Sidechains is a new technology that is undergoing development now. Sidechains allows transferring bitcoin between blockchains via a two-way peg system, thus eliminating the necessity of creating new cryptocurrency.
Blockstream is focused on the development of Sidechains technology designed to improve the blockchain. Sidechains are blockchains that are interoperable with each other and with bitcoin and that allow avoiding market fluctuations, liquidity shortages, fragmentation and security breaches. Blockstream develops Sidechains to enable new cryptocurrency networks that do not need new cryptocurrencies.
The technology has been widely discussed in the bitcoin community with many cast doubt on the whole idea of the project. Still, some bitcoin developers consider that Sidechains has the potential to turn cryptocurrency into the reserve currency of the Internet.
Fred Wilson from Union Square Ventures told: “Earlier this year some entrepreneurs walked into our office and explained sidechains to us. I was pretty excited about the concept then and I continue to be excited about it. It will be interesting to watch how all of this develops over the next year or two.”
“If ‘pegs’ are added to the core Bitcoin system and software, and if sidechains become popular and viable, then Bitcoin would essentially become the reserve currency of the entire cryptocurrency sector and there would be a host of sidechains and currencies that are pegged to it. This would allow a ton of innovation to happen around Bitcoin without requiring a lot of change to the underlying Bitcoin system,” he added.
Sidechains project has already gained support from a number of bitcoin developers. Among others Adam Back, the creator of the proof-of-work system, called Hashcash, which is used by bitcoin and some anti-spam systems.
In the Sidechains ecosystem, the new currency can be created only after the user deactivates bitcoins, in other words, new tokens can be issued if bitcoin is frozen. This means the new digital currency is backed by bitcoin. The Sidechain user can deactivate 10 bitcoins and issue 40 litecoins.
Sidechains is a way of creating new currency inside the bitcoin currency network and the project developers believe it could turn bitcoin into a reserve currency.
The large number of altcoins, which are traded on exchanges today, can be valuable to the bitcoin sector due to certain features, writes Kyle Torpey at Inside Bitcoins.
However, each altcoin has its own exchange rate and their usefulness as money is kept back by the bitcoin currency network. Thus, instead of having their own exchange rate, the issued litecoins are traded at 0.25 bitcoins. Analysts compare this to the fixed exchange rates that were used between fiat currencies and gold.
Although gold is not yet the reserve currency today, central banks are still holding the metal, although there are no important reasons for keeping it.
In spite of the fact that many fiat currencies have served as a reserve currency until today, dollar remains to be the main reserve currency. For years the US dollar was backed by gold, before President Nixon abolished convertibility of US dollar to gold back in 1971 in order to halt inflation.
About 87% of the world currency reserves are kept in currency and its value totally depends on the government. While having a potential to turn into the main reserve currency of the Internet, it also has chances to become the reserve currency in the real world. However, the decision is up to bankers who define what to keep as a reserve currency.
It’s obvious that one scarce source in the digital realm is enough and there is no need to have anything else besides bitcoin.