26 August  2024 · Block Height 830700 · Bitcoin Price $63K

Welcome back to the Blockspace Newsletter!

Layer Two tech is back in the Bitcoin zeitgeist, and that means that merged-mined sidechains are, too. In today’s newsletter, we break down Fractal Bitcoin and whether or not its unique merge mining mechanism makes sense.

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Bitcoin sidechain Fractal launches on September 9. Here’s how it works

If you thought that merge-mined sidechains weren’t en-vogue anymore, you would have been correct until about 6 months ago when Marathon announced its sidechain platform, Anduro. 

Since then, the “Bitcoin Layer 2” frenzy has heated up, with the ensuing excitement spawning over 100 scaling/sidechain/rollup-type projects that range from clever schemes to outright scams. “Fractal Bitcoin” is the topic of a lot of chatter on Bitcoin Twitter, although until the past week, there was very little information about its technical design. 

For today’s newsletter, we dive a little deeper than our podcast on Bitcoin Season 2 last week on how Fractal Bitcoin is supposed to work and why it has the degens so riled up.

A Bitcoin sidechain – with a twist

Merged mining is an old concept that dates back to 2011’s Namecoin, but it was most popularized by Doge and Litecoin. With merge-mining, a crypto miner commits hashes to two different blockchains simultaneously from the same machine, allowing them to extract block rewards from both chains while producing work from one machine.

Fractal is a merge-mined sidechain built by the team at Unisat where miners can produce a valid hash for either Bitcoin or Fractal and receive block rewards from both networks (in Fractal’s case, new issuance of $FB). 

The pitch from Unisat is that this is pretty much just a faster, somewhat more functional Bitcoin. Structurally, Fractal looks almost identical to Bitcoin Core, but it will include a few opcodes that Bitcoin Core lacks (OP_CAT, for example) for additional functionality. There are also some design differences, such as Fractal’s 30 second block times. 

But the biggest difference, though, lies in a concept that Fractal calls “Cadence Mining.” Under this system, miners produce one out of every three Fractal blocks via the merge-mining process, but this means that two in every three blocks on Fractal is mined from hashrate pointed solely at Fractal. 

Given this design, if Fractal doesn’t accrue enough hashrate from a diverse set of miners, Cadence Mining could give way to attack vectors.

“Any Proof-of-Work system that fails to capture the majority of available and compatible compute will find itself susceptible to multiple possible attack vectors, up to and including reorganization of the chain and/or censoring of other miner's blocks. Merge mining attempts to resolve this concern by onboarding as many mining pools from Bitcoin as possible, but if the majority of hashrate and block construction is controlled by a small number of actors, this makes such participants a potential threat to Fractal,” said Psifour, a developer at Taproot Wizards.

If this is confusing, don’t worry – you’re not alone. There is little documentation and research on the Fractal implementation to-date, and it’s still unclear how this so-called Cadence Mining will be coordinated.

Fractal Bitcoin launch is coming on September 9, 2024

Fractal just announced that it will launch on September 9, 2024, and the team said that it will deliver a suite of degen-oriented apps and integrations in the initial weeks. Fractal’s token, $FB, is distinct from $BTC, although it has a similar epoch subsidy schedule. That said, half of the $FB supply is premined at genesis. The recently released tokenomics are as follows:

The 50% premine effectively skips Bitcoin’s first mining epoch (when the block subsidy was 50 coins per block) and jumps straight to the second mining epoch (when the block subsidy was 25 coins per block) for the Sept 9 launch. Epochs are targeted for ~2 years in length, half of Bitcoin’s.

Fractal Bitcoin apps

Hands down the biggest narrative accompanying Fractal’s launch is a revitalization of and extension to the BRC-20 protocol. 

With this revamp, Fractal promises a swap module called “Pizzaswap” and ticker length extension of six characters and up (BRC-20s are currently limited to four characters on Bitcoin’s mainnet). BRC20 indexing activates at Fractal Block height 21,000 – estimated around September 18 (meaning BRC20s before block 21000 are invalid). BRC20s have been down bad for over half a year, but they have recently caught a bid as traders anticipate renewed interest in the token standard. Notably, this will create a fork in BRC20 indexer consensus on Bitcoin’s main chain if the six-and-up character tickers wish to be traded back on Bitcoin.

Unisat says that it plans to support all the degens’ favorite assets – from Runes (but on Fractal), to Inscriptions (but on Fractal), and maybe even Atomicals (but on Fractal).

If you’re wondering what the appeal is for having these assets on a different chain than Bitcoin, we are too. Isn’t the point of ordinals / fungible token issuance that the actual data itself lives on-chain? Something to think about…

Fractal’s impact on Bitcoin and transaction fees

It won’t be clear how much bitcoin miners can earn from Fractal until we see how much traction the network gains.

On one hand, miners could easily accrue $FB token by merge-mining fractal. On the other hand, if one of the primary goals is to move activity off-chain, then non-participant miners could see their bitcoin revenues fall as high-transaction fee activity (read: BRC-20 and ordinal trading) moves off chain. This also assumes that $FB block rewards are more profitable than the reduced fees on Bitcoin’s main chain and that miners are managing the revenue from their $FB block rewards optimally. Alternatively, if it results in net increased activity across both chains, then it could be a win? 

Of course, there’s nothing new under the sun. These are old arguments and discussions in Bitcoin about the merit of certain types of sidechains.

Buyer beware; degens proceed

It is very clear that Fractal is marketed to a primarily Asian market, the existing customer base of Unisat, and that this customer base demands fast and cheap ways to speculate on tokens in the Bitcoin-adjacent ecosystem. While the complete design & implementation of Fractal is still somewhat unclear to us, it does appear that the chain is extremely susceptible to chain reorganizations. It is not clear what the long term direction of Fractal is (there are still plenty of unknowns about the project) but you should probably have it on your radar if you want to stay dialed into the Bitcoin ecosystem.

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