It’s no secret that I’m not the biggest fan of altcoins, and I’ll try to hold back my excitement about this new project from Adam Back, the creator of Bitcoin’s proof-of-work system, and Austin Hill that could be the perfect way to finally achieve “Bitcoin 2.0“. There are plenty of projects out there today, such as Mastercoin, Counterparty, BitShares, and others who are trying to create the second generation of cryptocurrencies, but these two gentlemen seem to believe that there’s no reason to create a new altcoin when we already have Bitcoin. While there are a few other niche coins that have gained value due to some pretty cool added features, none of them can take down the main value proposition of Bitcoin, which is its network effect. Altcoins have been an amazing area of innovation for cryptocurrency over the past few years, but it makes sense to combine all of these new features into one ecosystem instead of creating a situation where you have to buy a new coin if you want to use a certain feature. For example, you shouldn’t need to use Mastercoin if you want to use a distributed asset exchange, and you shouldn’t need to switch over to Zerocoin if you want some extra anonymity in your transactions. This latest concept of Bitcoin 2.0 would keep all of these new features inside the Bitcoin network through the use of sidechains.

More Innovation, Less Altcoins

With this new system of sidechains, innovation would be able to take place on the Bitcoin network without having to worry about the entire system collapsing. One of the main reasons that there aren’t more features added to Bitcoin on a regular basis is that introducing one new bug could take down the entire $6 billion market. Sidechains allow innovation to take place in the Bitcoin network without putting the entire system at risk. If something goes wrong on one of the sidechains, only the bitcoins in that sidechain are lost, and the entire Bitcoin network can continue to flourish.

Altcoins have actually been quite suitable for testing new innovations in the cryptocurrency space, but the main issue with these new crypto coins is that they break up the overall network effect of this new technology. You shouldn’t have to buy into a new altcoin just because you want faster confirmation times or the ability to use some new, unique smart contracts. It’s possible to bring all of these features to Bitcoin by using a two-way peg system. This means you could move your bitcoins from the original blockchain to a new sidechain in order to gain the added features of that sidechain without having to switch into a completely new currency. For example, you may have your savings in cold storage on the original Bitcoin blockchain, but it could make sense to pay for your morning coffee on a sidechain that focuses on enabling microtransactions. Bitcoins retain their original value on each one of the sidechains, and this system also preserves the idea of having a hard limit on 21 million bitcoins that can be sent through all of the different sidechains rather than inflating the total number of crypto coins with each new feature.

The Real Bitcoin 2.0?

I’ve been following the Bitcoin 2.0 space for quite some time, and the projects that usually get me more excited than anything else are the ones that are coin agnostic. This is why Colored Coins and Open Transactions have been two of my favorite new platforms in this space. The main issue with other types of projects is that users will have to buy into a new cryptocurrency to use some of the new features involved in those platforms. For example, you need to purchase XCP if you wish to issue assets or place financial bets on the Counterparty platform. The main issue here is that the bitcoin is the cryptocurrency with the largest network effect and most liquidity. This means it also comes with the most stable price. When it comes to using new features in the cryptocurrency space, people will still want to use the currency that comes with the least amount of volatility. There is no point in trying to do contracts for difference or microtransactions in a currency that is much more volatile than the bitcoin. Due to the fact that this project is coin agnostic and is being put together by Adam Back, Austin Hill, and a number of different Bitcoin core developers, I have to think that we are finally looking at the project that deserves the title of “Bitcoin 2.0”.

Make sure to listen to Adam B. Levine’s full interview with Adam Back and Austin Hill from episode 99 of Let’s Talk Bitcoin. You can also find a breakdown of some of the main points made in the interview from Tim Swanson’s blog.