Adam Back discusses sidechains, which allow assets like bitcoin to move between blockchains while maintaining the same properties. Sidechains extend the functionality of blockchains to support new applications through interoperability. This helps address challenges like scalability and fragmentation in the bitcoin network. Examples are given like using sidechains for software upgrades, experimental features, and exchange settlements. Sidechains are secured through bitcoin mining incentives and can provide confidential transactions through techniques like zero-knowledge proofs.

1. Sidechains: weaving a network of
blockchains with Bitcoin
Hive event
February 17, 2016
Adam Back, PhD

2. Bitcoin vs Fiat
Bitcoin: virtual commodity
- creation via gold-like virtual mining
- supply limited mathematically
- electronic but with real-time assay
- cash-like bearer/fast final settlement
- same speed & low cost globally
- digital scarcity
- download wallet software & use
Fiat: USD, EUR etc
- prudence of central bank
- QE, inflation
- hyperinflation, capital controls
- often slow settlement wires, cards
- slow & expensive internationally
- political scarcity / moral hazard
- account & identity based
November 2015
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3. The Blockchain is a Ledger
Source: bitcoin.org
November 2015
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4. Traditional Ledgers
Closed
Systems
Hacked &
Accessed
High Transaction Fees Laborious Verifications
Slow Centralized
November 2015
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5. Bitcoin advantages
Bitcoin
- trustless: machine verifiable integrity
- automated real-time audit
- open network
- secure open protocol
- used over open internet
- permissionless, like internet
- fast pace of innovation
- low fees
Banks
- trust: reputation & integrity of issuer
- annual manual audit
- private network
- insecure protocol based on trust
- used over leased lines / VPN
- need permission from competition
- high barrier to entry
- high fees
November 2015
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6. Blockchain Ledgers
Open Sourced
Cryptographically Secure
Network Verified Beyond Borders
Fast Decentralized
November 2015
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7. blockchain to sidechain
Blockchain
- Bitcoin uses distributed ledger called a blockchain
- applications for wider finance: shares, bonds, derivatives, structured products
- currently slow reconciliation based settlement T+2 etc
- current blockchain is bitcoin only
- can extend blockchain to support wider applications: “sidechain”
- bitcoin connected chain with mechanism to move assets between chains
- think of sidechain as internetworking protocol for blockchain tracked assets
- defines interoperability and network transportability of electronic assets
November 2015
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8. Blockchain Challenges
Limited scalability & cautious development
7 transaction/second limit
Bitcoin only
Fragmentation resulting from
off-blockchain transactions & alt-coins
November 2015
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9. Solution: Extend Bitcoin Innovation
via Sidechains

10. about sidechains
Sidechains
- can extend blockchain to support wider applications: “sidechain”
- bitcoin connected chain with mechanism to move assets between chains
- think of sidechain as internetworking protocol for blockchain tracked assets
- defines interoperability and network transportability of electronic assets
- sidechain extends Bitcoin protocol to track issued assets (native coloring)
November 2015
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11. sidechains how
Bitcoin
suspend bitcoin ->
( coin frozen … )
proof returned <-
( maturity period … )
[potential fraud proof]
reanimated bitcoin
( coin in use again … )
Sidechain
-> proof of suspend allows move
( sidechain use.. )
-> return coin
November 2015
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12. supporting p2p sidechains
Sidechains
- need new op-codes to suspend and verify compact return proof
- soft-forkable
- compact proof (with skiplist using lucky extra work)
- ½ time get extra 0 bit, ¼ get two extra 0 bit, allow further skip
- makes PoW preserving compact proof membership in same chain
November 2015
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13. sidechain security model
Sidechains security
- incentive from bitcoin fees
- (optional) consensus rule to peg ½ of subsidy directly to sidechain
- have to maintain hash lead for maturity period (day)
- fraud proofs prevent precomputation
- different model but somewhat analogous to main chain:
- ... this level of hostile hash power could revert exchange deposits
- hybrid model with federated signer & hashrate (40%:60%)
November 2015
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14. major version usecase
software upgrade
- can use a sidechain to do major refactoring on a live beta
- migrate coins after it becomes goes from beta to stable
- users who need features early can use the beta
- safer than making invasive changes on live chain
- faster development cycle
November 2015
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15. experimental chain usecase
do other interesting things
- replace chain logic (ethereum script but with bitcoin: rootstock)
- zerocash
- snarks
- hivemind (prediction betting)
- elements alpha sidechain
- … http://elementsproject.org
- different chain parameters (block-size <- current hot topic)
- different block intervals
- but primarily an extension mechanism not a scaling solution
- lightning, duplex payment channels layer 2 are scaling
November 2015
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16. liquid sidechain
interexchange settlement
- deposit coins into liquid
- move coins faster for arbitrage, market making, virtual order book
- later add support for USD, EUR with exchange or separate issuer
- > 12 bitcoin exchanges coming soon
- confidential transactions default on (prevent front running)
November 2015
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17. Blockchain without Bitcoin
Blockchain
- mining security (or hybrid)
- trustless interchain transfer
- automated trust
- secure tokenized asset
- independently validated
- open, permissionless
- necessarily publicly auditable
- virtual narrow AI
Federated Chain
- trust group of banks
- legal contract between ledgers
- manual cross certification
- IOU from controllers of ledger
- validity assertion by ledger owners
- closed, permissioned
- maybe publicly auditable
- status quo + cross-checks
November 2015
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18. Mining sidechains
Mining is about immutability, permanent globally consistent record
- banks: immutable storage based on trust, brand, auditors
- federated sidechain: threshold of signers, trust, tamper resistance
- merge-mined sidechain: Bitcoin fees for miners to secure chain
- hybrid: federated signers plus miners in some ratio (40%:60%)
November 2015
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19. Permissionlessness matters
Permissionless Innovation
- Internet’s permissionless global platform credited with wave of innovation
- permissioned chains are good, but data integrity tools for closed networks
- incumbents have incentives to deny permission
- high barrier to entry due to complexity and regulation
- innovation path likely involve forward-looking institutions
- and direct competition in poorly serviced use-cases
November 2015
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20. Prevention over deterrence
Prevention over deterrence
- regulations are in many cases rooted in consumer protection
- ..from last century stock scams, bank runs, unscrupulous actors
- backdrop fairly regular fines for bending rules, schemes in finance/banking
- but regulation is friction, barrier to entry, which results in high fees & margins
Case for non-custodial low regulation
- business prevented from spending client funds, prop trading with client funds
- non-custodian concept is touched on in some bitcoin regulations
- if whole system
- reduces systemic risk
November 2015
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21. regulators should like blockchains
Case for non-custodial low regulation
- business prevented from spending client funds, prop trading with client funds
- non-custodian concept is touched on in some bitcoin regulations
- if whole system moved to blockchain model, real-time assurances of solvency
- capital requirements and leverage requirements
- reduces systemic risk
November 2015
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22. Scale with lightning
Lightning cache layer
- scale is also achievable via lightning
- a new blockchain cache layer
- faster, lower cost, higher scale (1,000 - 10,000 more TPS)
- not broadcast, routed like TCP
November 2015
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23. blockchain smart-contracts
Smart-contracts
- each Bitcoin payment is technically a smart-contract
- a smart-contract is small program that has custody of funds
- cause the program to return true, and you can take the funds
- normal contract: IF ( signature( pub-key ) ) THEN true
- but it can be a general programming language
- implement derivative in smart-contract, structured product etc
- program executed by the network
- behaves as-if executed by perfectly honest narrow AI
- reality is simpler: verified by all validators & miners
November 2015
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24. confidentiality - virtual private
chain
confidentiality in public ledgers: virtual private chain
- blockchain ledger is really public, maybe too public!
- confidential transactions - we can encrypt values and still have public audit
- need reasonable level of commercial confidentiality or hesitant to use
- so without confidentiality may never see adoption and benefits
- analog of VPN - use public internet but encrypt sensitive information
- technically using Zero Knowledge Proofs and Homomorphic Encryption
- only sender & recipient (and optionally auditor) know values
November 2015
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25. virtual (narrow AI) enforced business
logic
fiduciary code
- blockchain functions as a perfectly honest virtual narrow AI
- in reality simply by everyone checking, in future via SNARKs maybe
- new programming model of moving business logic into blockchain execution
- replace trusted third party, contract fullfillment by blockchain execution
- replace issuer trust with self-executing bearer instruments
November 2015
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26. blockchain implications
implications of programmable money
- can replace trusted issuer with trusted instrument
- can verify the instrument - small template smart-contract
- cost of many financial instruments undercut by competition
- current barrier to entry being trust of issuer
- improve systemic risk: provide society with real-time audited assurances
- re-architect financial networks using blockchain
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27. blockchain summary
summary of blockchain implications
- reduced reliance on third party trust via real time audit
- improved integrity and lower systemic risk for financial system
- smart-contracts replacing legal contracts and reliance on underwriter
- virtual private chains / confidential transactions - regaining confidentiality
- scale via lightning protocol
- move companies onto blockchain: income, expenses, dividends, shares,
accounts
- central banks issue electronic money into blockchain networks
- smart monetary policy possible
November 2015
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28. Growth of the Hashrate
9 petahash
350
petahash39.8
x
November 2015
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29. Bitcoin VC Outpacing Early ‘Net VC
November 2015
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• Total VC
investment in
cryptocurrency
companies as of
March 2015 was
$832m
• Bitcoin VC
investment
projected to
continue to
outpace early-
stage investments
in the Internet
Source: Coindesk, State of
Bitcoin Q2 2015, 07/16/15