This document provides an overview of sidechains, a proposed solution to improve bitcoin. Sidechains allow bitcoin holders to transfer bitcoin to linked sidechains with different rules while maintaining the same ownership. This allows for innovation without changing the main bitcoin blockchain. Sidechains are proposed to enable experimentation, new features like smart contracts, or riskier applications like lotteries in a separate chain without compromising the main bitcoin network. Potential drawbacks include increased complexity and centralization risks for sidechains.

1. Sidechains
Joris VALETTE
December 11, 2014

2. Limits to innovation Sidechains Conclusion
TABLE OF CONTENTS
2/16
Limits to innovation
Improving Bitcoin
Altcoins
Layers on top of Bitcoin
One-size-fits-all is not enough
Sidechains
Introduction to sidechains
How they work
Possible applications
Drawbacks
Conclusion

3. Limits to innovation Sidechains Conclusion
IMPROVING BITCOIN
3/16
Improving the protocol is slow
I A lot of testing and acknowledgment required
I Some changes require soft-fork or hard-fork (e.g.
increasing block size)
I Major redesigns are likely to be rejected (e.g. Treechains)
I Near-impossibility to change economic rules

4. Limits to innovation Sidechains Conclusion
ALTCOINS
4/16

5. Limits to innovation Sidechains Conclusion
THEIR LIMITS
5/16
I Few innovate; many scams
I Fragment the market and the effort
I Lack network effect
I Increased volatility
I Decreased security
I Poor number and poor quality of exchange markets
I Bitcoin still is 95% of total market

6. Limits to innovation Sidechains Conclusion
LAYERS ON TOP OF BITCOIN
6/16
Sometimes called ”Crypto 2.0”, they combine the blockchain
technology with innovative ideas on top
Some also need an altcoin:
I Mastercoin
I Counterparty
I ...
Some don’t:
I Open-Transactions
I Colored Coins
I ...

7. Limits to innovation Sidechains Conclusion
ONE-SIZE-FITS-ALL IS NOT ENOUGH
7/16
I The unique Bitcoin blockchain cannot suit every need
I Currently, if you have other use cases, you either:
1. Use or create a new cryptocurrency (altcoin)
2. Use or create a centralized service (top layers)
Here comes a fourth option.

8. Limits to innovation Sidechains Conclusion
INTRODUCTION TO SIDECHAINS
8/16
”One Currency to rule them all”

9. Limits to innovation Sidechains Conclusion
INTRODUCTION TO SIDECHAINS
8/16
”One Currency to rule them all”
I Separating Bitcoin the technology and bitcoin the currency
I An ecosystem of alternative chains carrying bitcoins
I Innovation can happen in sidechains
I The main chain cannot be impacted by a sidechain’s
wrongdoing

10. Limits to innovation Sidechains Conclusion
BLOCKSTREAM
9/16
They founded a company around this idea, with:
I Adam Back – HashCash
I Matt Corallo
I Mark Friedenbach – Freicoin
I Gregory Maxwell – Commit
access – The beardy genius
I Jorge Tim´on – Ripple and
Freicoin
I PieterWuille – Commit access
I And others...
Their motto is ”Can’t be evil.”

11. Limits to innovation Sidechains Conclusion
HOW THEY WORK
10/16
1. Lock bitcoins with a special address

12. Limits to innovation Sidechains Conclusion
HOW THEY WORK
10/16
1. Lock bitcoins with a special address
2. Wait for confirmation period (1-2 days)

13. Limits to innovation Sidechains Conclusion
HOW THEY WORK
10/16
1. Lock bitcoins with a special address
2. Wait for confirmation period (1-2 days)
3. Create a transaction on the sidechain that proves your
bitcoins were locked on the parent chain and buried under
sufficient PoW

14. Limits to innovation Sidechains Conclusion
HOW THEY WORK
10/16
1. Lock bitcoins with a special address
2. Wait for confirmation period (1-2 days)
3. Create a transaction on the sidechain that proves your
bitcoins were locked on the parent chain and buried under
sufficient PoW
4. Wait for contest period (1-2 days)

15. Limits to innovation Sidechains Conclusion
HOW THEY WORK
10/16
1. Lock bitcoins with a special address
2. Wait for confirmation period (1-2 days)
3. Create a transaction on the sidechain that proves your
bitcoins were locked on the parent chain and buried under
sufficient PoW
4. Wait for contest period (1-2 days)
5. You can now use your Bitcoins on the sidechains, with
whatever the new rules are

16. Limits to innovation Sidechains Conclusion
HOW THEY WORK
10/16
I Process is symmetric
I One rule will especially be enforced on Bitcoin : There can
only be as many bitcoins that come back from the
sidechain as there were sent to it.
I Possibility of ”atomic swaps”
I Sidechains can be recursive

17. Limits to innovation Sidechains Conclusion
POSSIBLE APPLICATIONS
11/16
I Beta (with real value unlike Testnet)
I R&D, experimentation, bleeding-edge cryptography
I Faster blocks (like Litecoin, Dogecoin)
I Alternative proof-of-work algorithms (Scrypt instead of
SHA256, etc.)
I Alternative consensus algorithms (like Peercoin,
Primecoin)
I Microtransactions

18. Limits to innovation Sidechains Conclusion
POSSIBLE APPLICATIONS
11/16
I Fully anonymous and untraceable transactions (like
Zerocoin)
I Demurrage (like Freicoin)
I Sophisticated scripting and smart contracts (like Ethereum)
I Possibility to peg an existing altcoin (Namecoin would be
awesome)
I Useless/gambling/high-risk sidechains: ”lottochain”[5],
etc.
I And many ideas we haven’t thought of yet!

19. Limits to innovation Sidechains Conclusion
A NEW PARADIGM
12/16
Now this picture makes more sense[2]

20. Limits to innovation Sidechains Conclusion
DRAWBACKS
13/16
I Increase complexity of the network; more complex wallets
needed
I Centralisation risks
I Soft-fork required

21. Limits to innovation Sidechains Conclusion
DRAWBACKS
13/16
51% attacks on a sidechain may be easy
I !Attacker rewrites the history of the sidechain at will,
allowing him to steal bitcoins
I Sidechain becomes a fractional reserve! possibility of
”bank run”
I or Sidechain lowers its exchange rate, putting every owner
of the sidecoins at a disadvantage (a little better)
This risk can be reduced via merge-mining, or totally removed
with zk-SNARKs (bleeding-edge cryptography)

22. Limits to innovation Sidechains Conclusion
CONCLUSION
14/16
I Ground for innovation
I Nobody is forced to use sidechains
I They do not offer the same level of security as Bitcoin as
currently designed

23. Limits to innovation Sidechains Conclusion
REFERENCES I
15/16
Blockstream team.
Blockstream’s github.
https://github.com/blockstream.
Blockstream team.
Nice Sidechains picture.
http://www.blockstream.com/.
Blockstream team.
Sidechain paper.
http://www.blockstream.com/sidechains.pdf.
Richard Gendal Brown.
A simple explanation of Bitcoin “Sidechains”.
http://gendal.wordpress.com/2014/10/26/
a-simple-explanation-of-bitcoin-sidechains/.

24. Limits to innovation Sidechains Conclusion
REFERENCES II
16/16
/u/socrates1024.
Lottochain idea.
http://www.reddit.com/r/IAmA/comments/
2k3u97/we_are_bitcoin_sidechain_paper_
authors_adam_back/clhnvwk.