Fractal Bitcoin: A Misleading Affinity

Fractal Bitcoin is a recently launched project that bills itself as “the only native scaling solution completely and instantly compatible with Bitcoin. In essence it is a merge mined system portraying itself as a second layer sidechain for Bitcoin, where multiple levels of “sidechains” can be stacked on top of each other. So think of a sidechain of the mainchain, a sidechain of the sidechain, a sidechain of the sidechain of the sidechain, etc. It is not.

Firstly, the entire system is built around a new native token, Fractal Bitcoin, that is issued completely independent of Bitcoin. It even comes with a massive pre-mine of 50% of the supply being split between an “ecosystem treasury”, a pre-sale, advisors, grants for the community, and developers. This is essentially the equivalent of the entire first halving period of Bitcoin when the block subsidy was 50 BTC per block. From here the network jumps to 25 Fractal Bitcoin (FB) per block.

Secondly, there is no peg mechanism for moving actual bitcoin into the “sidechain.” Yes, you read that correctly. They are framing themselves as a sidechain/layer two, but there is no actual mechanism to move your bitcoin back and forth between the mainchain and “the sidechain” Fractal Bitcoin. It is a completely independent system with no actual ability to move funds back and forth. One of the core aspects of a sidechain is the ability to peg, or “lock,” your bitcoin from the mainchain and move it into a sidechain system so that you can make use of it there, eventually moving those funds back to the mainchain.

Fractal Bitcoin has no such mechanism, and not only that, the discussion around the topic in their “technical litepaper” is completely incoherent. They discuss Discreet Log Contracts (DLCs) as a mechanism for “bridging” between different levels of Fractal sidechains. DLCs are not a suitable mechanism for a peg at all. DLCs function by pre-defining where coins will be sent based on a signature from an oracle or a set of oracles expected at a given time. They are used for gambling, financial products such as derivatives, etc. between two parties. DLCs are not designed to allow funds to be sent to any arbitrary place based on the outcome of the contract, they are designed to allocate funds to one of two participants, or proportionally to each participant, based on the outcome of some contract or event that an oracle signs off on.

This is not suitable for a sidechain or other system peg, which is ideally architected to allow any current owner of coins in the sidechain or second layer system to freely send coins to any destination they choose so long as they have valid control over them on the other system. So not only is there no functional peg mechanism for the live system, but their hand waving about potential designs for one in their litepaper is just completely incoherent.

The whole “design” is a clown show designed to pump bags for pre-mine holders.

Another troubling aspect of the system is its variation on merge mining, Cadence mining. The network utilizes SHA256 as the hashing algorithm, and it does support conventional Namecoin style merge mining. But there is a catch. Only one third of the blocks produced on the network are capable of being produced by Bitcoin miners engaged in merge mining. The other two thirds must be mined conventionally by miners switching their hashrate entirely over to Fractal Bitcoin.

This is a poisonous incentive structure. It essentially tries to associate itself with the Bitcoin network calling itself a “merge mined system”, when in reality two thirds of the block production mandates turning hashrate away from securing the Bitcoin network and devoting it exclusively to securing Fractal Bitcoin. Most of the reward is not capturable by miners who continue mining Bitcoin, and the greater the value of FB the greater the incentive for Bitcoin miners to defect and begin mining it instead of bitcoin to increase the share of the FB reward they capture.

It essentially functions as an incentive distortion for Bitcoin miners proportional to the value of the overall system. It also offers no advantage in terms of security at all. By forcing this choice it guarantees that most of the network difficulty must remain low enough that whatever small portion of miners find it profitable to defect from Bitcoin to FB can mine blocks at the targeted 30 second block interval. Conventional merge mining would allow the entire mining network to contribute security without having to deal with the opportunity cost of not mining Bitcoin.

The ostensible point of the network is to facilitate things like DeFi and Ordinals, that consume large amounts of blockspace, by giving them a system to utilize other than the mainchain. The problem with this logic is the reason those systems are built on the mainchain in the first place is because people value the immutability and security that it provides. Nothing about the architecture of Fractal Bitcoin provides the same security guarantees.

Even if they did, there is no functional pegging mechanism at all to facilitate these assets from being interoperable between the mainchain and the Fractal Bitcoin chain. The entire system is a series of handwaves past important technical details to rush something to market that allows insiders to profit off of the pre-mine involved in the launch.

No peg mechanism, an incoherent “merge mining” scheme that not only creates a poisonous incentive distortion should it continue rising in value, but actually guarantees a lower level of proof of work security, and a bunch of buzzwords. It does have CAT active, but so do testnets in existence. So even the argument as a testing ground for things built using CAT is just incoherent and a half assed rationalization for a pre-mined token pump.

Calling this a sidechain, or a layer of Bitcoin, is beyond ridiculous. It’s a token scheme, pure and simple.