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How would mining, theoretically, work in Pegged Side chains?

If mining can be done on these side chains, then it seems like too many coins could be created. And once they were used in transactions, how could they be accounted for to know which coins can and which coins can't be moved back to the main chain?

If mining cannot be done on side chains, then it seems like the side chain system could be very insecure, unless there is another way to secure the system.

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Sidechains cannot create the same asset that is pegged to Bitcoins to use as a reward for mining. Obviously, it would be problematic if anyone could put in a certain amount of Bitcoins into a sidechain, and get out more/less than what was originally put in.

However, there are many other ways to reward miners. Transaction fees is one example that is also used in Bitcoin. The sidechains paper lists some alternative reward mechanisms in section 6.1 such as demurrage (percentage of held coins are redistributed automatically to miners) and creation of a seperate unpegged asset on the side chain to reward miners.

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  • So, in the case where the incentive to mine on the side chain is a separate asset, does this mean the bitcoins moved over and the new asset cannot be used in the same transaction?
    – morsecoder
    Commented Nov 8, 2014 at 2:34
  • not sure what you mean exactly here, but different assets on a single blockchain can be exchanged for each other without any problem.
    – k kurokawa
    Commented Nov 10, 2014 at 15:41
  • Call the main bitcoin chain is chain 1, and some new side chain chain 2. If we move BTCs (chain1-assets) over to chain 2, then we hope that we can move them back to chain 1. But now chain 2 is making it's own BTCs (chain2-assets). Can these chain2-assets be moved back to chain 1? If they can, then isn't that messing up the 21 million coin distribution? If not, is it safe to do transactions on chain2 that mix chain1 and chain2 assets? Because after such a transaction, the resulting UTXOs are not fully chain1 or chain2 assets... ?
    – morsecoder
    Commented Nov 10, 2014 at 16:15
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    the chain2-assets cannot be moved back to the main chain for the reason you state. chain1 and chain2 assets cannot be "mixed" on the side chain because they exist as different coins on the sidechain blockchain. You can exchange a chain1 asset with a chain 2 asset on the side chain with someone, but you can't just magically convert a chain1 asset into a chain2 asset and vice versa.
    – k kurokawa
    Commented Nov 10, 2014 at 17:16
  • So there would essentially be 2 different coins on chain2, and you couldn't do transactions that spent both chain1-assets and chain2-assets?
    – morsecoder
    Commented Nov 10, 2014 at 17:18

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