Merging Chains

Written by Niraj and Dillon

If you posit that bitcoin has a network effect (the more people that use the currency to transact), the more valuable the coin becomes. The more valuable the coin becomes, the more users you get and the higher the network effects. Additionally, if longer chain history means better security and more miners mean better security, in the long run, is there a way to increase the network effect by merging chains?

Right now, we've only got people doing forks. Forks are important, they allow for experimentation on the rule sets, however, they potentially may reduce the overall network effect of any single token. Forks are really good because they align incentives between the people who have already done work on the master chain. In the example of ETH and ETC, we argue that it's a feature that the Ethereum Foundation automatically held ETH and ETC without their permission. They could gain in economic value of another development team. The new development team wins because they get an input customer set, the set of pub-priv key pairs that already holds ETH. This is a subtle shift in incentives, we'll write more about this later...

While we're not advocating for a maximalist approach, the idea that there should only be one token ever, it just seems like there needs to be a process to merge chains just as there is the process of forking. There is an argument to be made that "Core" or the Foundations bearing the base token name centralize development resources. In BTC and ETH respectively, only 5 and 2 developers make up the majority of commits. Forking seems to have to have become a way for talented devs to work on protocols. Just look at LTC and @satoshilite.

Additionally, we see that experimentation has been a net positive for society in other areas. Allowing for experimentation and merging isn't limited to blockchains. Just to name a few:
  • Policy experimentation within a federal system of government. I.e. adoption of a precursor to the Affordable Care Act before it became national law.
  • Startups as new entrants that can be acquired or grow to be large companies.
  • Spin offs from large corporations. Standard Oil became several smaller companies and Rockefeller was richer for it.
  • Mitochondria being swallowed to become the powerhouse of the cell.

In blockchain terms, you could conceive of merge mining as extended uncle resolution. In the GHOST Protocol, the individual uncle hash power is added to the winning block's score. Uncle miner still is incentivized, they get some proportion of the block reward. Likewise, people who contribute to the "losing token" are still incentivized. When you think of merging chains, you're still incentivizing a smaller chain's absorption into the larger chain. While protocols can directly implement the necessary hard/soft forks to include the rule set change of a fork, they won't have the now differentiated userbase etc.

How to Do Merges

There are two methods for potentially doing a merge for tokens (and probably more that we haven't thought of).

The first method is pegging a token A to token B.
  1. Agree on a price/exchange rate for A:B
    1. Oracle to determine price
    2. Hash power signaling/ratio
    3. Market pricing on exchanges
  2. Hard fork both protocols to have the same block + rule set
    1. Enforce a specific block height for the rule change, include the pegged price ratio
    2. Price converges
  3. Before the rule set is implemented, people are free to trade out of token B
  4. Allow for atomic cross chain swaps
    1. Using Decred or 0x → hard code this into the rule set change
The second method involves one chain "absorbing" the value of the other. Meaning that token A remains and token B is never used again.
  1. Agree on a price/exchange ratio for A:B
    1. Oracle to determine price
    2. Hash power signaling/ratio
    3. Market pricing on exchanges
  2. Acquire buy out funds for A to purchase B
  3. Post a public address where all B tokens can be sent to
  4. Before the rule set is implemented, people are free to trade out of token B
  5. Burn the B tokens, each B token holder, will get the amount of agreed upon amount of token A proportion to how much they sent to the specified address

Roadblocks to putting this in practice.

Both of these scenarios involve a lot of coordination. Imaging trying to do a protocol merge without some kind of explicit voting mechanism other than hash power signaling induces a headache right away. The future of decentralized governance will definitely play a large part in how these things happen.

Also, as we see in centralized mergers and acquisitions, the larger company often has to purchase the shares of the smaller company at a price premium. We'll have to establish a better pricing mechanism beyond hash power and other matters. Ari Paul and Chris Buniske have been doing a lot of great work in fundamental valuations for this.
Additionally, atomic cross chain swaps are not the only potential way to transfer a token from one chain to another, using a protocol such as Polkadot or Cosmos we might allow for this sort of thing as well.

Real World Procotols That Could Benefit.

These wouldn't just have to be currency tokens, you could potentially also merge utility tokens as well. For example, looking at Sia and Filecoin. If Filecoin were to establish a dominant market cap and share position, it might behoove them to purchase the Sia network. An additional step would need to be taken. Individuals would need to, before they can acquire any of token A, transfer their files over to the new blockchain. Once this is performed, they can claim their Filecoin token.
  • Small cap token mergers
  • Prediction markets (Augur and Gnosis)
  • File storage markets (Filecoin, Sia, and Storj)
  • BTC variant mergers (BTC, LTC, BCC)

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Look here as well