Bitcoin cannot become the safest exchange platform for sidechain coins to create and maintain a coin which is needed for venture capital investment, say industry insiders.

This is despite that the quest for a coin by new startups or existing companies has increased of late. They want to use these coins to exchange revenue and cash holdings with investors who are willing to buy into firms’ ideas and financial potentials.

Also, Bitcoin stands out as a plausible option to be considered to resolve the exchange issue since the sidechain allows the use of a Bitcoin-like system without going through the risk and effort of buying the native tokens for that platform.

What is a sidechain?

According to the Director of Research at Coin Center, Peter Van Valkenburgh, a sidechain is effectively an alt-coin (i.e. a different Blockchain keeping track of the movements of a different batch of scarce tokens), but it has a pegged exchange rate with Bitcoin.

Van Valkenburgh writes:

“Given the fixed conversion rate and the automated/deterministic process for conversion, it may be more appropriate to think of sidechains as new Blockchains that the user can simply move their Bitcoins into and out of at will.”

He cited one of the main technical challenges of the sidechain approach to be how to ensure that pegged Bitcoins can be recovered by honest sidechain users, and never dishonestly by interlopers. This requires a sophisticated technical arrangement and, for the most secure implementation, minor adjustments to the Bitcoin protocol itself—something that will ultimately require the political will of the community to enact.

Director of Research at Coin Center, Peter Van Valkenburgh

Bitcoin not a good fit

Max Kordek, co-founder of Lisk, thinks Bitcoin is not the right platform for the task. He notes that at the moment he doesn’t see any significant progress, development, or marketing for Bitcoin-based coloured coins or sidechains. That means they can't be considered the safest way to create sidechain cryptocurrencies, because the security of the parent Blockchain at which Bitcoin is superior doesn't matter in the case of sidechains.

He says to Cointelegraph:  

“Other platforms like Lisk and Ethereum with active development and a great future ahead are more promising. Lisk can really put a lot of effort into sidechain security solutions which is a big task, but solvable. Ethereum can polish their Blockchain to a level to make it very attractive for this case as well. Therefore, in my opinion, they will be the preferred solutions for startups or existing companies, and not Bitcoin.”

Wings’ Dominik Zynis, says he doesn’t see VCs being that interested in coins, but perhaps for tracking equity using the most secure Blockchain.

He explains:

“Why not? There are a lot worse ways to do it. Part of the Wings project is to allow coins for various DAOs to exist on RootStock (which uses Bitcoin and sidechains) and Ethereum and transfer between the two as well.”