentia’s approach seems a bit weird; I am not sure who they are trying to target with their USPs here, but I honestly don’t see the average Bitcoin pleb chomping at the bit to buy some governance token to participate in a sidechain.
We’ve seen countless examples of governance token failures in the past, from DOAs, DEXs and, of course, the countless altcoin chains launched over the years.
- Centralisation of Power: Despite the promise of decentralisation, governance tokens often lead to a concentration of power in the hands of a few large token holders. This can undermine the democratic principles they were designed to uphold.
- Lack of Voter Participation: Many governance token holders do not actively participate in voting, leading to low voter turnout and a lack of representation for smaller token holders. This can result in decisions that do not reflect the interests of the broader community.
- Manipulation and Sybil Attacks: Governance tokens are vulnerable to manipulation, including vote-buying and Sybil attacks. These tactics can compromise the integrity of the voting process, leading to unjust outcomes. This issue warrants attention and discussion for potential solutions.
- Misaligned Incentives: The incentives of governance token holders may not always align with the best interests of the network. This potential conflict of interest, where token holders may prioritise short-term gains over long-term sustainability, is a significant issue that needs to be addressed.
Given what I’ve learned so far, I’d probably give Sequenia a miss for my personal use and perhaps I am not the target market for their chain, but I just don’t see what it brings that will gain any real traction. If you want to speculate and chase yield can already do most of the things they talk about with WBTC on altcoin chains or use RBTC on a host of dapps that have enabled Roostock.
Adding the gimmick of paying with other tokens hardly represents a strong enough pull for anyone to move over to a new ecosystem.
I could, of course, be wildly misguided, and the next bull run could bring in crazy amounts of activity that justify the existence and need for side chains of all types. Still, I think even the sidechains we have now have not yet been pushed to the brink of their maximum capacity.
Do your own research.
If you want to learn more about the Sequentia network, use this article as a starting point. Don’t trust what we say as the final word. Take the time to research other sources, and you can start by checking out the resources below.
