What Are Surfchains?

To create a Surfchain, a Sponsor has to come in and act as a bridge between the mainchain and sidechain; the Sponsorship entity does this by locking up liquidity on the mainchain in exchange for the right to create blocks on the sidechain.

In exchange for the value locked up and use of this liquidity and allowing people to use it on the sidechain, the Sponsor is rewarded with interest, for example, 1%. The Sponsor is also responsible for setting the interest rate on the sidechain tokens.

The Sponsor can only regain custody of the escrow funds if the covenant chain is played out block by block all the way to the end. This means that the Sponsor has to make sure that there is enough demand for the sidechain tokens so that miners continue to mine blocks on the sidechain.

If there is not enough demand for the sidechain tokens, the Sponsor will lose money on fees trying to get their escrow funds back. The Sponsor also has to make sure that the sidechain is secure and that the users’ funds are safe.

Now that the Surfchain is established, it needs to process transactions, and Surfchains do so by inviting miners to mine additional blocks in exchange for fees earned from Surfchain activity. In blind merged mining, miners compete to create blocks on the sidechain by submitting a bid on the main chain. The winner of the bid gets to create the next block on the sidechain, and their bid is burned as a fee.

Example of a Surfchain schedule

In a Surfchain, the Sponsor takes duration risk and locks up 100% of the liquidity for 10,000 blocks. The Sponsor is rewarded with for example, 1% interest on the locked-up liquidity, and the miners are rewarded with 89% of the block rewards. The remaining 11% of the block rewards are held in escrow for the Sponsor.

Appending of the Surfchain

Since Surfchains have a predetermined life span of blocks, the Sponsor can append a new epoch one after the other, and the sidechain tokens become available for him to sell with sufficient confirmation on locking new liquidity into the covenant withdrawal chain in a non-trusted manner. 

A sidechain beacon address could be used to inform sidechain clients of the consecutive founding epochs, using anyone can spend similarly to how blind merged mining would be done without covenants. 

The main advantage of this is that if the Sponsor fails to meet their obligations, they can be replaced without a sidechain fork or without the Sponsor’s consent. In fact, anyone could bid for an epoch with their liquidity and take over as Sponsor of the Surfchain in question.

• Create trustless cross-chain transactions. This means that users can be confident that their transactions will be processed and their funds will be secure, even if they don’t trust the Sponsor.
• Reduce the cost of cross-chain transactions. The use of blind merged mining can help to reduce the burden on the main chain but allow for more transaction throughput on the overall Bitcoin network per 10 minute block, and generate additional revenue for miners. 
• Increase the scalability of Bitcoin. Surfchains can help to increase the scalability of Bitcoin by offloading some of the transaction processing to the sidechain.
• Enable new applications. Surfchains can enable new applications that are not possible on the Bitcoin mainchain, such as decentralized exchanges and smart contracts.

Why the need for Surfchains?

Surfchains require a Softfork that includes covenants like CTV and APO, so they cannot be created as a solution today. Still, it is a promising technology that could motivate these soft fork upgrades to come even sooner as they have applications outside the creation of Surfchains. 

If the ability to create Surfchains does come in the near future, it still has a considerably high barrier to energy as only certain entities would have the capital to consider becoming a Sponsor and would be willing to take on the operational risk involved. 

Surfchains would also need users to be motivated to move transactions off-chain, such as a consistently high fee environment, or it wouldn’t make sense for a Sponsor to lock up funds hoping to earn a yield when those funds aren’t returning enough and could even see opportunity cost losses as Sponsors could easily spin up Lightning nodes to secure yield on a more established L2 Solution. 

Surfchain incentives can work great while there is relatively constant or increasing demand for the sidechain tokens utility and block space if the Surfchain, for example, has specific tools or features built on top of it that users would like to take advantage of such as DEXs, P2P trading or on-chain smart contracts. 

Closing down a Surfchain

When demand for the sidechain utility comes to an end, normally, the Sponsor is not incentivised in any way to repurchase the tokens without the prospect of selling them to the users again in the future. 

It is possible to change the covenant chain rules so that the Sponsor can claim the remaining funds in the sidechain escrow if nobody makes a new blind merged mining transaction for 10,000 blocks (3 months). 

Any new sidechain block mined resets this counter. This way, the users can sell their tokens to traders who then swap their sidechain token with the Sponsor (at a slight discount) for mainchain bitcoin at sufficient batch sizes. 

After only the Sponsor owns sidechain tokens (that are not simply lost) the sidechain merged mining stops, and the withdrawal timeout would start. This would make surfchains almost a two-way-peg but only for the Sponsor.