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Sidechains White Paper Imagines New Future for Digital Currency Development

(@mpmcsweeney) | Published on October 23, 2014 at 22:55 BST

Sidechains

A group of bitcoin core developers and cryptographic technology experts have released a new proposal that could reshape the digital currency ecosystem if implemented.

The sidechains concept has long been argued as a solution to what many see as a volatile and self-damaging sector of the cryptocurrency ecosystem. Described by some as the “altcoin killer”, sidechains allow for the creation of multi-block chain ecosystems in which assets can be exchanged and transferred.

The paper’s authors consist of a broad team of digital currency researchers and developers – including Adam Back, Pieter Wuille, Matt Corallo, Luke Dashjr, Mark Friedenbach, Andrew Poelstra, Jorge Timón, Andrew Miller and Gregory Maxwell. Several members of the authorship team are co-founders of digital currency startup Blockstream, which provided support for the project and is in the process of raising millions as part of a major funding round.

If instituted, the sidechains concept would allow assets to be exchanged across multiple block chains, with bitcoin serving as the likely “parent chain”, according to the paper, which was released on 22nd October.

But unlike the current means of acquiring the assets of an alternative block chain – purchasing altcoins on an exchange – bitcoins swapped with a sidechain’s assets wouldn’t necessarily be subject to the frequent price fluctuations inherent in the altcoin market. If one transferred their bitcoins to a sidechain’s asset, it would still hold the value of a bitcoin because of a two-way peg linking the block chains.

The authors propose:

“Conceptually, we would like to transfer an asset from the (original) parent chain to a sidechain, possibly onward to another sidechain, and eventually back to the parent chain, preserving the original asset. Generally we can think of the parent chain as being bitcoin and the sidechain as one of many other block chains. Of course, sidechain coins could be transferred between sidechains, not just to and from Bitcoin; however, since any coin originally moved from bitcoin could be moved back, it would nonetheless remain a bitcoin.”

Paper cites need for change

Sidechains represent a restructuring of bitcoin’s infrastructure that could take years to implement, given the consensus- and experimentation-driven nature of core development.

Yet in the white paper, the authors argue that if bitcoin is going to succeed in the long-term, there need to be solutions brought to the table that address long-standing concerns regarding scalability and capability. Rising usage and global attention has shined a light on the weaknesses in bitcoin’s design, they write, requiring innovations that push the technology even further.

The altcoin market, the paper continues, became the effective laboratory for new ideas to be developed. It cites structural and behavioral weaknesses including opaque code development, speculative market fluctuations and the risk of manipulation as reasons why technical innovations arising from the space are few in number and often tied to driving speculation.

“This is dangerous not only to those directly participating in these systems, but also to the cryptocurrency industry as a whole,” the authors say.

In order to counteract these problems, the paper continues, a system of “interoperable block chains” known as pegged sidechains could be established that enables development outside of bitcoin but without the need to generate and support a new currency. This new infrastructure, the authors say, would allow much of the same activity you see today in the altcoin market.

The paper explains:

“Because sidechains are still block chains independent of bitcoin, they are free to experiment with new transaction designs, trust models, economic models, asset issuance semantics, or cryptographic features."

Infrastructure overhaul

The infrastructure envisioned by the sidechains development team is a multi-block chain network in which digital assets can be created and exchanged while still remaining tied to the value of a bitcoin.

Pegged block chains would be connected to one another via special outputs that receive proofs certifying that a designated amount of bitcoin is being exchanged for the asset native to that sidechain. The two-way peg maintains the value between those assets, basing it on whichever parent chain is established.

Transactions initiated between chains would be subject to what the authors call a contest period, during which the exchange may be invalidated if there is network consensus that the original proof is fraudulent.

The authors suggest two potential implementations – symmetric and asymmetric two-way pegs – which envision different ways for parent and sidechains to validate one another.

With a symmetric peg, each chain would require proof validation when exchanging between chains. An asymmetric latter peg means that proofs are only required when transferring back to the parent chain. The paper notes that the latter concept carries security risks and, in later discussion, refers primarily to the symmetric two-way peg.

The concept also calls for a firewall to be instituted for the parent chain. This, the authors say, would protect the basis of value for the chain ecosystem and those taking part in the system.

Smart applications

If implemented, sidechains would allow for smart transaction functions being developed today under the crypto 2.0 umbrella, but without tying those actions to the bitcoin block chain or relying on the stable value of an asset unpegged to bitcoin.

Further, sidechains could create and issue assets that are transferable across multiple chains. As the authors explain:

“To this point, we have mostly been thinking about sidechains which do not need their own native currency: all coins on the sidechain are initially locked, until they are activated by a transfer from some other sidechain. However, it is possible for sidechains to produce their own tokens, or issued assets, which carry their own semantics. These can be transferred to other sidechains and traded for other assets and currencies, all without trusting a central party, even if a trusted party is needed for future redemption.”

These assets can be used like those found on existing platforms such as Counterparty, Mastercoin and others – to represent contracts, claims or IOUs – and exist alongside whichever native currency is linked back to the parent chain.

Mining centralization, fraud risks

Putting sidechains in place wouldn’t be a risk-free process, however.

According to the paper, the implementation of sidechains may require the need for merge mining, a process by which miners provide 'proof of work' to multiple coin networks, thus certifying transactions. Otherwise, miners would have to choose which chain to support, thus creating potential security headaches.

The authors acknowledge the risk of centralization that would arise from this kind of mining ecosystem, as miners would bear the operation cost of supporting multiple chains. They add that this arrangement could result in competitive pressure on small-scale miners, saying:

“Smaller-scale miners may be unable to afford the full costs to mine every block chain, and could thus be put at a disadvantage compared to larger, established miners who are able to claim greater compensation from a larger set of block chains.”

The paper also identifies risks of fraudulent transactions across sidechains and the potential impact on both associated sidechains and the parent chain itself. Though stating the unlikelihood of these given the ability to create built-in security mechanisms, the authors outline the ways in which a potential 'chain run' could be launched or coin supply imbalances created during cross-chain transfers.

Community reacts

Since its release yesterday, the white paper has jumpstarted the public conversation surrounding the sidechains concept. A Reddit AMA hosted by the sidechains team included questions about the nature of the project, the intended goals and those supporting it, and a number of well-known developers in the space have weighed in on social media.

Supporters of the idea, which has been subject to significant debate among bitcoin developers and community members in posts on Reddit and discussions on IRC, say the proposal would still enable much of the experimentation and innovative projects present in the altcoin market today. Critics say that the implicit support of centralization sets a dangerous precedent and carries both short- and long-term risks for digital currency development.

In the Reddit AMA, Wuille remarked that ultimately, the goal is to create a means for developers to experiment with block chain technology while avoiding the pitfalls associated with the altcoin market.

“What we hope to accomplish is allow more innovation in the bitcoin ecosystem, without needing a different currency,” he said.

The full white paper can be found below:

Images via Shutterstock, Blockstream

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