The Bitshares blockchain as the first public sidechain for Bitcoin

[JonnyB]

Before I start, here is a good explanation of what sidechains are: http://gendal.me/2014/10/26/a-simple-explanation-of-bitcoin-sidechains/

Amanda discussed them on yesterdays daily decrypt also but the explanation above is better imo: https://youtu.be/Q6VwH1yKjdI

This is my proposal of how we should make the bitshares blockchain a sidechain for bitcoin and take the glory for actually implementing it before any other blockchain does.

Depositor sends bitcoin to the bitshares network.
The bitcoin address sent to is now controlled by 2 keys required to spend from it. (multisig)
One key is held by bitcoin depositor and second key is held by bitshares witnesses.
This bitcoin cannot move until both original depositor and a witness sign a transaction to send it somewhere else. (it's effectively frozen)
The witnesses can now issue a BTC token 1:1 for the same amount as was deposited to the depositor (lets call this SIDEBTC)
Original depositor now has SIDEBTC in his bitshares wallet which is non tradeable and cannot be transferred.
SIDEBTC has only one purpose which is to be used as collateral by the original depositor to create BITBTC.
If collateral is denominated in same currency as the bitasset it is creating there is only need for *100% collateral not 200%+
This BITBTC created from SIDEBTC can be transferred and traded.

For the depositor to get back their real BTC they must settle their BITBTC debts first then instruct the witnesses to redeem their SIDEBTC and return their real BTC back to them. 

if the original depositor never redeems his SIDEBTC, nobody including the witnesses will be able to access that real BTC again.
This means technically speaking the SIDEBTC is not real collateral. It means the committee can freeze it but not have access to it themselves.
Because of this we need ensure that almost all SIDEBTC holders redeem it for real BTC in the future.
Now earlier I said only *100% collateral is needed to create a bit asset if both asset and collateral are the same currency which is true.
But to make sure almost all SIDEBTC is redeemed in the future we should make the collateral requirements for BITBTC higher than 100%
For example we could require 110% SIDEBTC in collateral to create 100% BITBTC
This should make sure that all SIDEBTC owners will make sure they can redeem in the future.


Points to note.
-This sidechain proposal for bitcoin is intended to eliminate the need for bitcoin denominated UIAs as it would be free to transfer and trade and be 100% liquid at peg with zero chance your btc could be stolen. 
-Witnesses cannot steal BTC under any circumstances. The worst they could do would be colluding to freeze the bitcoin.
-Having the collateral in the same currency as the the bitasset also eliminates the possibility of a margin call.
-Forced settlement would not be possible because SIDEBTC (the collateral for BITBTC) can only be moved if the original depositor signs.
-SIDEBTC is not technically collateral because the real BTC cannot be recovered by the bitshares network if the original depositor never redeems his SIDEBTC